GRAND RAPIDS — If 2016 was the year of planning for myriad multi-family residential projects around West Michigan, 2017 seems to be the year for execution.
The next 12 to 24 months could see as many as 2,000 apartments come online in downtown Grand Rapids, nearby neighborhoods and surrounding suburbs, according to an analysis by MiBiz. It’s an unprecedented number of units for a region more known for single-family homes instead of mixed-use, urban living.
With the number of units proposed, commercial real estate sources are asking themselves three fundamental questions:
- Is the demand there?
- How quickly can the units fill up?
- Will potential tenants pay the asking rents — around $2 per square, in many cases — needed to cover the rising cost of construction?
While the sentiment surrounding the answers to those questions remains somewhat mixed, commercial real estate sources by and large said they absolutely believe the demand is present, noting that well-done products have been filling up quickly.
But the third question about tenants’ willingness to pay escalating rents leads to more skeptical replies.
“My opinion is that there’s plenty of demand for the units under construction,” said Ryan Kilpatrick, a member of the Michigan Economic Development Corp. community assistance team focused on Grand Rapids. “The question is whether they will fill at the rental rate the developers proposed on the front end.”
Development sources agree that as more and more units come online, building owners will have to grant concessions on rent or run promotions such as free rent for the first month.
“I think the market always adjusts, so yeah, there will be some of that,” said John Wheeler, president of Orion Real Estate Solutions LLC, the development arm of Grand Rapids-based Orion Construction Company Inc.
Still, Wheeler said he’s unconcerned rent concessions will affect his company, which plans to open about 550 units next year.
“I think the true threat (to the downtown rental market) comes from the near-neighborhoods being so much more financially attractive to the young renters, if you can save that extra 60 or 70 cents and get a free parking spot and you can still walk to work,” he said.
AVOIDING RENT CONCESSIONS
The fundamental questions about demand and rental rates have been top of mind in recent months for Jeff Olsen, director of development at 616 Lofts LLC, a Grand Rapids-based development and property management firm.
The company opened 241 units in 2016 between three properties, all in up-and-coming neighborhoods of the city. Olsen said that two of the properties — one at the corner of Michigan Street and Eastern Avenue NE and one on North Monroe Avenue — reached about 90 percent occupancy already. The firm’s Lofts on Alabama development off Bridge Street NW opened later in the year and stands at about 60-percent occupied, he said.
“There’s a balance between price reduction, velocity and ramping up leasing,” Olsen said. “Developers typically aren’t going to build something and reduce rents. The cost of construction will hold the bottom-end price point. Then it becomes a timing issue to fill up the units.”
The occupancy figures cited by Olsen generally align with what commercial lenders say they’re seeing in the market.
Michael Hollander, senior vice president and Michigan market leader at Kansas City-based Commerce Bank, said his organization projects that the Grand Rapids market has a vacancy rate of about 5 percent. Additionally, developers are getting strong rent growth of about 2 percent annually, he added.
Olsen said that so far, his firm has offered rent concessions on a handful of two-bedroom units, which he cites as part of an ongoing trend of younger professionals preferring to live alone in smaller units rather than have roommates.
PROJECTS BREAK GROUND
While Olsen said 616 is pleased with its leasing performance in 2016, it continues to push forward with other ambitious projects where visible progress will take shape in the new year.
Specifically, in October 2014 the firm announced plans for apartments and retail on two sites in Grand Rapids’ Creston neighborhood, but it has yet to start on any projects in that area. Olsen said that a “final deal structure” for the project took longer than expected and he anticipates a groundbreaking in the early part of next year.
Additionally, the company announced plans for its most high-profile project to date this past April, which calls for a movie theater, retail space, and 187 apartment units spread over two surface parking lots in downtown Grand Rapids south of the Van Andel Arena.
Olsen conceded that 616 Lofts may scale back some of the residential components of the proposed $140 million development, but he quickly refuted rumors that the project was on its final legs.
“I’m spending a lot of time working on it if it’s dead,” Olsen said. “It’s the most complex project Grand Rapids has seen in a long time.”
The development company and its partners on the project have an option on the publicly-owned land until April 2017 and must get final approval from the Grand Rapids Planning Commission prior to that, according to its current agreement with the Grand Rapids Downtown Development Authority.
LOCAL SCRUTINY HEIGHTENS
If the overall economy continues on an upward trajectory in 2017, developers seeking local approvals could also find themselves with an unforeseen obstacle: development fatigue.
Municipalities around the state have scrutinized new projects much more in recent months, according to Patrick Lennon, a partner focused on real estate, zoning and land use law in the Kalamazoo office of Honigman Miller Schwartz & Cohn LLP.
“I think we really experienced a unified desire to build and develop in 2012 and 2013 between local governments, developers, contractors and even communities,” Lennon said. “But in 2015 and 2016, the pendulum seems to be swinging back.”
Specifically, Lennon said he’s seeing not just local planning boards and city councils squaring off against new development, but also a growing number of residents. He said communities are placing more requirements on would-be developers and in some unspecified cases, scuttling projects altogether.
“This is a big change from 2013 and 2014 when communities, developers and municipal governments were really — I believe — going to lengths to accommodate development to stimulate their local economies and grow their tax bases,” Lennon said.
That sense of development fatigue remains one of many obstacles that developers of multifamily projects may face as they look ahead to 2017. Lenders like Commerce Bank’s Hollander say that macroeconomic factors also could present problems in the coming year.
“We’re beginning to see signs of risk on the horizon, headwinds for borrowers from increasing interest rates, a credit cycle that’s likely in the later innings and the downtown market having a huge amount of supply coming online simultaneously — ‘simultaneously’ being the key word,” he said.
While Commerce Bank and others are mitigating the risks stemming from the influx of new supply, Hollander said the market still has many positive attributes going for it.
“The one thing that is really encouraging to me is that downtown Grand Rapids, in many ways, has hit a new critical mass for much more than we were historically positioned for,” he said. “It’s no longer a cart before the horse situation.”