Detroit Multi-Housing is Dependent on Auto Industry

The reported bankruptcies of two of the top American automakers has certainly affected Motor City’s unemployment rate significantly.

According to the April U.S. Bureau of Labor Statistics figures, of the 49 metropolitan areas with a population of one million or more, the Detroit-Warren-Livonia MSA reported the highest unemployment rate at 13.6 percent. The MSA reported a 6.6 percent in over-the-year unemployment rate increase. Furthermore, in the same month, the two metropolitan divisions that comprise this area registered the highest jobless rates: Detroit-Livonia-Dearborn at 14.6 percent and Warren-Troy-Farmington Hills at 12.8 percent.
Dillon notes that the only new construction in the metro may be a condominium that is taking a rental exit strategy.

Because of this, it would come as no surprise to discover that Detroit’s apartment market is also suffering.

However, all things considered, the market is “faring pretty well,” according to Kevin Dillon, associate partner in Hendricks & Partners’ Birmingham, Mich. office. Perhaps the best explanation is the limited new construction—only five multifamily permits have been issued this year, compared with 435 permits issued in 2008.

The shadow market has not had a significant impact on occupancy rates, though vacancy has increased 100 basis points, to 7.4 percent, year-over-year from the first quarter of 2008 to the first quarter of 2009.

Furthermore, Dillon notes, the shadow market is limiting rent increases—rents slipped 0.6 percent year-over-year, to $832 per month, ending March 2009.

Among those developments suffering from high vacancies, Dillon tells MHN that Class A properties are generally the properties with the lowest occupancy, while B+ through C level properties have the strongest occupancies. “Residents are more comfortable with lower rent payments and they don’t believe they can get into A properties,” he notes.

Residents that tend to rent in Class A communities in good times are more likely to have experienced job losses this year, he explains.

Consequently, most of the market’s concessions are seen in Class A properties, where residents are being offered one to one-and-a-half month of free rent.

Transaction-wise, velocity is down approximately 85 percent as a result of a lack of lending sources, and cap rates have increased 150 to 250 basis points in the past 12 to 18 months. Unlike many other major markets, Dillon notes that the gap between buyer and seller expectations has closed. “Now it’s a matter of having good product available for sale. We don’t have as much for sale as we used to.”

So what will turn Detroit’s apartment market around? “If the country starts purchasing automobiles again and sales increase substantially, that will secure employment opportunities,” says Dillon. “That could be an outstanding benefit to the multifamily market, allowing people to maintain their own apartments and not have to move out of the area for employment.”