The Motor City’s New Ride

A look at Detroit’s multifamily market.

A lot has been written about the fall of Detroit over the last decade. After all, it wasn’t too long ago when the Motor City was a bustling metropolis of 1.8 million people and had the highest per capita income in the United States. The city’s problems have been well documented over the years, but the tide seems to be changing.

According to economic experts, there’s an aggregation of dozens of projects varying in size, scope, and aspiration that is giving the Motor City a vibrancy it hasn’t seen in decades.

There’s a palatable creative energy involved in rebuilding the city, and Detroit has become a place where young businesses are gravitating to and with that, young professionals in need of multifamily living.

Bob Kraemer, principal of Kraemer Design Group, Detroit, says housing demand has been absolutely booming in downtown Detroit. “Most of the incoming tenants are young professionals, thus the most sought-after set ups are small one-bedroom units (for those not interested in roommates) and large two-bed/two-bath units, which give individuals their own space while keeping to a budget,” he says. “There is an overall sustained excitement with Detroit’s resurgence. People are excited to be a part of something big, and take advantage of the unique opportunities a comeback city has to offer.”

Todd Szymczak, vice president of investment sales for Detroit’s Farbman Group, says the multifamily market is stable right now, due to limited opportunities. “Detroit is a market that has a higher number of long-term owners. There are more entrepreneurial ‘family’ owners here than some other markets like Chicago, Minneapolis, Nashville, etc., that have more coastal institutional owners who swing in and out of markets which create more turnover in ownership,” he says. “Many owners who were in a position to refinance in the past several years have put long-term agency debt in place that will self-amortize and have very low interest rates, so they are positioned for a very long term hold.”

Opening up

When it comes to multifamily development projects, the name of the game in Detroit is adaptive reuse as new development continues to revolve around the repositioning of former office buildings in the Central Business District.

“Detroit has some beautiful historic downtown buildings that investors are converting to contemporary urban housing options,” Kraemer says. “I suspect as more and more families look to the downtown area, we will face the need for three-bedroom units and economically driven micro-lofts.”

The Kraemer Design Group is currently working on a major redevelopment of the historic David Whitney building into a mixed-use hotel (Aloft Detroit) and multifamily housing complex, set to open late this year.

“In the Midtown district in particular, we are seeing renovation of older Class C properties into B+/A- properties,” Kraemer says. “New low-rise construction is also catching on in Midtown.”

While most new development announcements have been focused on Detroit, there are new apartments on the boards again. Szymczak says there is a significant new development in Oxford by Burton Katzman that has broken ground, and also a significant development in downtown Rochester announced by Soave Enterprises.

The Oxford plan calls for the developer to build 240 apartments (12 buildings containing 20 units each) and a maximum of 156 condominiums (26 buildings containing six units each) in two phases.

Developers will pay up for “main and main” locations, Szymczak notes, saying they are willing to work on infill locations that are near other rooftops, shopping and services.

“We are not seeing developers looking to push development out to the edges of population centers even if the land cost is cheap,” he says. “The rents in the areas need to support new development, and that is only going to happen in quality locations.”

Jonathan Holzman, CEO of Village Green, Farmington Hills, Mich., predicts that this is just the early stage of a new cycle in Detroit and that multifamily buildings will be on the rise over the next few years.

The company recently purchased two major apartment communities in downtown Detroit: The Detroit City apartments on Washington Blvd., and Millender Center Apartments, in the heart of Detroit’s Financial District, which features 338 luxury one- and two-bedroom apartments.

“For both, we did substantial renovations on the apartments, and amenities, and there was a dramatic increase in rental rates,” he says. “Village Green continues to invest in the City where we began three generations ago. We will be increasing our investment in our core business of luxury City-branded apartments.”

Redevelopment at large

Matt Cullen, president and CEO of Rock Ventures, the subsidiary of Quicken Loans that has invested $1.3 billion in revitalizing Detroit, and head of the Opportunity Detroit campaign to create an urban environment that attracts businesses, residents and visitors, says the plan to make the area more “live, work and play” is in full gear.

In fact, Clear Capital recently cited Detroit as the second highest performing metro area in terms of real estate valuation and collateral risk assessment.

In May, community development professionals gathered in Detroit for a three-day summit examining the pros of redeveloping distressed communities into places of opportunity.

“Community developers are doubling down on our support for Detroit,” NACEDA director Frank Woodruff, said in a statement. “Despite exceptional challenges, Detroit’s community developers are harnessing private enterprise and resident strength to bring the city back one neighborhood at a time.”

Cass Plaza and the Davenport Buildings are the latest historic buildings in Detroit that will be redeveloped into affordable housing apartments for 47 Detroit families, thanks to a $17 million investment.

