Midwest apartment markets gain notice as Sun Belt rents weaken

Sun Belt apartment markets that drew renters, employers and developers over the past decade are now facing rent declines and higher operating costs, according to a Fortune commentary by real estate investor Ivan Barratt. The shift is putting more attention on Midwest markets that Barratt says have benefited from slower construction and more affordable rents.

Barratt wrote that cities including Austin, Phoenix, Tampa and Charlotte became frequent targets for real estate capital as population growth, corporate hiring and rising rents made them look like the future of U.S. housing investment. He said that growth helped bring a wave of new building, and some of those markets are now dealing with the aftereffects of added supply.

Austin rents have dropped nearly 20% from their 2022 high, according to National Multifamily Housing Council research cited by Barratt. He also wrote that Orlando, Jacksonville, Nashville and Phoenix, among the cities with the most new permits issued in 2023, have recorded some of the sharpest rent declines since then.

Operating costs have added pressure. Barratt cited a Federal Reserve study finding that the largest year-over-year increases in property insurance premiums were concentrated in Orlando, Houston, Tampa and San Antonio, with Florida multifamily operators hit especially hard. He also pointed to rising property taxes that followed earlier valuation increases.

Midwest markets look steadier

Barratt contrasted those markets with Indianapolis, Kansas City and Columbus, which he described as less prominent in industry discussion but more attractive on a risk-adjusted basis. He argued that Midwest markets tend to pair job creation and population growth with construction that more closely tracks demand.

One measure he highlighted was rent burden. Indianapolis and Kansas City both have rent-to-income ratios below 20%, compared with a national average of 27%, according to figures cited in the commentary. Barratt said that lower rent burdens can support steadier occupancy because tenants are less financially stretched.

He also framed affordability as a tenant issue, not just an investor metric. For many renters, Barratt wrote, a quality apartment can be part of a plan to save toward buying a home. He argued that owners in less affordable markets risk losing residents if they push rents beyond what households can handle.

Barratt said his firm has focused on Midwest markets since 2010 and viewed the Great Financial Crisis and the pandemic as tests that showed the difference between high-growth markets and steadier ones. He described those periods as reminders of why the firm had stayed concentrated in the region.

Kansas City deal cited

As an example, Barratt pointed to his firm’s recent purchase of Kinsley Forest in Clay County, a Kansas City submarket. He wrote that Clay County has 342 units under construction, equal to 1.6% of total inventory, and that Kansas City is absorbing new units at more than twice the pace at which they are being completed.

Barratt said those conditions point to balanced supply and demand rather than speculative growth. He also said more institutional capital is starting to recognize Midwest markets, which could increase competition and lower yields on future acquisitions.

The broader argument in Barratt’s commentary is that real estate investors often overpay for markets with fast growth and strong buzz. He said Midwest multifamily investing has rewarded a more patient approach as several Sun Belt markets work through excess supply and higher costs.

This story draws on original reporting from Fortune.