Demand for multifamily units continues to increase across Michigan’s major metropolitan areas. And this demand is showing few signs of waning.
But what’s behind this demand? We spoke with Charles Krisfalusi, senior director of real estate finance with the Birmingham, Michigan, office of Walker & Dunlop to find out. Here is what he had to say.
The multifamily sector has long been a top performer in the CRE industry. Can you go through some of the reasons why demand from renters remains so high for multifamily units?
Charles Krisfalusi: This sector has been resilient. If you think back to after 2008, that post-recession time, we were underwriting multifamily properties with 10% vacancies. That is a little tight for underwriting, but it is not dangerous. And ever since then, vacancies have been very low, very stable in multifamily.
The multifamily sector in Michigan has been a nice resilient market. Demand has remained high in Michigan for apartment units. That has kept the vacancies here low. We haven’t seen an oversupply of new units coming online in Michigan. That has helped to keep that demand high.
At the same time, people today are remining renters for longer. We are seeing more people who are renters by choice. Part of that is that multifamily properties have gotten higher-quality amenities as time has gone on. The properties are flashier. These properties provide the kind of lifestyle that a young professional might want, one that might not be achievable when these young professionals are looking at first-time single-family homes for the same price.
Yes, apartments are getting expensive. But they are still a less expensive alternative when compared to the all-in costs of homeownership. As mortgage interest rates have gone up, that has exacerbated that. Many people are holding onto their apartment units for a little bit longer because of the challenging economics of buying a single-family home.
Charles Krisfalusi, senior director of real estate finance with the Birmingham, Michigan, office of Walker & Dunlop
What about affordable multifamily? Is it a struggle for renters to find that in the Detroit market and other Michigan communities?
Krisfalusi: I know that there has been a push for more workforce housing, properties that offer rents at 80% of the area median income. But a lot of our local building owners have naturally occurring workforce housing properties. These properties were built in the ‘60s, ‘70s and ‘80s. The rents for these older properties are affordable. But the occupancies are lower than in other, newer multifamily properties. So many people don’t want to live in older-style units with brown cabinets and Formica countertops. There is often a slower lease-up on those properties with rents at 80% AMI.
Are there any multifamily product types that are doing an especially good job of attracting tenants?
Krisfalusi: One of the products that is doing really well is the townhome with a garage. They don’t come with a ton of density. but they do offer another housing type that is attractive for people who want to remain renters for longer. These properties are very home-like. Townhomes with attached garages do exceptionally well. They get good rents and are built at a modest cost. That is a product that has gotten stronger the last two or three years.
Does the Detroit market, and the entire state of Michigan, need more multifamily housing to keep up with the demand, much like we’ve seen across the rest of the country?
Krisfalusi: There does need to be more housing. Michigan is still seeing a little bit of a yearly increase in apartment rents, about 2% to 3% a year. We have moved back to a more normal pace of rent growth. We are no longer seeing those crazy rental increases of 6% or 7% a year. But we can certainly use more multifamily units throughout the state.
It’s interesting when you look at what happened during COVID. The work-from-home movement created a bit of migration. Michigan held onto a lot of people, but we definitely did see some folks move to the Sunbelt. Those areas did get overbuilt with apartments. They are now seeing rent decreases. We are lucky that we have this slow-and-steady tortoise of a market. We have new development but it is only trickling in.
When economic times do get tough, we might see more people splitting rent and living together. Two-bedroom units might do a little better. People are looking to live with roommates to save on rent.
Our occupancy levels, though, are still solid. We can absorb new development without seeing that occupancy rate fall.
Do you expect to see an increase in new multifamily development in Detroit and its surrounding locations this year?
Krisfalusi : Detroit has had a good number of new developments come online. A lot of them were delivered at around the same time. Because of that, it’s a bit harder to fill those developments. Detroit’s multifamily occupancy percentage is somewhere in the high 80s. It takes a little longer to bet those stabilized.
We saw that in Grand Rapids about two or three years ago. They were developing a lot. Because of that, owners might have to build in a two-year lease up instead of a12-month or 14-month lease-up. The only reason our occupancy rates in multifamily get below those post-recession rates is oversupply. We don’t have an oversupply of multifamily units right now.
But we do need more supply. We see strong occupancy rates and rents everywhere else. As a lender, we look for 30-, 60- and 90-day delinquencies. We are not seeing any spikes in those. I don’t know how much new supply we will get, but I do think we will see some new building in particularly strong markets.
How is the multifamily sector performing in the suburban areas of your market?
Krisfalusi: The suburban areas are interesting. Many have created these vibrant downtowns with mixed-use developments. The City of Auburn Hills has done this. They are trying to bring in new restaurants and retailers and build a downtown. Those type of developments are very successful, and multifamily buildings in them are usually popular.
Are you seeing more financing requests for multifamily properties today?
Krisfalusi: Yes. We pulled so many maturities forward when rates were low. There was a lull in financing requests. Now there is a big wave of naturally occurring maturing debt coming up. That is giving us a lot of loans to work on.
Everyone did these short-term five-year loans. So we are seeing a compressed maturity schedule. We have also seen more investment sales offerings in the last six months. The momentum is there. The offering memorandums are flying. We are picking up more loan requests for multifamily.
I think we will continue to see stability in the multifamily market. There is not a huge push for messing with 1031s and the tax code. That eliminates some investors’ concerns. Owners know that they can run their properties without the giant overreach of the federal government.
Because of all this, I do expect that we will see an increase in multifamily financing requests.
