Once overshadowed by the Sun Belt's spectacular growth, it's now the Midwest that has been attracting more investment demand in recent quarters.

Higher interest rates cooled construction activity across the southern United States and kindled this unexpected shift, as stagnating rents froze what had been high-growth sales activity. Though it has stalled in the aggregate across the U.S., capital is beginning to enter the nation's heartland in modestly increasing volumes.

The rent growth that drove capital into the Sun Belt during the pandemic may now be nudging capital into the country’s interior. Capital tends to ebb and flow to where it can be most efficiently allocated, and it’s not always in the same places. The markets that received little national attention over the past several years are beginning to experience a moderate uptick in investment activity. And now, capital seems to be signaling a growing preference for more stable investment environments where rent growth volatility and new construction have been restrained.

Over the past decade, multifamily investors were attracted to the strong rent growth associated with net migration patterns into the Sun Belt and West Coast. In 2018, the Sun Belt led the country with 3.3% average annual rent growth, while the Midwest trailed at 2.4%. However, things changed after the onset of the pandemic in early 2020. For a few quarters, the Midwest overtook the Sun Belt in rent growth, as economic uncertainty emerged and high-growth markets paused.

But as the world recovered and government stimulus bolstered the economy, multifamily's echo boom took hold. Once again, capital inflows became concentrated in high-growth areas throughout the South and West, with the Sun Belt’s rent growth peaking at 16.1% in the second quarter of 2021. Since then, however, rent growth there has slowed and is now in the low single digits.

In comparison, rent growth in the Midwest never achieved such a blistering pace and had less room to decelerate. By the first quarter of 2023, the Midwest's 4% year-over-year rent growth surpassed that of the Sun Belt, which posted a mere 1.6% increase over the prior year.

Chicago, Cincinnati, Milwaukee and Kansas City, Missouri, could meet or exceed their pre-outbreak annual rent growth in 2023, according to CoStar projections. Of the seven major markets included on this list, only Northern New Jersey, New York and Pittsburgh are forecast to do the same from outside the Midwest.