EB-5 may be the key to financing in gateway cities on the US coastline, but the middle of the country is seeing a host of different influences.

While often overlooked, these markets—such as Wisconsin, Michigan, Indiana and Ohio—have bustling commercial real estate markets, racking up billions in deals and developments over the last few years. According to JLL, many Midwestern office markets, like Cleveland and Indianapolis, are off to a good start in Q1, and even Detroit is seeing a major rebound, with property prices reaching new highs.

But to get a little more insight on the lending trends in Midwestern markets, we sat down with Hunt Mortgage Group managing director Josh Messier (left)—who specializes in the Michigan, Wisconsin and Indiana markets—and Cleveland-based loan originator Dan Eibler (right), who does business throughout the Midwest.

Dan tells us multifamily is the Midwest’s strongest asset class, with strong sales activity, high absorption, little to no material rental concessions, and a robust pipeline of projects.

The reason for this success, he says, is a lack of single-family supply, and a big boost to rental demand by city-bound Millennials. After all, tech and financial is booming all over, and the Midwest cities are attracting many of the companies priced out of the coastal tech hubs.

The Midwest markets also have near record-low interest rates and much more favorable cap rates in comparison to the coastal markets, where a flood of foreign cash has slashed cap rates to a minimum, Josh says. This is prime for potential borrowers, and thus many Midwest cities have seen a boost in demand for financing.

Multifamily is doing so well that even Downtown Cleveland—which has seen strong growth over the past few years—has started seeing a trend of conversions from Class-C office space to Class-A multifamily. The existing supply, Dan says, is nearly 100% occupied, due to the rise of the Cleveland Clinic, University Hospitals, and the off-shoot growth in medical and medical/tech startups.

There’s also been a spike in sales of older multifamily stock, particularly in secondary and tertiary markets where the assets have been under poor management but still have a strong NOI upside.

But does increased demand mean that government-sponsored enterprises like Fannie Mae and Freddie Mac are overlooking them like most foreign investors and media do? No, Dan tells us. Freddie and Fannie are not only interested in the region, but they’re providing serious fundraising for multifamily assets.

“Workforce housing and properties that qualify as VLI pursuant to Fannie/Freddie affordability estimations work very well in the Midwest,” Dan says.

But what about small balance lending? According to Josh, SBL’s been going strong, especially for five- to 50-unit buildings, “where borrowers like the execution which includes interest-only, step-down prepayment structure and cash-out features that compete aggressively with banks.”

Both Dan and Josh believe the high volume of multifamily being built in the CBD of Midwestern cities, combined with quick leasing and high rents, spells good news for these markets going forward.

“I expect this activity to continue until the demand subsides,” Dan says.

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