COVER STORY, AUGUST 2004

A TASTE OF METROPOLITAN LIVING
While some markets are overbuilt, multifamily developers are seeing a demand for custom units and urban living.
Jennifer Orr

Apartment renters in the country’s heartland want a taste of big city life. At least that’s what many multifamily developers are counting on, as the trend for more urban-style properties continues to take hold in the Midwest.

“Loft development is probably the hottest ticket item out there,” says Cliff Cohn, president of Kansas City-based Yarco Co. “In Kansas City, there are 3,000 to 3,500 units, either built or that have been announced.”

Metro Lofts, a project recently completed by Clayton, Missouri-based Conrad Properties in St. Louis, is a prime example of the current trend in apartment development. The one- and two-bedroom units feature the true loft lifestyle, with ceilings more than 9 feet high, concrete floors, oversized windows, exposed ductwork and walls only three-quarters high. Coupled with the minimalist design are deluxe amenities, including maple cabinetry, individual outdoor spaces, secured and heated underground parking, a health club, a landscaped courtyard area with grills and furniture and an on-site porter.

The property has already proved popular with St. Louis renters. The first 70 units opened in May, and, as of June, were 90 percent leased. When complete, the project will feature 213 units. Metro Lofts doesn’t sound like the typical Midwesterner’s dwelling, but perhaps that’s the reason behind its popularity — the project is atypical. The Midwestern renter is more sophisticated, and these cultivated tastes are affecting the state of multifamily development throughout the region, according to Wendy Timm, Conrad Properties’ COO and CFO.

“We are catering to more discriminating renters,” she explains. “They are lifestyle renters looking for a certain quality of life and convenience. That typically means a building with a lot of services, a strong location, amenities, parking, good storage and a workout facility on site.”

George Quay IV, president and COO of Farmington Hills, Michigan-based Village Green Companies, agrees. “Today’s renters are exposed to a lot more influences than the previous generation,” he says. “They are more interested in urban, hip, 24/7 cities with constant activity, high amenities and high service. They want good value for their rental dollar, but they want to be somewhere cool and attractive.”

The urban style is not limited to apartment design. Because Midwestern renters want the metropolitan style to reflect not only their apartments but also their lives, developers are bringing elements of the urban lifestyle into their buildings.

“This generation frequents coffee houses and places where they can have conversations,” Quay says. “So in our urban projects, we’re developing community areas.”

Farmington Hills, Michigan-based Village Green Companies has completed the 163-unit Uptown City Apartments in Minneapolis’ Uptown neighborhood. This project marks the area’s first multifamily development in 25 years.

Village Green Companies is finishing Uptown City Apartments in downtown Minneapolis. The project will include numerous resident gathering areas, such as a community room, a media room, centralized courtyards and a whirlpool area. The Medical Dental Arts City Apartments in downtown Chicago will feature a bar in the building’s lobby where residents and their guests can hang out.

Timm agrees that “anything communal” is popular in amenity packages — a public area for watching television, a community kitchen, outdoor gathering places, outside fireplaces or fire pits, picnic areas and courtyards.

These communal elements are not limited to rental communities. Museum Park, a condominium project developed by Chicago-based The Enterprise Companies, will include a 3-acre park and a clubhouse with a swimming pool, spa, game room, entertainment center and convenience store. The project, which is a redevelopment of Central Station, will combine loft residences with high-rise towers and townhomes. The lofts will feature an early 20th century Chicago-style warehouse design, while the townhomes will incorporate more classic architectural elements.

Condominium and townhome buyers are becoming more discriminating in their tastes. They want something more than what the typical cookie-cutter condominium projects offer. “We see a need to individualize units,” says Ronald Shipka Sr., principal at The Enterprise Companies. “We have six different people working with homebuyers on selection upgrades, and we’re seeing more custom work going on as compared to buying off the rack.”

Projects in unique settings are doing well in Chicago, according to Shipka. “The velocity and absorption levels are on target with anything that we’ve ever seen,” he says.

Shipka also notes that many developers are building extremely high-end condominium projects — projects that Chicago might not be ready for. “How many $2 million buyers are here in Chicago?” Shipka asks. “There just aren’t that many.”

Mike Mullenix, president of Mullenix Apartment Homes, also questions the vitality of luxury communities, specifically the numerous high-end rental units going up in St. Louis. “We’ve always thought of St. Louis as more of a manufacturing community, without a tremendous amount of young, white collar executive jobs,” he says. “We’ve never gone after that type of product, but now you see a number of them being built.”

