HEARTLAND SNAPSHOT, MAY 2007

Detroit Multifamily Market

Even though the Detroit economy has continued to lag behind the rest of the country, 2007 is marked as the trough, with the economy beginning to climb back toward positive territory. There are signals in the market that the Detroit economy could begin to see a recovery as other industries begin to replace the automotive manufacturing sector as the main driver of the region. Employment statistics indicate that the manufacturing sector is still losing jobs at a faster pace than technology sectors are adding them. This inequity will change as employers such as Google and automotive research-and-development firms add operations in southern Michigan. The job losses in 2007 are expected to be 0.2 percent for the year. However, the Detroit economy is expected to turn the corner by adding 4,000 new jobs, an increase of 0.5 percent, in 2008. The Detroit economy, albeit at a slower pace, is following the national trends with its evolution toward the service and technology-based industries.

The multifamily market has suffered due to the single-family home building and the economy of the region. However, with limited single-family home construction and sales, apartments have experienced an increase in better-qualified residents and leasing traffic late in the first quarter of 2007. While concessions and high vacancy rates remain in the market, occupancy trends are showing signs of improvement. The average apartment vacancy remained essentially unchanged in 2006, closing the year at 7.4 percent. Asking rents continued to grow in 2006, as operators pushed rental rates up by an average of 0.5 percent. The downtown Detroit submarket noted the highest gains of the year at 2.3 percent, an indication that the city’s efforts to revitalize the central business district have taken hold and enticed people to move inward.

The apartment demand in 2007 is anticipated to be greater than the supply. The new construction of multifamily units is expected to be only 260 units, with a positive absorption in excess of 300 units for the suburban markets. New development of multifamily units is located in the suburban markets of Oakland, Macomb and western Wayne counties.

Rental rates have ranged between $500 and $1,500, depending on the one-, two- or three-bedroom apartment or townhome. This is a wide range; however, it varies based on the class of multifamily property. Class A properties’ asking rents range between $0.90 and $1.10 per square foot, or $850 and $950, for a one-bedroom unit, and between $1,000 and $1,500 for a two-bedroom unit. Class B properties rent between $0.80 and $0.90 per square foot, or $675 and $800, for a one-bedroom unit, and between $750 and $900 for a two-bedroom unit. Class C properties rent between $0.70 and $0.85 per square foot, with one-bedroom rents at approximately $475 to $600 per unit, and two-bedroom rents at approximately $600 to $750 per unit.

The multifamily market in the Detroit area is anticipated to grow at a slow pace during the next several years. There is limited land zoned and available for multifamily development in the suburban markets, where the majority of the growth is anticipated. This phenomenon, coupled with entitlement costs, including permits, fees and additional construction costs, creates extremely high barriers of entry for new multifamily developments. A few of the newer developments include Village Green of Rochester and Rochester Hills, Lake Village of Auburn Hills, Pendleton Park of Milford, Wyndchase of Canton, and Cidermill Village in Rochester. These properties were completed between 1998 and 2003.

The Detroit investment market has been affected by the negativity of the big three automotive companies — General Motors, Ford and Daimler Chrysler. However, investors from other regions of the country, including California, the mountain region, the Southwest and New York, have been focusing on the opportunities in Detroit and the Midwest. This is anticipated to be a strong opportunity for investors to pursue properties with higher cap rates as compared to other markets around the country.

— Kevin Dillon is an associate partner with Hendricks & Partners.


©2007 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.