HEARTLAND SNAPSHOT, SEPTEMBER 2005

Detroit Multifamily Market

Apartments in the metropolitan Detroit multifamily market have been greatly affected by the recent recession, exhibiting elevated vacancy rates of 7 percent or greater on average, while rental rates has essentially held steady during the past 2 years.  In addition, as with many markets throughout the country, the Detroit metropolitan area has experienced a substantial increase in home construction and sales. And while the construction industry, primarily led by single-family construction, has proven to be a strong source of job creation — recording a growth rate of 5 percent during the past year ending in March — the active single-family for-sale market has, at least temporarily, contributed to the stagnation of the apartment market.

Yet, the dynamics of an expanding and evolving economy serve as a catalyst for improvement of the local apartment market. Even while the Detroit metropolitan area remains a manufacturing center, its economy is evolving as it diversifies and expands into the services and technology centers. This is evidenced by Detroit’s expansion into other industries and the measure of new jobs added to the local economy during the past two decades. For example, even as transportation equipment manufacturing lost 62,000 jobs from 1984 to 2004, business services gained more than 277,000 positions. Meanwhile, Detroit’s automotive dominance is cemented with recent developments such as Hino Motors Manufacturing USA’s recent relocation of its headquarters to Farmington Hills. This is one of several new expansions in the Detroit metropolitan market by various companies adding jobs to the business services industry.

The Detroit apartment market is proving to be the beneficiary of these developments and has experienced recent gains in physical and economic occupancy in many communities. This is a sign of improving economic conditions in the Detroit metropolitan market. However, certain areas have remained substantially affected by the low interest rate environment and single-family and condominium home purchasing experienced throughout the country. The areas where apartment occupancy and effective rental increases have improved are predominantly in the low- to mid- rental rate areas, while the upper middle and higher rental rate ranges, or luxury and semi-luxury apartment communities, have continued to be negatively affected by these single-family homebuyers.

Also benefiting Detroit’s apartment owners, very little or no new construction has been added to the apartment market in 2004 and 2005 throughout the Detroit metropolitan region. The areas that have experienced the majority of the apartment development during the past 5 to 7 years have been western Wayne County, southwest and western Oakland County and northern Oakland County. Even so, during the past 18 months less than 200 apartment rental units have been completed and made available for leasing in these areas.

As experienced in many areas around the country, the conversion of existing apartment communities to condominiums has remained a strong trend locally. Owners and operators of apartment communities are finding new financial opportunities in the condominium conversion market. For example, Michigan Realty, a local company specializing in the conversion of apartments to condominiums, successfully converted a 60-unit apartment community in Dearborn in 2004 and the first two quarters of 2005. Kaftan Enterprises has also purchased the 144-unit Briar House Apartments in Royal Oak for conversion to condominiums. They have completed a successful renovation of the property and opened for sales in the second quarter of 2005. The Royal Oak market is proving to be a strong condominium conversion market as it attracts a young resident profile with its vibrant downtown, office, retail and eateries.

Royal Oak, located in central Oakland County, also is the recipient of several newly built condominium communities. These new condominium developments have captured the young, upwardly mobile professional seeking the amenities offered by the downtown Royal Oak business district and community. The apartment acquisitions remain healthy with several transactions having taken place during the last 12 months. Some of these apartment acquisitions include the acquisition of luxury communities to maintain a strong yield to an investment fund, the acquisition of older communities seeking the upside opportunity through limited, and even extensive renovation of the apartment communities for the upside opportunity, occupancy and rental rate growth. A few of these transactions include the sale of The Pines Apartments, a 582-unit community located in the Township of Pittsfield. This property was purchased by Sterling American Properties of New York and is being managed by Timberland Partners of Minnesota. The new owners are in the process of renovating the common area facilities of the property as well as completing substantial upgrades to the apartment interiors. Within the first 90 days after closing, they have increased the occupancy by more than 5 percent and are anticipating continued rental and occupancy growth. In another recent sale, Applegrove Apartments and Townhomes, (renamed to Village Park of Rochester Hills), a 368-unit townhome development, was purchased by Village Green and Cornerstone Real Estate Advisors. This property is anticipated to receive a new clubhouse, pool and amenities package, as well as more than $15,000 per unit in renovations. Several other transactions that have been completed in the past 12 months include Walden Woods Apartments and Townhomes in Southfield selling to a Seattle-based investor with an investment partner from California; Village Green East of Troy has been acquired by a new Detroit investor with Village Green Companies and Henderson Global Partners; and the sale of Pheasant Run Apartments in Fenton to Southfield-based PB Associates.

As evidenced, the Detroit apartment market has experienced a recent substantial recession. However, investors have remained highly interested in the Detroit metropolitan market. It has been perceived that the region has experienced all of the effects from the economic recession and is on the road to recovery. Job growth is expected to measure 15,000 positions in 2005 to 60,000 new positions in 2006. Manufacturing is expected to begin stabilizing, and the forecasters perceive an increase in automobile sales for the Big Three. Job creation is expected to be centered in the business services sectors of retail, hospitality and health care. The metropolitan area remains a strong, stable living environment for 4.9 million people, and many local and national investors continue to seek investment opportunities throughout the Detroit metropolitan region.

— Kevin Dillon is associate partner with Hendricks & Partners in Detroit.

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