Formerly Vacant Buildings Find New Life as Apartments

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Revitalization efforts in Detroit are underway and drawing residents and businesses back to the city. These measures aim to improve downtown Detroit’s streets and parks, enhance outdoor activities to increase foot traffic and attract new retailers, jobs and residents.

In addition, construction will begin later this year on 3.3 miles of the M-1 light rail line, which will run mainly down Detroit’s Woodward Avenue between downtown and the New Center neighborhood, attracting redevelopment along the route.
These efforts, coupled with a growing desire of many young professionals and downsizing baby boomers to live in an urban setting, have led to tightening vacancy rates in the downtown core. Although there is no hard data collected on apartment vacancies in the downtown market, developers claim vacancy in some pockets is below 4 percent. The vacancy rate across the metro area currently stands at 4.4 percent.
As a result, some vacant buildings such as the former Broderick Tower, Detroit Savings Bank and the David Whitney office building are being put to new use as apartments. Older apartments are also being renovated, some of which are being converted to luxury units, such as the Griswold Apartments. As renters in these properties are relocated, occupancy in surrounding Class C properties should rise.
Renovations Aplenty
Although the apartment inventory across the metro area is expanding and multifamily building permit activity is growing, it is due in large part to building renovations. Completions in the metro area will total 410 rental units in 2013, down slightly from 572 units last year.
New construction activity in metro Detroit will continue to lag behind other major Midwest markets such as Chicago and Minneapolis where job growth is driving apartment demand.
The Chicago labor market, for example, has added more than 43,700 jobs since the start of the year and is expected to generate more than 63,000 jobs for all of 2013. Minneapolis generated 31,900 jobs during the first seven months of the year and that figure is projected to reach nearly 50,000 by year’s end.
Detroit has produced 17,500 new positions so far in 2013 with year-end projections of 27,000 jobs. Expect the largest growth in the professional and business services sectors and continued cuts in the government sector.
In addition, the availability of underutilized properties, the cost of existing buildings and average rents for newer apartments will not justify the cost of new construction in many neighborhoods of metro Detroit. The median sale price for apartments in Detroit is lower than in other major markets, making renovation expenses in Detroit more affordable than the cost of new construction.
In Chicago, suburban apartment properties sold at a median price of $64,200 per unit for the 12-month period ending in July, while in the city the median price reached $100,000 per unit. These figures contrast sharply with Detroit where the median price for properties traded during the same period was $30,100 per unit.
A Bargain for Renters
Average rents for new apartments in Detroit are also lower than other major Midwest markets such as Chicago and Minneapolis. As of the second quarter, the average monthly effective rent for a rental unit built since 2000 is $1,775 in Chicago, $1,410 in Minneapolis and $1,188 in Detroit.
In light of the availability of vacant and underutilized buildings in the city of Detroit, renovation and conversion activity will likely dominate development pace in the year ahead.
The Detroit apartment market has made significant strides and is poised for growth once job growth accelerates. As of the second quarter, vacancy in all but three of 16 submarkets in the metro area was below 5 percent, with 10 of the submarkets posting rent gains.
Construction of new apartments in metro Detroit will most likely begin in submarkets where demand for newer units is high and rents are elevated, such as Ann Arbor or Farmington Hills/West Bloomfield.
In these submarkets, the average monthly effective rent in buildings built since 2000 is $2,320 and $2,263, respectively. The vacancy for units built since 2000 sits at 0.8 percent in the Ann Arbor submarket and rests at 1.2 percent in the Farmington Hills/West Bloomfield submarket. There is one project underway in Ann Arbor containing 155 units and nearly 400 proposed units.
In many more affordable submarkets, apartment operators face rising competition from the for-sale housing market. This competition will limit the amount that operators can raise rents at Class A properties in many of the more affordable neighborhoods.
— Gordon Navarre, senior associate, Marcus & Millichap Real Estate Investment Services

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