Positive Economic, Demographic Trends Fuel Detroit’s Apartment Rental Market
Throughout metro Detroit, employment and population gains are bolstering apartment demand. Following the creation of 40,200 jobs one year ago, employers in the metro area added 22,200 people to payrolls during the past four quarters. The hiring brought the unemployment rate to 4.5 percent in March, down 10 basis points year over year.
The tighter rate may make it more difficult for some employers to find qualified workers to fill openings. During the past 12 months, the hospitality sector led hiring with 8,200 additional workers. New hotel openings contributed to the increase.
Sustained job growth has helped to boost the metro population by nearly 11,700 people and 6,600 households over the past year. Many of these residents are opting to rent, as rising home prices place homeownership beyond the reach of more households.
During the past five years, the median price of a single-family home has soared 68 percent to $177,053 as of March. Highly amenitized homes or properties in desired areas such as downtown Detroit, Troy or Royal Oak, have much higher median prices, making renting a more affordable option in numerous areas of the region.
Multifamily construction is gaining traction in the suburbs. Completions in the metro area reached a 10-year high, with 1,275 units finalized in the most recent four quarters compared with 1,240 in the prior year. Deliveries will remain elevated as developers have more than 2,400 apartments underway throughout the region, with completions scheduled into 2020. Nearly 1,500 of the units under construction are in the city of Detroit.
In recent years, apartment deliveries have been focused on the repurposing of older buildings into rentals in the Detroit core. In the upcoming years, tightening vacancy and improving rent growth have builders active in cities surrounding Detroit. After the completion of 360 rentals in the suburbs during 2017, roughly 800 units are scheduled to be placed into service this year. The largest of these projects is Montclair at Partridge Creek in Clinton Township with 270 units.
Even though deliveries are heightened, vacancy remains tight. The metrowide vacancy rate ended the first quarter at 4 percent, down 20 basis points from one year earlier. In the Downtown-Midtown-Riverside submarket, where nearly 2,400 units have been added in the past five years, vacancy ended March at 4.6 percent, down 30 basis points year over year. Effective rent soared 13.5 percent to $1,195 per month, a metro high.
Rental demand is especially robust in the Novi-Livingston County submarket, with the lowest vacancy rate in the metro at 2.3 percent in the first quarter. Here, just 100 units have been built in the past five-year period and delivery will be limited to 100 units through 2020, likely maintaining tight vacancy and pushing rent growth in the submarket this year.
As vacancy tightens, rents are climbing. Following a 3.4 percent metrowide advance one year ago, the average effective rent posted a 4.1 percent hike to $943 per month in March.
By class type, B units registered the largest annual rent gain, rising 6.5 percent to $934 per month on average. Vacancy in these units is especially low, at 3.8 percent, having declined 30 basis points over the past 12 months. Effective rents in Class A rentals rose 4 percent during the same period, while vacancy in these units climbed 40 basis points to 4.8 percent as new buildings have yet to stabilize.
Buyers continue to eye lower entry costs and higher yield potential in Detroit apartments. Although trading activity remained relatively steady year over year, the number of out-of-state investors soared 63 percent as more buyers sought the higher returns available in the metro area. Many are focusing on suburban assets with more than 100 units, especially in Oakland and Washtenaw counties. Cap rates for these properties typically start in the mid-5 percent range.
A lack of listings, however, generates an active bidding environment. Competition for available assets assisted in pushing the average price up 10 percent to $61,950 per unit during the past 12-month period, while the average cap rate for all product class types held steady in the mid-7 percent range.
Properties trading for less than $5 million led transaction activity in the most recent four quarters and local buyers dominated purchasing in the city of Detroit. Here many buyers are focused on value-add buildings. Redeveloping neighborhoods that surround downtown Detroit, such as the East Riverfront, offer opportunities.
Major redevelopments underway throughout Detroit, including the former Tiger Stadium and Packard Plant, are transforming additional areas in the city. As portions of these projects are completed this year, property values nearby should improve and attract additional investors. Throughout the metro, the reassessment of property values has some buyers hesitating on additional purchases as tax bills on a number of assets soar above owner projections.
— By Chris Futo, First Vice President, Associate Director, National Multi Housing Group, Marcus & Millichap. This article originally appeared in the July 2018 issue of Heartland Real Estate Business magazine.