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Suburban multifamily? In the Detroit market it’s still a strong performer

Posted By: REjournals on September 5, 2024.  For more information, please click here to read the source article.

It wouldn’t be accurate to call the Detroit multifamily market a booming one. Yes, demand from renters remains strong. But multifamily investment sales are sluggish thanks to higher interest rates. And while monthly rents continue to rise on a year-over-year basis, that growth has slowed.

Still, the fundamentals of the multifamily sector in Detroit and its suburbs remain strong. Greg Coulter, founder and managing member of Bloomfield Hills, Michigan-based Income Property Organization, said that this is especially true in Detroit’s suburban areas, where a growing number of renters want to live.

We spoke with Coulter about the resilience of the Detroit-area multifamily market and what he expects to see in this sector in the future. Here’s some of what he had to say.

And if you want to learn more about the Detroit multifamily sector, attend our fifth annual Detroit Apartment Summit being held Oct. 24. You can sign up for the event here.

It looks like the suburban markets are performing better for multifamily today. Is that accurate in the Detroit area, too?
Greg Coulter: It is. We haven’t transacted a multifamily sale in the city of Detroit itself in probably 18 months. The suburban areas, though, are seeing more activity. Overall, the vacancy rate for multifamily for the Detroit MSA is about 7%. In most suburban locations, that rate is below 5%. In Plymouth and Livonia, places like that, it hovers near 4.3%. We still have low vacancy rates in the suburbs, especially for Class-A properties.

What about rental growth? Are apartment rents still rising throughout the Detroit market?
Coulter: We are seeing rental growth at about 3% or so. Rent growth was a bit stagnant last year. The pace of rental growth has slowed. We are seeing a little bump in some markets, though. In places like Dearborn and the Downriver region, we are seeing rent growth of as high as 5%.

How about leasing activity? Is there still a steady demand from renters for apartments here?
Coulter: In the suburbs, the leasing activity lead time has gotten better. In 2022, we could lease something in a matter of an hour or a day. Last year, we were filling units in two to four weeks. On average now, we are leasing units in two to three weeks. Things have gotten a little better, then, when it comes to the speed of leasing units.

There is a tale of two different markets here, though. The vacancy rates for apartment units in the city itself are about 10% in Class-B and -C properties and about 25% in Class-A buildings. A lot of the trouble is still stemming from the COVID years. We had a big increase in delinquencies and the court system is slow. Changing those units over took a long time. It has taken a while to fill those units with qualified tenants.

The vacancies in the Class-A buildings are higher mostly because of an increase in deliveries while there was a slowing demand. You can point primarily to the amount of new construction for the higher vacancy rates in the Class-A market.

And during the past 12 months, the city as a whole has seen negative rent growth. Once again, the new deliveries and softening rental market are to blame.

Why are apartment rents so much stronger in some of Detroit’s suburban communities?
Coulter: In some of the markets like Macomb County and Downriver, apartment rents were below the average to begin with. They are catching up now. These older markets still have more room to expand.

Because of COVID, a lot of younger kids who moved into the cities moved back to the suburbs. The kids moved to the city for the nightlife and to be around other people. When everything shut down because of COVID, that nightlife and entertainment dried up. That played a part in people moving back to the suburbs. That might reverse itself as time goes by.

Have the challenges of buying a single-family home played a part in the continuing demand for rental units in Detroit?
Coulter: The single-family market challenges have a lot to do with it. It is difficult to get into a single-family home with the high costs and interest rates. A lot of young people want to be mobile, though, too. They want to move around. Renting is very popular with that type of person. New apartment construction is being absorbed. It’s a little more difficult to absorb new construction in the city. But in the suburbs, new units are being gobbled up.

Are you still seeing a steady amount of new apartment deliveries in the market?
Coulter: In the last 12 months, we’ve seen nearly 1,800 new apartment units in the suburbs. In the next 12 months, we should see another 2,000 units delivered. They should be absorbed quickly. They don’t compete with older stock. There is such a delta between the new amenities versus the older 1980s buildings with no amenities. It’s such a gap. New developments compete against themselves. And in the suburbs these new developments are spread out enough so that they are absorbed quickly.

In the city, we’ve seen 1,402 units delivered in the last 24 months. Those units don’t get absorbed as quickly.

Is there still a multifamily shortage in the Detroit market?
Coulter: There is a shortage in certain suburban locations. In the city of Detroit, we have to shore up the vacancies first and get these new developments online. I don’t know if I could advise someone to put up additional units in the city now. Maybe the lag time in filling the units in the city is because so many are online in such a small space. Most of those city developments are done within one square mile or a mile-and-a-half. It’s not a big area where all this multifamily development is taking place.

What kind of amenities are renters looking for in new apartment developments?
Coulter: There is an emphasis on higher-end workout facilities. Basic amenities like WiFi are important, too. Most new buildings come with a pool. Those make for great pictures, but I don’t know if they are a must-have amenity like they used to be. I don’t see a lot of people using the pools. The workout facilities are used quite often, though.

I know investment sales are down throughout the country. Are you seeing many multifamily sales yet in the Detroit area?
Coulter: Last year, the market as a whole was down 70% to 75% from 2022. That year, though, was an extreme high. This year will be better than 2023. Our third and fourth quarters of this year will be the best two quarters we’ve seen in the past two years. As I mentioned, though, we have not closed a multifamily sale in the city of Detroit since January of 2023. That’s significant when city sales typically make up 15% to 20% of our multifamily transaction volume.

Will an interest rate reduction help?
Coulter: We have already seen some downward movement in our rates. We are at sub 6% for agency loans, which we haven’t seen for a couple of years. So we are already seeing the effects of lower interest rates in our world. That’s why we are seeing a bit of a pick-up in sales activity now.

I think better times for the multifamily sector are ahead. Barring some macroeconomic disaster, we should see more activity in the near future. The market loves stability. I don’t think the market foresees interest rates going up anytime soon. That’s what investors are looking at.