How busy has the multifamily sector been? Just ask Greg Coulter, managing member and founder of Income Property Organization in Bloomfield Hills, Michigan. He says that he’s never seen more activity in this sector.
And that’s pretty impressive, considering how long Coulter has worked in commercial real estate.
“I’ve been doing this for 31 years. I’ve never seen anything like what we’ve had in this sector in the last 24 months,” Coulter said. “Cap rates are at all-time lows. Demand is high. Capital is out there everywhere you look. It’s been incredible in multifamily.”
And the best news? There are few signs that demand for multifamily space, both among renters looking for a place to live and investors searching for a safe harbor for their dollars, is ready to slow anytime soon.
Don’t expect, then, new sales and development of multifamily space to suddenly slowdown in the coming months.
The threat of rising interest rates?
This doesn’t mean that rising interest rates aren’t a concern. Coulter said that in the last 60 days, acquisition activity in the multifamily sector has tightened slightly. But still, demand for multifamily assets remains high among investors, even with the economic uncertainty now plaguing the country, Coulter said.
Coulter points to his hometown market of Detroit. In Detroit’s Midtown, Corktown and CBD areas, demand for multifamily space, both among renters and investors, continues to soar. Monthly apartment rents are still rising and cap rates remain low.
In the more tertiary markets of Detroit, though — those city neighborhoods located farther from the CBD and downtown — demand is slowing slightly. Coulter said delinquencies are higher in these areas, making multifamily properties here less desirable to investors.
But “less desirable” doesn’t mean “undesirable,” even in the city’s tertiary markets.
“The tertiary markets are seeing more multifamily properties up for sale,” Coulter said. “And these properties have more issues when it comes to delinquencies and collections. But still, the demand for these properties is there. It might not be as high as in the areas around the CBD, but people are still buying these properties.”
What’s behind the continued demand among investors and renters for multifamily space? Coulter points to interest rates first. Yes, rates have risen recently. And that does throw some uncertainty into even the strong multifamily sector.
But historically, interest rates remain low. This makes it more affordable for investors to purchase multifamily assets. And the demand for rental units remains high, meaning that investors continue to make solid returns on their multifamily assets.
“People always need a place to live,” Coulter said. “That still holds true. There is a lot of capital out there looking for a home. Investors still see the long-term prospects for multifamily as being solid.”
Also interesting has been the performance of monthly apartment rents. Apartment rents continue to increase on a year-over-year basis across the country. Coulter says that in Detroit, monthly apartment rents are up 3% to 4% when compared to a year earlier. In the suburbs, apartment rents are up 3.5% to 9% year-over-year, depending on the community.
Because demand for apartment units has been so high for so long, it can prove challenging for renters to find units. The National Multifamily Housing Council says that the United States would need more than 4 million additional apartment units to meet the demand that consumers have for multifamily space.
And in most major markets across the United States, there is nowhere near enough apartment units to meet the demand for them.
“They are working on bringing new units to market, but you can only build so fast,” Coulter said.
In the Detroit market, builders are adding new apartment projects in communities such as Auburn Hills, Rochester Hills, Troy, Royal Oak, Novi and Westville. And in Detroit itself, developers are repositioning outdated industrial facilities, turning them into trendy multifamily spaces.
What does the future hold for the multifamily market, in Detroit and across the country? Coulter said that he expects demand for apartments to remain strong among both renters and investors.
“I think interest rates will go up some more in the next 12 months. But the demand for multifamily space is still high and the supply is still low,” Coulter said. “We had a little blip, a little slowdown just now because interest rates rose so fast. I think that was a shock to people. But it seems like the multifamily market is heating up again already. I think the population is already getting over the higher interest rates. I think demand for multifamily space, then, will remain high. I see no reason why that won’t be the case.”
A diversified economy is key
Andrew Farbman, chief executive officer of Southfield, Michigan-based Farbman Group, said that Detroit today benefits from a diversified economy.
