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The true definition of “mid-market” assumes an industry such as multifamily real estate is divisible in thirds. The lower third represents the smallest companies/owners in the market, and the upper third is comprised of the largest companies/owners in the market. The mid-market is the middle third and is a definition for all those in between the lower and upper thirds.
The concept applies to multifamily real estate for a slightly different variation on the definition. In multifamily real estate, the definition has much more to do with the sources of capital involved in an investment. When a property is purchased with capital from a source such as a REIT, life insurance company, investment bank, large family office, private equity company, pension fund, etc., the investment/ownership is most commonly referred to as “institutional.” Institutional capital seeks predictable returns, so investments are made in brand new or newer construction, large, fully amenitized, core-location assets.
Once the definition of institutional multifamily is understood, the definition of mid-market multifamily becomes simple: It’s pretty much everything else. This means everything from a large portfolio owned by a professional management company right down to the six-flat lived in by the owner renting out the other five units. Mid-market basically means the source of the capital comes from money more closely held. Although there are a few hybrid companies and other miscellaneous situations in the market, the majority of multifamily buildings fall into two categories: institutional and mid-market.
The problem mid-market owners have always had is that data, reports, media coverage, press and think tanks all come from research created by institutional entities. This is because 1) institutional owners have an obligation to report to institutional investors, and 2) the accounting and analytics systems at institutional companies are state of the art — and there is simply way more data available. For mid-market multifamily, there is less streamlined data. Individual property management companies, small family offices, investors and brokers all have data, but it’s siloed, rarely shared publicly and most applicable only to very localized markets.
I’ve discussed for years with clients and brokers the need to avoid drawing conclusions on the mid-market multifamily industry based on reports created by the institutional market and press using these sources. One of the best examples I’ve seen recently was in the Wall Street Journal on April 8, 2020. The article cites a report by the National Multifamily Housing Council (NMHC), which the reporter calls a “landlord trade group,” and goes on to say that rent collection in April 2020 in multifamily properties was approximately 70%. What mid-market owners need to understand is that the NMHC is a trade association that has many to most of its members from the institutional segment of the market.
The information is not incorrect; it simply does not address the market as a whole, therefore should not be interpreted that it does. In an April 9 article published by The Real Deal regarding the Chicago market, they interview mid-market property managers who say they collected above 80% of rent. The dichotomy between the two segments of the market could not be clearer than demonstrated by these two articles.
So, what press and stats are applicable to the mid-market?
Almost all press is still applicable to the mid-market, just not necessarily in the way the content might suggest. There’s a yin-yang relationship between the institutional market and mid-market in multifamily that is important to understand. Mid-market properties are typically more affordable than institutional buildings — and remember that people always need a place to live. Historically, institutional apartments are the most negatively impacted by any form of an economic downturn, from recession to pandemic.
In a previous article, I went into great detail about why mid-market apartments are a good investment during a recession whereas institutional apartments struggle. To summarize, when money doesn’t go as far during a recession, tenants want less of their available cash to go toward housing. Luxury apartment renters then gravitate toward more affordable options, a boost for mid-market apartment buildings. The increase in demand for the mid-market adds to the regular demand increase from existing tenants who were already in the asset class prior to a recession. This compounding increase in demand results in higher rates of rent increase in the midmarket than in the institutional market.
In conclusion, mid-market multifamily owners should certainly pay attention to multifamily reports and industry headlines, but also be aware that their assets perform differently than institutional apartments. Consult with local experts such as brokers, appraisers and property managers to get a better idea of what is happening to mid-market properties in your area.