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Sunday, 21 January 2018 12:21

Location factor: Strong apartment demand persists in GR, with thousands of units on the way

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Grand Rapids-based Third Coast Development LLC, which is developing Diamond Place along Michigan Street east of downtown Grand Rapids, has shifted away from strictly market-rate housing to more affordable and middle-income projects. Grand Rapids-based Third Coast Development LLC, which is developing Diamond Place along Michigan Street east of downtown Grand Rapids, has shifted away from strictly market-rate housing to more affordable and middle-income projects. Photo by Nick Manes

GRAND RAPIDS — Demand remains strong for urban apartments, although occupancy rates for the burgeoning market have begun to slip as new units come online. 

That’s according to data presented last week at a commercial real estate forecast from the Grand Rapids office of Colliers International Inc., a commercial brokerage firm. 

Occupancy rates for apartments in Grand Rapids peaked in early 2017 at about 96.8 percent and have since dropped slightly to 96.5 percent, largely as new supply comes on the market and not as a result of any decrease in demand, according to the Colliers data. 

Even with that dip, researchers say there’s little indication that demand will diminish for high-amenity, newly-built projects in the foreseeable future. 

“I think amenities continue to drive rental rates and I think that’s going to continue through 2018,” said Jeff Hainer, senior research analyst for Colliers International. “There’s still high demand for nice (amenities). … I think residential developments will continue to differentiate themselves by using different amenities.” 

The recent federal tax reform could also add to the demand for more apartments, according to Paul Isely, an economist and the associate dean of undergraduate programs in the Seidman College of Business at Grand Valley State University.

Isely projects that the recently-passed tax legislation will add about 20 percent in costs for new homebuyers in the short term, meaning that many renters who were looking to buy a home might continue renting. 

The Colliers research comes at a time of continued concerns over housing affordability, and as municipalities re-examine their own policies about how to incentivize new housing development. 

To that end, plenty more development remains in the pipeline. 

As of the close of 2017, 1,025 new housing units were under construction around Grand Rapids, according to Colliers. Additionally, the firm was tracking 776 “prospective” units –– units that have been discussed but for which there have been no documents or filings –– and another 642 planned units for which documents have been filed with municipalities. 

ADAPTING TO THE MARKET

That influx of new projects has led to some developers exploring new strategies. 

Third Coast Development LLC, a development firm primarily focused on the Grand Rapids apartment market, largely has shifted away from the market-rate sector. That move comes mostly as a result of the proliferation of what Principal Max Benedict called “the same white boxes” being built all over the city. 

Instead, the company has pivoted to building affordable units and middle-income housing developments, with two currently underway along the Michigan Street corridor and on the city’s west side at the southeast corner of Leonard Street and Alpine Avenue. 

“Our company made that fundamental shift because we knew the demand for market rate was being satiated by all the cranes in the air building it,” Benedict said. “And (affordable housing is) the biggest problem that the city has right now, so it just kind of made sense to follow the demand.” 

PRIORITIZING AFFORDABILITY

As housing development continues to heat up, it’s not just developers like Third Coast that are tapping into the demand for increased affordable options. Municipalities like Grand Rapids and a variety of stakeholders in Ottawa County have sought to address concerns related to the affordability of housing, particularly as newly built units rent for an average of $1.33 per square foot, according to the Colliers data. 

Sources contacted for this report agree there’s no silver bullet to make housing more affordable. Still, many stakeholders believe that by bringing a large influx of supply to the market while financial conditions remain strong, they can slowly move the needle on affordability. 

“The city is doing everything they can and I’ve never seen such a large entity be as agile as they are to solve a problem,” Benedict said. “They have it as a top priority and they’re saying, ‘What levers can we pull?’” 

City officials in Grand Rapids have been holding public meetings in recent weeks to lay out anticipated changes to the city’s zoning code in the hopes of spurring more development and supply, particularly for more small-scale projects. 

Proposed changes include zoning incentives to allow for more two-, three- and four-unit projects; permitting for Accessory Dwelling Units (ADUs), or additions to homes and garages for living purposes; and incentives for increased density.

Third Coast Development’s Benedict –– who served on the committee that came up with the zoning proposals –– said one recommendation to reduce the amount of Payment in Lieu of Taxes (PILOT) related to subsidized housing could affect his firm. The PILOT functions essentially as a service fee that affordable housing developers pay based on rent collected by the project instead of paying property taxes. 

The proposal would reduce PILOT from 4 percent to 3 percent. One third would go to the city, while the remaining portion would go into a proposed fund the city of Grand Rapids hopes to use to incentivize future affordable housing projects. 

TIME FOR ACTION

Real estate industry sources hope that by aligning land use and zoning policies at the city, they can get enough supply to move the needle on rental rates. 

The Seattle Times, citing data from RealData Inc., reported in mid January that rents in the booming Pacific Northwest city fell 2.9 percent in December compared with the previous quarter, equating to about $50 per month in savings for the average renter in the area. The report described how many newly built units remain empty as a massive amount of supply hit the market in recent months. 

Locally, stakeholders acknowledge that it will take considerable development to change the West Michigan region from a landlord’s market to a tenant’s market. But with economists like Isely anticipating that a minor recession is likely in 2019 or 2020, now is the time to bring more units to market, according to policymakers. 

“Understanding the way in which the economic cycles work in the greater economy, if we’re going to try and address things on the supply side, you have to do it while financing is available,” said Jon O’Connor, a Grand Rapids city commissioner representing the city’s west side neighborhoods. “And so right now, it’s still possible to do this. Given our extremely low vacancy rate in housing in the city, we clearly need to get more on the books as fast as we can.” 

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