MARKET SNAPSHOT: Positive Auto Industry News Provides Cautious Optimism to Detroit Apartment Industry

Detroit–The resurgence of the automotive industry has brought some optimism to Detroit and its apartment market.

“With the improvement of these industries, there have been economic improvements,” notes Jonathan R. Borenstein, partner in Honigman Miller Schwartz and Cohn LLP real estate department. He was recently appointed to serve as an executive board vice president for the Apartment Association of Michigan.

For one, the city has dropped off the top list of unemployment, he points out. The Detroit-Livonia-Dearborn unemployment rate was 12 percent as of December 2010, according to the U.S. Bureau of Labor Statistics. While admittedly high, this is down from its peak of 18 percent in July 2009.

“We are experiencing very strong employment news with the automotive industry,” agrees Kevin Dillon of Hendricks & Partners’ Michigan office. “Ford and GM have identified adding shifts, totaling over 2,000 employees.” In addition, he points to Vanguard Health Systems’ recent acquisition of Detroit Medical Center and the renovation plans for Cobo Hall, Detroit’s convention center, as positive economic indicators.

“We’re still very much an automotive town and subject to the cycles and variables of that industry. Historically, there have been labor disputes and innovations … There have been layoffs, there have been new car and truck models, mergers and business combinations … All of these have significant economic impacts within the city and all of its suburbs,” Borenstein tells MHN.

Despite this, the state has made efforts to diversify, offering its film incentives, or film production credit, for example, which is a tax credit of up to 42 percent of the amount of a production company’s expenditures that are incurred producing a film in Michigan.

“Like a lot of communities, the Detroit area experienced steady and significant development of the outlying suburbs—lots of new housing starts that had a negative impact on apartment vacancies and rents, especially when it was so easy to get into a home as opposed to renting,” recalls Borenstein. “Now that we’ve had this contraction and the retreat from homeownership, we’ve experienced stronger multifamily rental markets across the whole region.”

While there hasn’t been market rent growth, Dillon reports that Detroit has experienced a significant reduction in concessions, whose burn-offs have averaged about a 3 percent increase in effective rents market-wide. (In reality, he adds, some markets have seen as little as 0.5 percent or 1 percent increase, while other submarkets have seen a 5 percent increase.)

At the same time, he tells MHN, occupancy has improved by a couple of percentage points, ranging from about 93 percent to over 95 percent in the strongest submarkets.

Of those interested in investing in the market, Dillon notes that there is about a 65 percent-35 percent ratio in terms of local buyers versus regional or national buyers, but it is all private equity.

“In the past couple years, institutional investors are avoiding a number of cities or regions, and in the case of the Detroit area, they have been unwilling or unable to make distinctions between various markets, each of which is distinct [and] some stronger than others,” Borenstein notes.

Cap rates have compressed from late 2009-early 2010 to the third quarter of 2010 by 50 to 100 bps, reports Dillon. Buyers are looking at all asset classes, he notes.  Class B and C assets are attractive due to their high occupancy rates. And while there is some interest in Class A assets, there is not much product available on the market because it has been the slowest asset class to recover.

While continued job growth directly impacts the apartment market in a positive way, as Borenstein points out, “even with little job growth, the bright spot is this migration from homeownership to apartment living is continuing.”

Furthermore, Michigan is one of the few states with property tax caps on assessments, “not just on the tax amounts and rates but the actual assessed values,” through Proposal A, notes Borenstein. “This capping of taxes is more or less permanent because it will take a Michigan constitutional amendment to overturn it, so that will have a significant long-term impact on expenses.”

While those in the market are optimistic, the metro does continue to watch oil prices, which may jump dramatically as turmoil in the Middle East continues.