How The Midwest Was Won: Nation’s Midsection Enjoys Best Rent Growth In The Country

The Midwestern multifamily market is roaring back to relevance after a period of pandemic hibernation, with marked increases in rent growth and occupancy upticks offering a sharp contrast to softening rental conditions in previously hot metros around the country. 

“It was like someone turned the switch on who came out of nowhere,” Finger Cos. Executive Vice President Hunter Wagner said. 

The lights came on for Finger Cos. years after it began in the fall of 2019 to lease a newly constructed, 305-unit luxury apartment property in the Chicago suburb of Northbrook called The Elaine. Leasing velocity tumbled when the pandemic hit, Wagner said. 

But once its effects eased, especially recently, The Elaine leased up quickly. As renters emerged from their parents’ houses and regained employment, occupancy at The Elaine settled at roughly 98%.

Four of the nation’s six strongest rental markets were in the Midwest as of the end of 2023: suburban Chicago, Milwaukee, Grand Rapids, Michigan, and Omaha, Nebraska, according to a RentCafe year-end multifamily report. While much of the U.S. showed signs of declining rental competitiveness in 2023, especially the once-smoking Sun Belt, Midwestern cities like Chicago are upending the trend.

In Chicago’s suburbs, an average of 14 prospective renters apply for each vacant apartment, according to RentCafe. 

One of the key drivers behind a boom in rent growth and occupancy is that the region didn't enjoy the massive construction boom seen in other areas like the Sun Belt, which means it doesn't face oversupply. The trend of remote work is also playing a role, with a steady stream of workers migrating in search of affordability and a few seeking shelter from the worst impacts of climate change.

Interra Realty Managing Partner Patrick Kennelly said in the 10-plus years he has worked facilitating deals in the suburban Chicago market, the vacancy rate is as low as he has seen, and the rental growth rate is at its most robust in three years.

The median rent in Chicago is $1,643, with prices up 2.7% year-over-year, according to an Apartment List monthly rent report. The city as a whole has outpaced the national average rent decline of 1%. In some Chicago suburbs, the pace of growth was even higher, like Wheaton’s 7.7% year-over-year uptick and Mount Prospect’s 6.5% annual growth.

Suburban Chicago saw occupancy rates hover around 95.3%, while Chicago's rate is about 94.4%, according to RentCafe. 

Key factors driving rent growth include a lack of inventory, a generation of people who prefer the flexibility of renting to owning, and upticks in costs like taxes that led landlords to raise rent to cover expenses, Kennelly said.

It doesn't hurt that interest rates have kept the cost of buying single-family homes out of reach for many.

“Chicago's remained the stable, affordable city compared to the larger metropolitan coastal cities or Southern cities that have all these big buzzwords and headlines but aren't performing where a lot of folks projected them to perform,” Kennelly said. “We've seen just steady, steady growth. No surprises. [Chicago has] been a good, strong investment for folks.” 

Chicago-area rents are still affordable on most people’s salaries, in contrast to coastal markets across the country, said Vicky Lee, senior vice president of development for Focus. Focus’ newly constructed properties in the Chicago suburbs of Vernon Hills and Fox Valley are leasing up at a pace previously “unheard of in suburbia,” and the company has managed to sustain steady rent growth since its 2022 Fox Valley opening, she said.

Suburban renters are seeking comprehensive live-work-play environments that incorporate retail and public spaces to generate a citylike experience, Lee said. That environment draws young professionals looking to live closer to suburban corporate headquarters and empty nesters who prefer not to live in a retirement community, she said. 

“We've seen in the dynamics of suburbia that if you have a really good placemaking story and actually execute well on it … that’s very key to success,” Lee said.

Roughly a third of Midwestern and Northeastern metros were home to year-over-year rent growth of 3% or more in 2023, largely due to a more constrained supply, according to a December RealPage multifamily report. Among large markets, Chicago led the way in rising rents, followed by northern New Jersey, Cincinnati, Milwaukee, Cleveland, Boston, Indianapolis and St. Louis.

“Chicago is one of the places where we're still a big central hub, where the Big 10 universities [are nearby] as well as [being] a major city in the middle of a country,” Lee said. “You find that people still gravitate towards it.” 

Chicago is expected to continue a “robust” recovery in rent growth in 2024 due to strong demand and weak supply growth, according to a 2024 Yardi multifamily outlook. New inventory in the city represented 0.7% of the existing stock, or 2,691 deliveries, Yardi reported in October. That was down 54% from the same point in 2022.

As a result, the metro is forecast for 1% year-over-year rent growth, according to Yardi, while the national outlook calls for declines.

Elsewhere in the Midwest, rent growth is projected to increase even more significantly. Four Midwestern metros top Yardi’s forecast for 2024: Kansas City at 2%, Columbus, Ohio at 1.9%, Indianapolis at 1.8% and Minnesota's Twin Cities at 1.7%.

In Chicago, especially in its suburbs, multifamily demand has remained strong in the face of higher rents, thanks to the struggle to find affordable homes for purchase and because high interest rates are hampering would-be homeowners, Marquette Cos. Managing Director of Acquisitions Bryan Berkey said.

“Interest rates have doubled, so to get a 30-year mortgage today, you're probably plus or minus 7%,” Berkey said. “On top of that, you'd [need] to come up with a 20% down payment. So most people are priced out of buying a home.” 

In suburban Chicago, new construction is up 103% year-over-year, according to Yardi. That trend may continue as more developers look to capitalize on the market's improvement.

“There's been some new development, not a ton, but some trying to keep up with the demand,” Wagner said. “We're one of them. And that newer development is stepping up this game with better amenities.”

Some of the amenities at The Quin, which The Finger Cos. opened in January 2023, include a fitness center, dog wash station, golf simulator and 2.5 acres of green space, as well as high-end finishes in the apartments, Wagner said. Amenities are a huge factor in renters’ decision-making process, he said, largely because renters expect higher-rent products to have top-of-the-line draws.   

But developers looking to enter the suburban Chicago market will face challenges trying to jump into the construction pipeline. Strict suburban zoning laws and the arduous permitting process that accompanies suburban development are a couple of the reasons there isn’t more supply in the works, Wagner said. 

“There's a lot of barriers to entry in the state of Illinois,” he said. “So you just don’t have as many developers developing up there.” 

One factor driving at least a small portion of multifamily growth in Chicago and the rest of the Midwest is the impact of climate change. As the planet gets hotter, the Midwestern multifamily market may continue heating up as well. 

Over the past several decades and particularly during the pandemic, many Midwestern states hemorrhaged population. Illinois, Michigan and Ohio all lost population between 2020 and 2022, Time magazine reported. But some of the region’s leaders say the region’s climate change resiliency could help to reverse that. 

So far, climate migration represents just a trickle of newcomers. But as severe climate impacts begin hitting home, the decision-making process for individuals and businesses on where to move could shift as well, Milwaukee Mayor Cavalier Johnson told Time. This may lead them to places more insulated from climate change’s most dramatic effects. 

“Folks will consider — do we want to [live] in a place that’s more likely to see intense hurricanes and storms year-over-year, a place that has earthquakes constantly, a place where it is unbearable to go outside for weeks or months?” Johnson said.

CORRECTION, JAN. 12, 9:15 A.M. CT: This story has been updated to correct the misspelling of a building name.