As Farbman says, Detroit ranks as one of the mortgage-lending capitals of the country, with three of the largest producers of residential loans based in southeastern Michigan. At the same time, the Detroit market has benefitted from the rising demand in autonomous and electric vehicles, with major auto makers working on this technology here.
Another positive? Ford is getting closer to occupying its new space in Detroit’s Corktown neighborhood. The auto giant purchased the formerly vacant Michigan Central Station and plans to transform it into a campus dedicated to new technology.
“Once that opens, it will be a significant driver in that marketplace,” Farbman said. “Detroit is fortunate that we now have three submarkets – Corktown, Milwaukee Junction and Eastern Market – all finding their footing in the tech hub. Watching them compete for tech businesses has been interesting. Hopefully, they are all successful. They all have former loft buildings that can be converted to new-age loft office space and residential. It’s an interesting time here.”
The Detroit market is fortunate, too, in that the problems facing the office sector across the country aren’t having as much of an impact here. Farbman says that the office sector is not as significant a portion of the user base in downtown Detroit as it is in the downtowns of other major Midwest cities.
“We are seeing less of an impact here from the work-from-home movement going on with some of the younger workforce,” Farbman said. “Detroit is healthier today and is moving along on its path of becoming a true 24-hour global city. It is fun to see.”
The Detroit market is benefitting, too, from the number of national banks that are expanding their presences in Southeastern Michigan. Old National Bank and Citizens Bank have each expanded their footprint in the market.
As in most markets, the multifamily and industrial sectors are the strongest today in the Detroit area, Farbman said. And even with the challenges of rising interest rates and construction costs, industrial, at least, looks to remain strong throughout the rest of the year and into 2023.
“No matter what town you are in, the industrial market and the growth of the industrial market has been fairly rampant,” Farbman said. “Occupancies are at historical highs. Demand seems infinite when you are showing industrial space. The amount of activity in that sector is shocking. We’ve seen rents take a nice move forward in industrial, too. We are seeing some new developers focusing on our market than we had seen in the past. That is exciting to see.”
Multifamily remains strong in the Detroit market, too, Farbman said. However, when it comes to valuation, Detroit and southeastern Michigan tend to trail other Midwest apartment markets, Farbman said.
That is slowly changing, though. Farbman said that a greater number of institutional investors are sinking their money into Detroit-area apartment developments. That is pushing values a bit higher today, he said.
The challenge for investors is that the supply of multifamily properties in Detroit and its surrounding communities is still too low to meet the demand for them. And Farbman doesn’t see this changing soon.
“It is still so hard to find good infill sites,” Farbman said. “You do see more multifamily product coming in the edge cities and in some of the growth pockets of western Wayne and western Oakland counties. Those communities continue to grow in population, so they need new multifamily product. The growth of multifamily supply, then, is not as dramatic in the Detroit market as it is in some of the other communities we cover, but it is happening.”
The good news in the office sector is that most employers in Southeastern Michigan are back to work today, Farbman said. This doesn’t mean that the amount of office traffic is the same today as it was before the pandemic hit. But many companies have made their post-pandemic work plans here, and that certainty has helped the office sector in Detroit and its nearby communities.
Farbman said that office activity in downtown Detroit has rebounded faster than it has in larger cities such as Chicago.
“Detroit’s resiliency is partly because a good portion of the city is not mass-transit-focused,” Farbman said. “The cities that rely heavily on mass-transit systems have been the slowest to recover when it comes to the office market. Our office market is also spread out a bit, with a smaller concentration of our office space in Detroit proper. That has helped as office space in suburban markets tends to have lower vacancies right now.”
The retail sector in the Detroit market is firmly in rebound mode, too, Farbman said. This is especially true of infill locations in busy city and suburban neighborhoods.
“I am bullish on retail in general,” Farbman said. “The location and land are so reusable and adaptable.”
As Farbman says, the pandemic did slow some of the momentum that Detroit, and specifically its CBD, had been seeing. But commercial real estate activity in the city is picking back up again, he said.
“Detroit has seen plenty of tough times in the past,” Farbman said. “We are a tough city, and we work hard to recover from those challenging times. That is happening now.”