HEARTLAND SNAPSHOT, APRIL 2009

Suburban Detroit Multifamily Market

The Detroit multifamily rental market is much stronger due in part to limited new construction. The current apartment rental rates in the greater Detroit multifamily marketplace do not justify the cost of new construction. The majority of new multifamily development over the past few years has primarily been for-sale condominiums. It is anticipated that new construction of apartment communities will be limited until the recovery of the economy. However, some units are being added to existing communities that are experiencing strong occupancies.

New conventional multifamily construction is limited to approximately 365 units with the exception of student housing communities at the University of Michigan in Ann Arbor. The largest new development, which includes office, retail, condominiums and luxury apartment components, is Developer Diversified Realty’s Bloomfield Park. The development, which is located in Pontiac, adjacent to Bloomfield Township, Michigan, has been halted at this time. The developer did not receive the anticipated pre-sales and pre-leasing requirements due to the poor economy and state of the retail environment; therefore, the development has been curtailed until the overall economy begins to recover. As noted, three student housing communities are being built at the University of Michigan. The developers are Joseph Freed & Associates, Zaragon Development and Kensington Development all from Chicago. All of the properties are focused solely on the student resident base, with leasing per bedroom as opposed to per unit.

New conventional multifamily development has been limited almost exclusively to additional phases in existing communities, or to condominium projects under construction being converted and completed as rental properties. These proposed new rental communities have focused their marketing efforts on the middle-to-upper-income resident base. Edward Rose Companies has added units to its properties in Belleville and Sterling Heights, Michigan. No ground-up construction of new luxury apartment communities is scheduled for the near future.

The majority of the expansion endeavors that are underway have been primarily concentrated in the western and northeastern suburban markets. The submarkets to watch are Oakland County and western Wayne County, Michigan. The majority of new employment over the past several years has been in these submarkets, which will likely spur additional apartment demand and construction in the future. The western suburbs have experienced job growth from global automotive engineering firms moving into the Canton, Northville and Novi, Michigan, submarkets.

Market growth is expected to be moderate this year, as it has been during the past several years. The automotive industry has shed thousands of jobs over the past 7 years, devastating the Detroit region. Until the industry returns to a sustainable level of annual sales, the growth will remain limited. However, the overall deterioration of the market has slowed and the industry is well positioned to thrive upon a recovery of the economy.

Multifamily vacancy rates have improved substantially since 2006; topping out above 7.4 percent at the start of 2007, vacancy rates declined to 6.4 percent by the second quarter of 2008. Some area multifamily professionals believe that vacancy rates will increase slightly, by perhaps 10 basis points, in 2009, while several local owners have indicated that February has been their strongest month in several years. This increase in occupancy and collections has primarily occurred due to the slowdown in homebuilding and an increase in homeowners moving back into apartments.

The rental rates for the overall market range from $550 to $1,453 per unit. The majority of the rental rates are between $682 and $931, depending on the size of the apartment and the location. While many reports indicate that rents have been trending down slightly, actual collections have been increasing. In many situations, concessions have slowed and occupancy has improved, which has resulted in increased annual collections. Market rents are not increasing, yet economic rents in the market are improving.

The state of Michigan and the Detroit region have been in a continual downturn over the past seven years. While many other parts of the country were thriving during the construction and real estate boom, this trend was offset by the manufacturing (auto) sector in this region. Michigan is experiencing some of the effects from the national economy; however, it appears that the effects are much less severe here than in other markets. After reducing the labor costs in the auto industry through job cuts and renegotiated labor contracts, this region is poised for strong economic conditions upon the recovery of the economy and increased auto sales. This will bode well for the apartment market. Limited new apartment supply and an improving auto industry will drive the employment market, apartment occupancy, stabilize rental revenue and eventually create rent growth.

— Kevin P. Dillon is an Associate Partner in the Birmingham, Michigan office of Hendricks & Partners.

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