By Jason Krug, Berkadia
Sunbelt states are top of mind for multifamily investors these days, as COVID-19 has accelerated the trend of renters leaving major cities in search of more space and a better cost of living. Of course, the allure of sunshine and warm weather is hard to compete with, but cities across the Midwest are also seeing a spike in interest from renters and investors and chief among them is Detroit.
There has been overwhelming interest in multifamily opportunities in and around the city, as investors looking for yield move beyond core and core-plus markets in search of real value deals, which Detroit has aplenty. So, what’s driving this interest, and why should more investors be paying attention to Detroit? There are a few key reasons.
Jason Krug, Berkadia
Solid fundamentals
Limited supply of new units being delivered across the state will continue to drive organic rent growth. As is the case across the country, there is a shortage of housing throughout Detroit and the metro area. Although Detroit’s population growth is smaller compared to the South and Southeast, the region has a fraction of the units coming out of the ground as the South and Southeast, paving the way for continued rent growth.
Of course, there is some new supply coming out of the ground but since the city doesn’t have a concentration of merchant builders, much of the new construction doesn’t translate into opportunities for investors as it doesn’t hit the market for sale.
Beyond solid rent growth drivers, the region has promising economic drivers as well. The big three auto companies continue to underpin the state’s economy, but Eds and Meds employment has grown substantially over the last decade. Cars continue to push into technology, which has contributed to a growth in engineering and tech jobs in and around Detroit as well. Many of today’s manufacturing jobs are “intelligent” manufacturing jobs, which are attracting a new and more diverse workforce to the region, paving the way for multifamily to continue to perform exceedingly well.
Opportunities for all capital
Investors across the spectrum, from institutions to family office to private equity are active in Detroit. Many groups have different buckets of capital that are more flexible in today’s aggressive market allowing them to cast a wider net. Post-COVID we have seen many new entrants to Detroit, not only from multifamily groups who are new to Michigan but also from investors from different real estate classes raising new multifamily funds and looking to put money to work. We expect the number of U.S. and international investors to continue to grow as Detroit continues to outperform the historical returns.
Value-add on the table
True yield is hard to find in today’s multifamily market but Detroit and Michigan as a whole provide opportunities, particularly for investors looking for value-add. The simple fact is the region doesn’t have enough new units to stimy the momentum we have seen in the value-add space, and we don’t see it slowing down anytime soon.
Ann Arbor, Grand Rapids and quality metro Detroit are the most sought-after markets in Michigan, which is not surprising, though more and more investors are proving willing to dig into secondary and tertiary markets. These markets provide more opportunities for well-priced value-add investments relative to Gateway markets especially.
Detroit has not historically been the first market investors think to target. However, those investors who have capitalized on opportunities in the region have learned that the demographics, property performance and risk-adjusted returns far outweigh many other markets across the country.
Nowadays, we continue to see more new investors enter the market and push for deals in Detroit. Therefore, we expect to see pricing and cap rates hit records through Detroit and all of Michigan as economic drivers and indicators in the region are more broadly recognized by multifamily investors.
Jason Krug is a managing director with Berkadia. This article originally appeared in the July 2021 issue of Heartland Real Estate Business magazine.