Investor fatigue driving multifamily investment to Midwest

Panelist Samantha Miller, Senior Vice President of Multifamily Mortgage Banking at KeyBank, covers multifamily debt throughout the Midwest. Miller said the region’s relative consistency, affordability metrics, and rent growth are attracting investors. “The Midwest has had really persistent and stable growth,” Miller said. “We’ve seen such intense volatility in interest rates, in supply, in inflation, and in macroeconomic trends that investors are really fatigued from all that volatility and uncertainty.”

That dynamic is helping drive capital toward the Midwest, which has historically not seen the same level of attention as the coasts or Sun Belt. In fact, Greysteel’s Mid-Year 2026 Investor Sentiment Pulse Check noted that 84% of survey respondents plan to increase their multifamily exposure over the next 12-18 months.¹

Preferred equity gains traction

One area seeing increased activity is preferred equity, specifically as borrowers look for alternatives to traditional debt and common equity. Panelists pointed to the difficulty of making development and acquisition deals pencil with today’s costs and return requirements as one reason that preferred equity has become more prominent. For lenders and investors, the growing pool of capital targeting the product has also expanded the number of options available to borrowers.

“We’ve seen a lot of groups create buckets of capital for Pref equity,” Miller said. “That has been a huge theme over the past few years. For some real estate owners and operators, this is another path to gaining exposure to assets without immediately purchasing them outright,” she added.

The challenge in the Midwest is often the size of the opportunity.

Panelists noted that many Midwest multifamily transactions are smaller than those found in coastal and Sun Belt markets, making it more difficult to attract providers looking to deploy larger amounts of capital.

“The biggest problem I see with it in the Midwest is the Pref providers wanting a large enough check to make it worth it,” Miller said.

Still, panelists agreed that preferred equity is proving useful as gap financing for properties acquired or developed during the 2020-2022 period, when assumptions about financing costs and market conditions were different.

Stability attracts new competition

The increased flow of capital into the Midwest is also creating more competition for multifamily assets.

Chicago and other Midwest markets have benefited from relatively limited new apartment supply, while demand and rent growth have remained consistent. Colliers noted in its 2026 Chicago Multifamily Report that a sharp pullback in new supply is allowing existing assets to absorb demand, while effective rents rose 4.2% in 2025 and occupancy recovered to 96.5%.² That combination is drawing interest from investors outside the region.

Miller explained that the appeal is more about predictability over the life of an investment. “You might not be getting the crazy rent growth numbers that you were seeing in the Sun Belt, but I think it’s proven out over a long-term financing horizon that the Midwest is a safe bet,” she said.

The shift has implications for pricing as well. As more capital competes for a limited pool of multifamily opportunities, investors and lenders are having to weigh the benefits of putting money to work against the risk of overpaying for assets.

For larger Chicago properties, institutional capital remains more selective, while smaller transactions can attract private investors and more nimble capital sources.

Bridge financing remains active

Even with more capital available, the financing market is still working through loans and business plans that were originated under very different assumptions.

Miller explained that KeyBank has seen continued demand for short-term bridge financing, including from existing borrowers who are not ready to sell or refinance because of current market conditions. “I can think of four deals that we’ve had on balance sheet this year that have either extended, they plan on selling it and they don’t love where the market is right now, or they plan on refinancing it and don't love where interest rates are right now,” she said.

The need for flexibility is also showing up among new acquisitions. Some buyers are pursuing short-term financing so they can execute their business plans while waiting for a more favorable long-term financing environment.

“The handful of acquisitions I’m looking at are all looking for a short-term bridge solution because of the current interest rate environment. They want to implement their business plan, and they need a year or two to do so,” Miller said.

That is contributing to a shift toward what Miller described as a “bridge-to-bridge” type product, particularly as borrowers and lenders work through extensions, refinancing challenges, and unfinished business plans.

The growing presence of non-recourse debt funds is another part of the equation. Miller said KeyBank launched a debt fund alongside its balance sheet lending platform, providing a non-recourse alternative to its partially recourse balance sheet financing.

Insurance costs fall; taxes remain a Chicago concern

Insurance costs appear to be moving in a more favorable direction for multifamily owners and investors in the region. “I think insurance costs have been stable, if not down,” Miller said. “I have a lot of clients that have decreasing insurance premiums right now, which has been excellent to see after what we went through a couple years ago.” Miller alluded to a sharp increase in multifamily property insurance premiums and the broader hardening of the commercial property insurance market, particularly around 2023 and 2024. The Federal Reserve Bank of Minneapolis stated that, on average, 2024 premiums were roughly double 2021 levels.³ However, U.S. commercial property insurance rates declined 13% in Q2 2026, the eighth consecutive quarterly decline, according to Marsh.⁴

The same improvement cannot be said for property taxes in Chicago, she added. Property taxes remain a major underwriting consideration for Chicago multifamily investments. The key, according to Miller, is incorporating the potential impact into underwriting early rather than treating it as an afterthought. “I think taxes will always be a challenge in Chicago,” she said. “It’s really about getting in front of it, making sure that you're underwriting it appropriately, and sizing your debt accordingly.”

Senior debt remains attractive

Despite the increased activity across the capital stack, the panel discussion also highlighted the appeal of senior debt at conservative leverage levels. For Miller, the combination of yield, leverage, and multifamily fundamentals makes senior debt compelling from a lending perspective.

“From a debt perspective, senior debt is at attractive yields for a very conservative leverage point and a really great basis. You can’t beat that when coupled with strong multifamily fundamentals.”

As borrowers navigate a wider range of capital sources in the Midwest multifamily market, lenders and investors continue to seek opportunities that balance returns with greater certainty.

As Miller put it, the appeal of the Midwest today may be less about chasing the highest growth and more about finding a market where investors can have greater confidence in the underlying fundamentals over the long term.

Connect with us

To discuss the current market environment and what financing options are best for your next multifamily housing project, connect with Samantha Miller or reach out to your KeyBank mortgage banker directly.

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