CHICAGO—Second-tier cities did not take the same roller-coaster ride of financial disaster and recovery endured by the rest of the country in the last few years, and that stability should give investors confidence in these out-of-the-way towns, according to Tadd M. Millar, the CEO of Indianapolis-based Milhaus Development. Millar was speaking at a morning session yesterday at the Urban Land Institute's Fall Meeting in Chicago.

“We don't have the huge highs or huge lows,” he explained. Even in the midst of the housing crash, he helped deliver about 200 condos to the market, and had very little trouble getting them sold. Millar later helped start Milhaus, which works primarily in other second-tier cities like Cincinnati, Louisville, Lexington, Oklahoma City, as well as Indianapolis. The company now has about 2,000 units under construction and Millar hopes to have started a total of 5,000 units by mid-2015.

“We're very narrowly focused on urban infill,” he added, since most second-tier cities have a host of older, underutilized buildings in downtown areas now considered desirable. For example, the company recently bought an aged, two-story concrete structure in downtown Indianapolis, and in 2012, began transforming it into Artistry, a five-story mixed-use development which will eventually have 502 apartments, 75,000-square-feet of commercial space, a third-floor pool and LEED certification.

Many potential investors may not realize the diversity of the population in these new urban cores, Millar added. Instead of a uniform collection of young singles, about 15% of those moving into the company's developments are families with school-age children. Although young families are frequently worried about the quality of neighborhood schools, in the second-tier cities “you're seeing significant [numbers of] magnet schools that test as well as suburban schools.” And unlike in first-tier cities such as Chicago, Millar contends these schools are far more open and easy to get into. “For some reason, these markets are way ahead of Chicago.”

Markets like Indianapolis gain much of their stability from a diverse economic base. Major corporations near Milhaus' downtown developments include Eli Lilly, Wellpoint, Inc. and Rolls Royce. In addition, a huge proportion of all products moved in the US flow through Indianapolis, much of it through one of the nation's largest Fed Ex hubs, and in the last few years the metro area has seen over $1 billion spent on medical facilities, second only to Houston, according to Millar.

However, there are reasons, Millar admitted, that institutional capital sometimes shies away from cities like Indianapolis. “What we hear from them pretty regularly is that our deals aren't big enough.” Average multifamily deals usually cost between $20 million and $25 million. “There is just not a lot of volume and absorption in our markets.”

Millar also said that out-of-town institutional investors have helped get a number of projects out of the ground that would not have happened with only local dollars. But he remains cautious. “We're careful about which institutional equity we bring into our market.” Sometimes, he has seen big investors overpay for a local development and then react with surprise when can't make money with it. “You're at a conference a year later and they're trashing Indianapolis. Because of that one [investor], it puts a big black eye on our market and it's frustrating.”