Often overlooked, Midwestern multifamily is having a moment.
As the Sun Belt still deals with supply and some coastal cities, like Washington, D.C., and Boston, face deteriorating fundamentals amid federal government spending cuts, apartment markets in the middle of the country have been churning out solid numbers.
While New York and San Francisco led the country in July rent growth, Midwest markets like Kansas City in Kansas and Missouri, Chicago and the Twin Cities in Minnesota weren’t far behind, according to an Aug. 3 report from real estate data firm Yardi Matrix.
“In the Midwest, I think you've got, generally, supply constraints, strong absorption and strong rent growth,” Roger Daniel, founder and president of Daniel Management Group, told Multifamily Dive.
Daniel started DMG in 2013, after working in institutional property management and underwriting. After beginning in his home base of Chicago, he expanded to the suburbs over time.
Growing through referrals to hit roughly 5,000 units, he expanded to Wisconsin, Indiana, Texas and, recently, Iowa. DMG also has a capital-raising side that helps it acquire properties, though third-party management remains the focus.
“We pride ourselves on being nimble as an operator,” Daniel said. “We've done BTR [build to rent], we've done scattered-site, we've done boutique — small enough where it doesn't really have a staff. We've done adaptive reuse.”
Daniel said DMG also has “gained a lot of traction” leasing up new “high-touch” properties in urban areas and the suburbs where they compete against institutional managers and mid-market firms.
“The larger the property, the more opportunity we see to add value both on the income side and the expense side,” Daniel said.
Here, Daniel talks with Multifamily Dive about investment in the Midwest, growing his platform and mergers and acquisitions in the management space.
This interview has been edited for brevity and clarity.
MULTIFAMILY DIVE: Are you seeing new investors move into the Midwest, given the perceived security in the region?
ROGER DANIEL: I think the short answer is yes, although there seem to be some — for lack of a better term — zombie groups that still are chasing Sun Belt markets. There's just been so much oversupply there. Will it absorb? Probably, but it's going to take some time.
I think when it comes to the Midwest, there is interest. The smaller Midwest markets are just a lot less transactional, and a lot of it is more local. There are cities that have very good demand drivers, like in Madison [Wisconsin], with the state school and the state capital all there in one smaller city that's attracting maybe not institutional equity but equity from outside of the local area.
What are the investor dynamics like in Chicago?
Chicago is another outlier. For Chicago, specifically, although the equity has gotten more interested, they're definitely more interested in outside of Cook County in general. I think they're also tepid just in general. They find ways to say no, but I think the trend is to say yes more.
It's not easy to get deals done, and partly that's capital markets. So it’s not Midwest-specific, and I think that's icing things everywhere, like interest rates going up and varying widely. Rightly or wrongly, I think Chicago has some additional perceived risk around taxes. It's not just about taxes going up. It's about the unknown with taxes. And I do think this new assessor will help there, just in terms of making it more transparent about what to expect on taxes, more medium- to long-term. So I think that will be helpful there.
How has the tepid transaction market affected your growth?
We’ve been a growth platform really from our inception. If you are good at what you do, I think transactions tend to help you. You're getting referred. Your clients are growing. They're putting you in properties. There's an established relationship. You've produced, and they want you to do more for them. That's been our experience when transactions were up.
When transactions are more stable, people are more willing to just suffer with their existing property manager if they're not happy. That does make it harder from a growth perspective.
How much harder is it to grow when fewer new units are being delivered?
The supply is more naturally constrained if development is constrained, so you end up competing for market share rather than growing your business through general economic growth. For anybody with a growing business, a stifled economy makes it harder and everybody is left competing for what's existing.
We have been fortunate enough, I think, that we've been able to increase the breadth of our clients. When they give us an opportunity to produce, and that's helped us grow. Even though we're being less helped by the broader economic conditions.
Would you like to grow beyond 5,000 units?
I literally started with nothing. So, it's always been ‘let's provide good value, be nimble and continue to produce and see where things take us.’ As I mentioned, it's a referral business and it's a service business. So clients come and go and buildings sell.
So, we're looking to just continue to provide value to our clients, and then see where that takes us. Do a good job and see what happens with no real hard-set vision because even if I had one, you're not in total control. You have to do the best you can and hope for the best.
There is a lot of M&A in the management space. Is it necessary to grow larger to survive?
I think it depends who your audience is. If you're private equity-backed or whatever, I know that [growth] is a common refrain. I have no partners. I think of my own hands-on experience. I started by leasing apartments in '03 and worked my way up in that business. I've been able to underwrite and budget, and then operate, all along.
We literally started the company with a property accountant and myself. We've been profitable from the beginning. I think the bigger you are, generally, the more profitable you are. We've used our growth to sort of reinvest in the platform. I have heard that a lot of companies aren't profitable under a certain number of units. We've certainly reinvested a lot in the platform as we've grown, and that's helped us. Generally, if you're doing things right, the larger you are, the more profitable you are.
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