Core Markets Series: Midwest


Carter Olles

Assistant Vice President

The Midwest, as defined by the Bureau of Labor Statistics, is comprised of 12 states (IL, IN, IA, KS, MI, MN, MO, NE, ND, OH, SD, WI), over 68 million people, and is the backbone of American production. The Midwest is built on a deep history of agriculture, manufacturing, and mining industries that continue to fuel growth and have paved the way for advancements in tech, medical, and logistical innovation today. 

When we look at commercial real estate, the Midwest presents an opportunity to acquire quality properties, in a market with a significant percentage of individual and regional owners and strong rent-to-income ratios, often at higher cap rates than other regions. Its centrality and robust industries fuel stable job and wage growth and predictable population trends, all of which are critical to income growth and reducing the risk of supply imbalance. MLG’s corporate headquarters in Brookfield, WI positions us well to take advantage of these strengths and acquire quality real estate in the Midwest. Below are some of the reasons we like investing in commercial real estate in the Midwest: 

Individual and Regional Owners: 

The Midwest, seemingly more so than other regions, has numerous individual and regional owners of real estate, who own a limited number of properties in one or a handful of cities. This presents a significant opportunity for MLG as we often find these owners are: 

  1. Hesitant to invest in non-essential capital improvements to improve the value and appearance of the property
  2. Inefficient operators who are don’t have the tools and portfolio to maximize income and minimize expenses
  3. Generally not aggressive in increasing income

MLG capitalizes on these opportunities, both via in-house management (affiliates Point Real Estate Management “PRM” and Valiant Residential) and through sophisticated, national management companies we partner with to invest into the asset, operate efficiently, and maximize income to increase the value of the property. 

Income-to-Rent Ratio: 

A key factor to consider when acquiring multifamily properties is the income to rent ratio. This ratio is helpful in understanding the average household’s ability to pay rent. The typical minimum managers use to qualify residents is that they must earn 3 times the annual rent expense for the unit they are looking to lease. For example, if a household earns $57,600/year, they could qualify for a monthly rent of up to $1600/month. Maintaining this ratio is not only in the landlord’s best interest to insure its tenants can pay rent, but also in the tenant’s, so that they can afford other living expenses such as food, transportation, utilities, and more.  

Nationally, the income to rent ratio is approximately 3.81, when comparing the median household income to the average effective rent (CoStar). An adequately healthy ratio, however, one without significant cushion. On the contrary, MLG’s last 5 acquisitions in the Midwest (as of 1/22/23) had an average income to rent ratio of 5.67, far above the national index. This, we believe, has the following effects: 

  1. Lower Delinquency Rates
  2. Better Affordability for Our Renters
  3. Room for Future Rent Growth

Central Location: 

With the rise of ecommerce and two-day shipping, a central location, efficient supply chain, and reliable workforce has become imperative for companies to remain competitive in today’s landscape. The Midwest offers companies exactly that, often with lower operating costs than its regional counterparts. Of the top 20 U.S. metros with the largest population within a one day drive, 16 of which are located in the Midwest.  

With its reliable workforce and strong manufacturing base,  the Midwest has seen an incredible demand for distribution, manufacturing, and flex space. According to CBRE, the vacancy rate as of Q3 2022 was a staggeringly low 2.9%. MLG has been able to capitalize on this strong demand through its existing and recent acquisitions of industrial and flex real estate throughout the Midwest. While we do expect vacancy rates to normalize and the frenzy of demand we’ve enjoyed for the past few years to eventually subside, we do expect the fundamentals of the Midwest and the expectations of the consumer to remain, making the Midwest a strong market for industrial and flex (and the associated housing it requires) for years to come. 

Economic Stability and Innovation: 

When looking closely at the industries present throughout the Midwest, you’ll find a diverse array of employers across most all sectors. Top Fortune 500 employers include United Health Group (Minnetonka, MN), General Motors (Detroit, MI), Kroger (Cincinnati, OH), State Farm (Bloomington, IL), Proctor and Gamble (Cincinnati, OH), and numerous more. The Midwest uniquely balances its deeply rooted agricultural, manufacturing, and mining industries with 21st century advancements in technology, logistics, and medical equipment. This unique duality yields a well-trained workforce, stable, recession resistant industries, and cutting-edge companies at the forefront of American innovation. 

In the most recent, non-pandemic induced recession, the Great Recession (2007-2009), Midwestern states like North Dakota, South Dakota, and Nebraska maintained some of the lowest unemployment rates in the country, demonstrating the stability of their essential agriculture-based industries, present throughout the entirety of the Midwest (STL Fred, Kathleen G. Arano and Arun K. Srinivasan School of Business, Indiana University Southeast, USA School of Business, Indiana University Southeast, USA).  

Keeping an eye on growth, Midwestern cities such as Columbus, OH, Ann Arbor, MI, and Des Moines, IA are seeing substantial population growth fueled not only by manufacturing and production growth but also technology infusions by companies like Meta, Microsoft, and others. Cities like Milwaukee, WI and Grand Rapids, MI are leading “blue” and “green” innovation, respectively, putting them in the global spotlight for the future of sustainable living. All this is built on the Midwest’s well trained workforce and low cost of living, providing a strong foundation for future innovation. 

Higher Cap Rates: 

Properties in the Midwest tend to trade at higher cap rates compared to their counterparts in the Coastal and Southern regions. For example, a property in Columbus might trade at a 100bps+ cap rate premium to a similar property in Boston. Considering debt costs are relatively similar across both markets, this allows properties in the Midwest to often generate greater cash-on-cash returns than comparable properties in other regions. Further, we’ve seen these higher cap rates be more elastic to increasing debt costs, as investors can afford higher interest rates before losing positive cash flow. For more about cap rates, my colleague, Nathan Clayberg has written a blog about how to ask the right questions

While ultimately each investment decision is unique and features its own set of circumstances, the aforementioned qualities are some of the reasons we like investing in the Midwest. The Midwest has been a stable, relatively predictable market since far before the 35+ years MLG has been investing in it. With its strong fundamentals and unique qualities that will drive further rental demand (both residentially and commercially), we believe the Midwest will continue to be a prudent place to acquire commercial real estate and earn strong returns for our investors. 

Carter Olles is a Senior Associate at MLG Capital, focused on real estate acquisitions and contributions in the Midwest. He also leads MLG’s Model Integrity Committee, overseeing the accuracy of MLG’s models and underwriting standards. Carter enjoys playing tennis, golfing, skiing, and spending time on the water.

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