With so many people buying homes in this economy, developers could shy away from multifamily projects — not to mention high-end luxury rental developments. That is not the case in the Midwest. The low interest rates that are attractive to homebuyers are also attractive to investors. Right now, apartments are a safer investment than office buildings, according to Mullenix. “With a short 12-month lease, you can argue that your rental streams keep up with inflation as long as your supply stays under control,” he says. Mullenix also points out that investors aren’t making money in either the bond or stock markets. “A lot of institutional players are looking at apartments as being an investment bellwether,” he says. “There’s so much capital chasing real estate right now. Sites that are 3 to 5 years before their time will be developed.”

Timm also predicts a broader field of players in the industry. “Developers that historically haven’t been in the residential development business are starting to look at it because of an over capacity in the office and industrial markets.”

An interesting situation is developing in the apartment industry — more buildings have been going up at a time when more renters are choosing to buy. “You have two things moving parallel down the same track and not enough bodies to accommodate both tracks,” Cohn says.

This trend may have ended as developers expect a decrease in new projects in the next year. “I expect [development] to settle down,” Cohn says. “We’re probably not going to see the level of development that we’ve seen in the last 18 to 24 months.” Even so, most of the Midwest remains overbuilt with apartments. This oversupply coupled with a weak job market has contributed to an overall weakened multifamily sector, according to Cohn.

However, developers think the worst has passed. The fundamentals are returning in three areas, Quay says. First, the major automobile manufacturers have announced record earnings, which has positively affected the business confidence in the Midwest market. “Detroit, while it is diverse as an economy, is still very reliant on the auto industry, Quay says. “Ford and GM having announced record earnings has certainly assisted confidence in this market.”

Second, Midwest markets are either seeing a slight increase in job growth or no decrease in jobs. “Every quarter, during the past 3 years, we’ve seen job losses, and now we’re seeing either stabilization or some positive growth,” Quay says.

Third, interest rates are moderately increasing. “Those three factors, from a multifamily property management standpoint, all bode very well for our operations, and we hope they will stabilize the economy and submarkets,” Quay says.

Quay is already seeing the effects of these factors in his own properties. Traffic, closing ratios and renewal percentages are all up, while concessions are down.

Mullenix is also experiencing success with one of his newest properties, the Vinings at Bordeaux in O’Fallon, Missouri. The project is a 93-unit gated community, with a clubhouse, exercise facility and swimming pool. “We’re about 75 percent occupied and 80 percent leased, and it’s climbing very well. I think we’re a little off projection, but with 2003 being the toughest year in the apartment business, I’m pretty happy where we are.” As some of his older properties are not faring well, he feels that the Midwest multifamily market remains fragile. “Mortgage rates, even though they have increased in the last 2 months, are still at low historic rates,” he says. “Even though job growth is improving on a national basis, I don’t see it getting a lot better here [in St. Louis] anytime soon.”

The lack of jobs in the Midwest market is a current challenge facing multifamily developers. “Your renters are becoming people who can’t buy homes. They are people who don’t have established credit,” he says. “The market is a lot different than it was 10 years ago.”

Job growth is key to a stabilized multifamily market, according to Quay. During the past 4 years, the recession and disappearing jobs have caused the typical renter, who is 25 to 32 years old, to either move back home or move in with roommates. “As job growth and job confidence returns, typical renters living at home or with multiple roommates will be more comfortable with having their own rental environment,” says Quay. Job growth will not only bring back former renters, but will also encourage new renters to try out the apartment market.

Job growth and an overabundance of supply face most Midwest apartment developers. Individual developers also find they are faced with challenges unique to their specialty or location. Mullenix, for example, has found zoning to be an issue in St. Louis.

“You can only build apartments in St. Louis where, in terms of pioneering, it doesn’t make sense,” he says. “Not only can you not build them in the right places, you must balance a lot of negative forces for development.”

The government is creating obstacles for Cohn, who builds apartments for the lower income population. “In the Section 8 environment, there has been commentary that the ready supply of Section 8 certificates, which provide supplemental money to lower income families for housing payments, is going to be inadequate for our future needs,” he says. “That is going to be a problem for us — how to house this portion of America.”

Despite these challenges, developers have a positive outlook for the future. Their projects are leasing up nicely, in spite of a weakened market, and the economic signs signaling better times are slowly coming into view. This year is shaping up to be a better year than 2003, which hopefully means more good news in 2005.



©2004 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.