Many of the national trends unfolding in the multifamily sector are playing out in Grand Rapids, the second largest city in Michigan, with a population estimated at 195,000 and slightly more than 1 million metrowide.
A combination of demographic, economic and lifestyle trends are leading to the creation of more renter households. This includes Baby Boomers, Millennials and renters by choice across all income levels.
In addition, Grand Rapids is experiencing an urban renaissance that is bringing new commerce, housing and amenities into the downtown area. During the 2016 National Multifamily Housing Council conference in Orlando, Grand Rapids was recognized as one of the top three small to mid-sized markets in the country for multifamily investment.
Annualized apartment rent growth in Grand Rapids has been running at a robust 7 to 8 percent for the past two years, but some momentum has been lost in the wake of a large number of units that have come on line. The annual rent growth slipped to 4.6 percent during the four-quarter period that ended Sept. 30.
Scott Nurski, NAI Wisinski of West Michigan
The average occupancy rate remains above 97 percent, but is gradually coming off a peak of 98.6 percent in the third and fourth quarters of 2013.
Overall, property performance is quite strong across both urban and suburban rental housing.
Favorable attributes
For those who live in Grand Rapids, it is well known that the city offers a great quality of life and an attractive investment environment. This is due to positive attributes such as a diversified economy, relatively low cost of living and a skilled workforce.
The unemployment rate in the Grand Rapids-Wyoming metropolitan statistical area was 3.3 percent as of August and has remained below 3.5 percent for the majority of 2016. Employment growth has remained steady with the addition of 11,312 new jobs during the 12-month period that ended in August, representing a 2.1 percent annual gain.
Furthermore, Grand Rapids offers a strong medical component that has been driven by several billion dollars of investment over the past two decades. The Medical Mile district, located on the northeast edge of the Central Business District (CBD), is a renowned healthcare destination comprised of clinical, research and academic institutions.
The latest addition is the Michigan State University College of Human Medicine.
These are only some of the factors that continue to drive demand for rental housing throughout greater Grand Rapids. High occupancy rates have put landlords in the driver’s seat in establishing rental rates, substantially increasing the revenues and values of apartment assets.
However, the most notable result is the sudden boom in multifamily development, predominantly in the urban districts.
Urban lifestyle evolution
Grand Rapids has experienced a resurgence and tremendous urban renewal that started with the advent of the popular Van Andel Arena in 1996 and DeVos Place Convention Center in 2004.
Blueprinted by the same architects who designed the Palmer House in Chicago, the 13-story Morton is more than 90 years old and first served as a hotel in downtown Grand Rapids. Renovations by Rockford Development Group highlight the beautiful architecture inside and out at the 99-unit apartment building that opened in fall 2015.
The result has been a relatively sudden demand for urban, market-rate rental housing with only a nominal supply to meet this new demand. Prior to 2012, there were approximately 500 units of market-rate product within the CBD. This figure has since grown to 865 units.
There are less than 2,000 units of existing market-rate inventory both in the CBD and immediately surrounding neighborhoods combined, counting projects 20 units and larger. This includes 179 units that came on line in 2015 and 499 units that developers have delivered so far in 2016.
Currently there are 954 units under construction and an additional 1,545 units proposed or approved within these areas. An additional 658 units of affordable housing are also in the pipeline.
While supply is rapidly rising to meet demand, typical urban rents range from $1,500 to $2,000 per month. The high rents have sparked much discussion regarding how to maintain a gradient of affordability in and near the downtown area.
To address this issue, some developers are beginning to introduce what they call “micro units” — typically defined as studio-style units of less than 475 square feet — in order to create a lower entry price point for urban product.
A wide variety of multifamily product is being added in and near the CBD, including modern steel and glass mid- and high-rise buildings, loft-style adaptive reuse projects, exquisite historic renovation projects and some student housing.
A prime example of a modern high-rise currently under construction is the Venue Tower, an eight-story building that will feature 88 market-rate apartment units, including 24 “micro lofts,” as well as a music and entertainment club called 20 Monroe Live, which is a partnership with Live Nation’s House Of Blues Entertainment Division.
Recently completed, The Rowe is an exceptionally well-executed renovation/adaptive reuse of the historic Hotel Rowe building constructed in 1921.
The building offers 77 luxury market-rate apartments, eight luxury condominiums, rooftop amenities, first-floor retail and underground parking.
Suburbs play catch-up
Rents in most suburban submarkets of Grand Rapids still do not support the cost of new construction. However, there are pockets with strong income levels or lean rental inventory where the economics make sense.
The suburban construction pipeline is just starting to gain momentum. There are currently 1,112 units proposed or approved and 818 units under construction in outlying communities across metro Grand Rapids. This activity includes new projects, as well as several existing apartment communities that are expanding.
Investment darling
Investor demand for apartment assets in the Grand Rapids market continues to outstrip available inventory. While in-state investors are regularly seeking quality local product, more than three-quarters of transactions are completed with out-of-state buyers.
The Midwest tends to provide higher yields than coastal markets, and Grand Rapids is no exception. Intense buyer competition has compressed cap rates to the low to mid 6 percent range. Based on recent transaction activity, Class C product is trading between $35,000 and $55,000 per unit, while Class B assets are trading between $55,000 and $90,000 per unit. No true Class A product has sold in 2016 within the Grand Rapids area.
Near-term outlook
Due to the urban renewal currently underway — marked by an influx of entertainment options, medical-related development and a growing downtown workforce — there is a sudden demand for downtown living options. With limited supply on hand, this demand has been met with a tremendous boom in new apartment construction. Eventually the supply-demand ratio will reach equilibrium, but until then construction cranes will be a fixture downtown.
As often happens, developers run the risk of oversupplying the market. The pace of absorption of two-bedroom units in and near the CBD is already beginning to slow down. Demand for studio apartments and one-bedroom units remains strong. It is yet to be seen how well the next wave of units will be absorbed over the next 12 to 24 months.
In the suburbs, this new round of apartment construction should not significantly impact the real estate fundamentals in most submarkets over the next 12 months. The number of deliveries is modest in comparison to total apartment inventory.
Although rent growth is beginning to moderate, it should maintain a healthy pace through 2017. Many properties are 100 percent leased with no landlord concessions in place. While asking rates may begin to temper, concessions are not expected to increase significantly as long as occupancy levels remain above 95 percent.
Investor appetite for apartment assets, especially properties with over 100 units, has been insatiable. That appetite is not likely to abate soon as Grand Rapids continues to evolve.
— By Scott Nurski, Multifamily Investment Advisor, NAI Wisinski of West Michigan. This article first appeared in the November 2016 issue of Heartland Real Estate Business magazine.