Chicago’s red-hot industrial market is cooling. Retail’s biggest brag is that now “we suck less, finally.” Office assets are struggling mightily, to put it lightly.

In a CRE climate featuring more ugly ducklings than Cinderellas, investors say the glass slipper fits best on Midwestern multifamily assets, which are standing out as a relative bright spot these days.

Constrained supply has led to better rent growth in Chicago and other formerly overlooked Midwestern and Northeastern cities. This is leading to a general sense of optimism from investors in the asset class, panelists said at Bisnow’s Multifamily Annual Conference Midwest on Thursday at The Ritz-Carlton Chicago.

“Most investors would look at multi as the darling of the party,” said Scott Zwilling, principal at Spirit Investment Partners. “There's been a lot of investors of other asset classes that have flooded into multi over the last three, four years.”

The Sun Belt benefited from most of the spoils in the early years after the onset of the pandemic. But now the focus has shifted north.

Four of the nation’s six strongest rental markets were in the Midwest at the end of 2023: suburban Chicago, Milwaukee, Grand Rapids, Michigan, and Omaha, Nebraska, according to a RentCafe year-end multifamily report.

Yardi Matrix projects Chicago at 2.2% rent growth in 2024, according to its summer 2024 multifamily outlook. That is a marked difference from several other once-hot metros across the country with projected rent declines, like Austin's anticipated 4.1% fall, Atlanta's 2.2% drop and Raleigh-Durham's 1.7% dip.

“I'm super optimistic,” Zwilling said. “I'm actually seeing a number of opportunities with very juicy yields, and we're aggressively looking to buy.”

Over the past year, the Midwest and Northeast have led metro-level rent growth, according to Yardi Matrix. This is a result of moderate supply growth coupled with strong labor markets and economic growth, the company said.

Meanwhile, in the Sun Belt, strong delivery pipelines have kept rent growth weak or even negative despite the region continuing to attract jobs and population. The volume of deliveries has outpaced demand in several Sun Belt markets, according to Yardi Matrix.

“We're still, as a country, very undersupplied in multi,” Zwilling said. “The markets that don't have a lot of supply are seeing rent growth, like Milwaukee, Chicago, New York and Minneapolis. New markets that have seen a lot of supply are seeing negative rent growth.”

High rates have also forced the hand of some would-be homeowners who are stuck renting because the cost of owning a home is too high, said Samantha Miller, vice president of mortgage banking at KeyBank Real Estate Capital. Those dynamics continue to increase the demand for multifamily assets, she said.

“We have a ton of owners and operators that I've heard from that have said their tenants are staying longer than they've ever expected,” Miller said. “We're starting to see renting being a long-term play for a lot of people and really the only affordable option.”

However, the growth might not be sustainable in the long term, according to Yardi Matrix. Chicago, New York and San Francisco are struggling to approve enough new units to meet demand. That lack of new supply can provide a short-term boost to occupancy and rent growth, but it can also indicate regulatory hurdles that create a problematic investment environment, according to the report.

Regardless of whether the market is Chicago or Nashville, it is increasingly difficult to build any new multifamily properties in this financing climate, said Tom Shanabruch, vice president of residential investments and capital markets for CRG.

“No one's building anything today. You can't build anything today,” he said. “Institutional capital is not going there. Unless you have really aggressive and thoughtful private capital, you're not going to get a building out of the ground.”

The lack of supply is driving rents up, Shanabruch said. Meanwhile, operating expenses are on the upswing as well, said Roger Daniel, founder and president of Daniel Management Group. An unpredictable interest rate environment makes it harder to forecast those expenses and get financing, he said.

Properties are also changing hands less frequently than they did last year. Elevated interest rates have impacted sales volume, which is down 30% since 2023, according to a June JPMorgan Chase multifamily report.

Sellers have had a tough time adjusting to the new pricing environment, said Daniel Stevens, principal at Ansonia Properties.

“Most of the transactions that are happening are being forced by some capital event,” Stevens said. “For folks that do not have to sell, they're holding on and holding on in hopes for a better day.”

Still, Stevens said the time is right for people who are able to make deals to do so.

“Transaction volume is down, and so there's less competition on the deals that we're bidding on,” Stevens said. “Fundamentals remain strong, and we think now is a great time to be deploying [capital].”