Great Lakes Capital Fund invested just under $9 million in total development costs to rehabilitate the historic buildings, which are currently vacant and badly in need of repairs.

Paving the way

According to research from Marcus & Millichap, job growth in Downtown Detroit—thanks heavily to being named as one of seven Google tech hubs in North America—will attract new tech firms and boost employment opportunities for young professionals, increasing apartment demand in the re-emerging neighborhoods located near the city’s financial core.

The report notes that as Detroit sees robust job growth, residents are expected to return to the city and its suburbs. The market report predicts that approximately 29,000 new jobs will be created in Metro Detroit in 2014, accounting for a 1.6 percent growth in total employment.

There are dozens of new tech/creative firms setting up shop in the city, adding to the demand for more housing.

“We recently designed a new office space in what has come to be known as the ‘M@dison block,’ for App start-up Detroit Labs—the developers behind the Domino’s Pizza app with more than 8 million downloads to date,” Kraemer says. “The type of work culture and tech savvy these companies offer draws a lot of great talent from the rest of the state and even the country.”

A number of organizations, like Blue Cross Blue Shield of Michigan, have moved significant amount of staff into the city lately, but no one matches the nearly 10,000 people the Quicken Loans family of companies have brought to downtown.

Szymczak says Detroit is seeing growth in high-tech engineering jobs that design and produce using modern production methods, so like many parts of the country, it is experiencing modest growth in jobs at the low end (services) and high end (engineering and medicine).

“The feeling around town about the economy is really the best that I’ve seen in 20 years (since the SUV boom times of the 1990s). People are shopping, people are dining out, spending money,” Szymczak says. “It is 180 degrees from where we were in 2007-2010. The region has stabilized and suppliers are adding jobs again.”

While Szymczak feels tighter lending standards for purchasers of homes have also contributed to the revival, he thinks it’s a larger attitude change by young people that has really affected the resurgence.

“Ten years ago, kids coming out of college wanted to rent for two years, then felt it was a waste of money and wanted to jump into a condo purchase. This caused a ‘move up’ problem for apartment owners as many Class A apartment renters became owners and the pool of tenants shrunk,” he says. “Now, after what we all witnessed in 2007-2011, potential home buyers have come to realize that a home is not always a liquid investment and there are significant trade-offs in homeownership in flexibility, free time, and the realization that prices can move in both directions. Some people are choosing apartments as much for a more carefree lifestyle as they are for financial reasons.”

By the numbers

In the Central Business and Midtown districts, rent for all property types, from economy to luxury, is rising dramatically, and many buildings have extensive wait lists.

“Despite all the negative press and attention, Detroit is, in so many ways, the land of opportunity,” Kraemer says. “It’s a great place to start a business or create an immediate community impact.”

When it comes to rents, Szymczak says Downtown Detroit has some of the highest rents per square foot of any submarket due to the very tight supply in the best parts of downtown. However, if it is not near Midtown, the CBD, or the Riverfront, the rest of the City has some of the lowest rents in the market.

“Of course, the interest of both tenants and buyers are in all the places locals would logically expect, such as Birmingham, Royal Oak, Rochester Hills, Troy (West), Novi, Northville, etc.,” he says. “We are observing strengthening rents in the older ‘inner ring’ areas of Warren (north), Livonia, Wayne… so much of this can vary from property to property within the same market depending upon unit vintage, amenities, and the quality of management and maintenance.”

According to the Marcus & Millichap report, nearly 500 new rental units are due for completion in 2014, down slightly from 2013, when 600 new units came online. Construction of new market-rate apartments will likely be fueled by tightened vacancy rates and soaring rents, especially in submarkets such as Royal Oak or Farmington Hills.

The report foresees metro-wide vacancy to reach the lowest year-end rate in 13 years, falling 30 basis points to 4.1 percent. As a result, effective rents will see a 1.2 percent climb and reach $827 per month as compared to 2013, when rents increased by a modest 0.6 percent.

The 411 of investments

Szymczak says velocity in investments are down, but prices are up, noting it’s the best time to be a seller, as deals are happening based on fundamentals and rational underwriting.

“There have been several transactions this year that would be considered ‘mega-cap’ deals in the Detroit market, but overall there are fewer deals hitting the market,” he says. “There are more deals being done ‘off-market’ than a few years ago as many buyers are trying to avoid a competitive bidding situation by making preemptive offers to sellers. For buyers, it is a large market that they can buy with more reasonable yield and upside than what they can buy in cities that get all the competition from REITS and large institutional buyers.”

According to Kraemer, people are captivated by Detroit, and both national and international investors are coming in, interested in the city projects. “In addition,” he says, “we are seeing non-traditional or ‘new’ developers interested in the City, which could lead to a lot of exciting opportunities for the market.”