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When Eric Raymond returned home to Detroit last fall after two decades living in other cities, he was hoping to find a place near the water, ideally in West Village. As an experienced renter, he knew that finding the right apartment was about making tradeoffs. But he found that the tradeoffs in Detroit weren’t the same ones he’d faced in other cities.

“In D.C. or New York, it was about what neighborhood do I want to live in? Or, do I want to live in an older building or new building? Do I want to be closer to the subway? Not like here,” Raymond says.

In Detroit, he found the choice was largely between “space versus updates.” In Midtown or downtown, he found amenities like central air that many neighborhood apartments lacked. But those units were often smaller and more expensive.

Raymond’s experience reflects the growing pains of a nascent but developing market-rate apartment rental market. As demand continues to outpace supply, developers are eager to continue building in Detroit—but experts and renters say they haven’t figured out exactly how to meet the needs of Detroit’s renter population.

Strong demand, sustainable growth

According to a multifamily rental market study by developer Broder & Sachse, Detroit had 15,156 rental units in multifamily buildings between downtown, Midtown, Corktown, and Lafayette Park in the first quarter of 2019, with about half of those in the central business district. The vast majority of those units were market-rate rentals in larger buildings that require onsite property management, with occupancy rates ranging from 92 to 98 percent.

Another 1,955 units are proposed within the next 18 to 24 months, according to the report.

Jon Rowling, vice president of acquisitions for Broder & Sachse, expects maybe half of those proposed units to materialize. But even if they all did, he says, it still wouldn’t be enough to meet demand.

”We can’t build enough apartments,” Rowling says. “We think there’s a very deep demand for not only millennials but empty nesters to come back to the city.”

Downtown Detroit Partnership CEO Eric Larson agrees that demand is strong, not only because of renewed interest in urban living environments, but also because of pent-up demand.

“This is a market that for a number of years has not delivered any product to speak of,” Larson says. “From 1990 to 1999, zero new residential units were delivered to downtown. And from 2000 to 2010, there were approximately 500 units delivered.”

The number of new units in recent years has ranged from between 500 to 1,000 per year. According to a demand study commissioned by the Downtown Detroit Partnership and performed by Zimmerman/Volk Associates Inc., Detroit’s market-rate apartment demand is on the order of 1,200 to 1,500 new units per year.

Because demand is outstripping supply, Larson says, the pace of new development is appropriate.

“What you’re seeing on both East and West coasts is overbuilding in reaction to the demand to re-urbanize. So while Detroit is absolutely participating in that, and is one of the last major iconic cities to re-urbanize, because of some of the challenges we have faced in the past, it has not been as rapid to grow.”

He adds that Detroit’s slower pace of building, combined with its commitment to concurrently developing some affordable housing, may mean that the market here will remain more sustainable than in other cities.

“It’s only a matter of when, not if, there’s a downturn in our economy, and we are going to be significantly better poised to deal with that because we haven’t overbuilt,” says Larson. “Yes, there’s more demand than there is supply, but I view that as a positive. Over time we obviously will catch up. I think we are being sensible and logical about our growth.”

Not all rental markets are created equal

Last year, rental markets in places like Seattle, Portland, Washington, D.C., Chicago, Pittsburgh, and Baltimore saw a decline in median rent prices year over year. It’s largely a response to overbuilding in the high-end market; affordable and moderate-cost housing markets in those cities are still tight.

But Jerome Huez, president of real estate network Berkshire Hathaway HomeServices/The Loft Warehouse, sees an opposite trend in Detroit. Primarily working in the condo market, Huez says he is contacted by five to 10 prospective tenants on a daily basis who can’t find the level of amenity they are seeking in Detroit’s rental market.

“We can see that a lot of the new product is really aimed at the millennial tenant—the young workers at Quicken Loans and the different employers downtown,” says Huez. “And we get a lot of the overflow, the people who don’t really match the millennial clientele that those products are designed for. They’re not looking for living in a small unit. They don’t want to be in a building where there are 200 other small units and young people. Not everyone wants to minimize their living space and share the building’s amenities.”

Huez says that while he faces stiff competition for one-bedroom units, he’s seen more success with larger units. He points to recent success renting out 1,800-square-foot units in the Fort Shelby as an example.

“For smaller units that compete with the new apartments, the rental rates have flattened over time, or even seen a slight decrease depending on the location and the finishes,” he says. “The larger units are continuing to appreciate in rental rate over time.”

Huez sees a need for much more careful planning on the part of developers, especially with respect to being intentional about which market segment they are going after.

“Five years ago, whatever you threw at the market would be absorbed. It was easy. There was not much competition,” he says. “Today, it’s not just a free-for-all. You have to carefully find your niche and then study it, and then design for it. That seems to be basic, but that’s the new phase we are in. We’re maturing slowly in Detroit, but we are getting to that stage of the market.”

Peter Cummings, executive chairman of the Platform, described one such niche as employee housing for healthcare workers. The Platform has begun pre-leasing for two projects: a 231-unit complex at the corner of Third Avenue and West Grand Boulevard, and a smaller, 23-unit building at the corner of Baltimore Street and Woodward Avenue.

According to Cummings, the company’s development strategy hones in on the needs of a specific geography and market, namely students at College for Creative Studies and employees at Henry Ford Health System.

“People from the outside looking in tend to look at Detroit as one market, but there are a lot of submarkets,” Cummings says.

Constraints to growth

“I don’t think there are real threats to demand,” says Richard Hosey, owner of Hosey Development. “Compared to other cities, we’re still at a relatively early stage of this idea of people demanding urban multifamily space. The constraints will be on the development side.”

And even the expected economic downturn may not dampen demand much, according to Peter Allen, an Ann Arbor real estate developer and adjunct lecturer of real estate at the University of Michigan Ross School of Business.

“Certain industries are somewhat unaffected by the typical economic cycles. And the best examples are the eds and meds,” says Allen. “Wayne State University is going to continue to grow. College for Creative Studies is going to grow. The community colleges are going to grow. The medical schools are going to grow.”

At this point, the main constraints on market-rate apartment development in Detroit appear to be rising construction costs and access to capital. According to a recent Crain’s Detroit Business report, labor costs were a significant factor in shelving two large-scale multifamily condo projects being constructed by the Platform.

Hosey’s number-one concern is the potential for rising interest rates. “That shrinks your debt capacity and makes deals harder to get across the line,” he says.

As for amenity-seeking renters like Raymond, it may be a while before they see a wider selection of options.

Because he wanted his dad to have a place to stay when he comes to visit, Raymond ended up settling on River Place Apartments, trading off location and updates for size and parking. He thinks he’s paying too much given the lack of amenities (no hardwood floors, no control over the thermostat), but he’s glad to be home.

“I’m going to have a blast. I am super happy to be here,” Raymond says. “And if I have to give up some amenities, whatever. I’ll be okay.”