Apartment Market Perks Up

Apartment Market Perks Up
Rents, Building Sales Rise as Demand Grows

BY JENETTE SMITH

Landlords who faced a build-up of empty apartments a year ago are starting to take down the free-rent signs.

Apartment owners and brokers report the beginning of a turnaround. Occupancies are on the rise in several pockets of metro Detroit, and some of the aggressive incentives used to fill buildings, such as sharply discounted rents and periods of free rent, are winding down at many complexes.

John Marr, senior vice president of EF&A in Southfield, a specialist in apartment financing, said a client who has a Royal Oak complex and had to cut rents by $25 a month a year ago recently bumped the price back up.

“We’re able to get back to the rents from three years ago,” he said.

The consensus in the industry is that the local market bottomed out in 2004 and continued to suffer last year with heavy vacancies in many complexes due to job losses and low interest rates that made home-buying more affordable. However, now that a growing number of metro Detroiters are having trouble affording homes as interest rates rise — or are losing them in foreclosure — apartment demand is gradually growing.

“For a negative reason, the apartment buildings are starting to fill out,” said Steve Chaben, regional director for investment sales brokerage Marcus & Millichap. If the region were to receive a boost with job growth next year, it could be a “one-two punch” boosting apartments, Chaben said. Brokers say occupancies in many parts of metro Detroit are in the high 80s or low 90s, an improvement for many complexes facing vacancies as high as 20 percent last year. Some of the healthiest areas for landlords are Royal Oak, Ann Arbor and downtown Detroit, which have occupancy rates above 90 percent. Marcus & Millichap estimates average third-quarter apartment vacancy in metro Detroit at 7.3 percent. CB Richard Ellis estimated overall vacancy at about 9 percent, an improvement from 11 percent.

“People who are either losing jobs or taking pay cuts are looking for less-expensive housing and shorter (lease) commitments,” said Howard Perlman, senior vice president in the brokerage division at Farmington Hills-based Friedman Real Estate Group.

Another boost to the apartment market is very little new construction and many condominium conversions during the last several years, which means it is expected to take less time for demand to catch up to supply than it has in previous economic cycles.

Some landlords have taken a sluggish market as an opportunity to buy assets or to renovate older units in an effort to attract tenants.

Eric Brown, managing member of Urbane Apartments, an apartment group with 165 units in seven locations in Royal Oak, Berkley, Troy and Ferndale, said the company has thrived by acquiring older complexes with smaller units, renovating them and adding details to attract 20-something tenants. Amenities include free wireless Internet and LED lighting on building exteriors.

Brown launched Infill Inc., the parent of Urbane Apartments, three-and-a-half years ago. Urbane boasts occupancy rates in the mid- and upper-90s for its complexes, plus two are fully occupied, Brown said.

Brown said concessions have “nearly burnt off” and rents are on a slight uptick. Brown, who previously worked for Village Green Cos. and remains a consultant, attributed high occupancy rates not only to general market trends, but also to the focus on young renters. His rents are $750 to $1,100 a month.

Morningside Group, the developers of Royal Oak’s Skylofts for-sale condominium project, are even entering the rental business in a limited way. The company is offering a two-year, rent-to-own program on a few units where tenants have the option to put a percentage of rent aside that goes toward equity in the unit at the end of two years, said Nico Schultz, development manager. Rent is $2,000 to $2,300 a month.

The idea fits buyers who might be trying to sell an existing home or want to buy a home but haven’t had time to save for a down payment. It stemmed from inquiries about rentals, Schultz said.

Perlman said there are still apartment complexes in other parts of the region that will take two to three years to recover, depending on location. Farmington Hills, for example, still has higher vacancies.

Joe Anthony, senior vice president of the investment properties group of CB Richard Ellis, said that in general cities with younger or more working-class residents will see the apartment market rebound more quickly than communities with more-affluent demographics.

“People with money can keep on buying homes,” he said.

Said Chaben: “This year, you’re going to see a slight improvement in occupancies, a decline in some areas of concessions the landlords are needing to offer. … Some submarkets may see modest rent growth,” he said. “Moving into 2007, there’s probably more things out there really starting to turn.”

Marcus & Millichap estimates average Detroit area monthly rents at $1,016 for class A and $854 for class B, up about 1 percent from a year ago. CB pegs average rents at $805.

Chaben said his company is so bullish on the investment sales side of the business, including apartment buildings, that his Southfield office is aggressively hiring new brokers. While deals may take longer to get done because some national lenders are wary of Detroit, there are still plenty of interested buyers, he said.

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