The Midwest Market encompasses a varied set of states that mainly include: Missouri, Kansas, Minnesota, Illinois, Kentucky, Ohio, Indiana, Iowa and Wisconsin. The major cities and metro areas that highlight this market are St. Louis, Kansas City, Indianapolis, Minneapolis/St. Paul, Madison, Kansas City, Des Moines, Cincinnati and Columbus. Chicago continues to show its separation from the remainder of the Midwest Market with cap rates 100 bps lower than similar assets in other cities. St. Louis and Indianapolis have seen upticks in office and industrial absorption. Both major metropolises are experiencing lower unemployment and vacancy rates. This is good news, but the Midwest as a whole is still considered a very niche secondary market for the net lease investor.
There have been some new deliveries in St. Louis County, with over 1,000,000SF of outlet malls between two separate assets added in August and September of 2013. Developers are trying to create a destination shopping experience. It is too early in the aging to determine if this saturation of big box and big name retail in small concentrated areas will prove successful. The two new developments are within a mile of the largest outdoor mall that has over 1MM SF.
The uptick in the economy in the Midwest is also a positive note, but new development is still lagging. Furthermore, getting net lease investors interested in purchasing assets in this market is still challenging. Net lease investors that are looking in the Midwest are limited and inevitably, have some personal experience with the market. The investors and owners are generally still more conservative than in other markets.
The Midwest market as a whole, with the exception of Chicago, is still considered a tertiary market at best. The investors doing the lion’s share of the transactions have some intimate knowledge or live in the area. Outside investors face a steep learning curve on the nuances of this market. The Midwest market is also filled with more multi-tenant assets than most markets, other markets build out more single tenant free standing properties. Due to this fact, the assets tend to have a wide variation of tenants with respect to the creditworthiness. There is a mix of maybe one national or regional tenant while the majority of the tenants are non-credit local tenants. This creates an immediate objection for many experienced investors with required criteria for the varied leases and overall lower credit for the assets.
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