While local housing officials expect last year’s spike in housing prices and interest rates to cool off in 2023, high demand and low inventory are still creating difficulties for renters and homebuyers.
As well, builders and investors still face relatively high interest rates and construction costs, making investments costlier and margins thinner.
In response to these difficulties, local nonprofit leaders and real estate investors are reaching into their toolbag to grow housing opportunities in West Michigan. They maintain that the local housing market will be healthy in 2023.
“We are incredibly optimistic,” said Brooke Oosterman, director of policy and communications at housing nonprofit Housing Next. “While we don’t see trends changing drastically early on in 2023, we’ve had some really big wins at the local and state level” at the end of 2022.
Those include a statewide housing bill package signed by Gov. Gretchen Whitmer in December, as well as two West Michigan counties that will use federal American Rescue Place Act (ARPA) funding to establish affordable housing revolving loan funds.
“I expect that we’re (starting) 2023 ready to impact the overall trend of housing shortages,” Oosterman said.
Zoning reforms, cost hurdles
Ryan Wheeler, president of Grand Rapids-based Wheeler Development Group LLC, said obtaining local approvals for new projects remains a difficult process and an ongoing challenge.
“Even if you can find the land to develop multifamily properties on, you’re likely rezoning it, and I’ve never had a scenario where that takes less than a year,” said Wheeler, whose company has multiple ongoing or recently completed housing projects near Grand Rapids. High construction costs also have forced the company to halt other projects, including a four-story mixed-use project in Grand Rapids’ Eastown neighborhood and a 24-story tower in downtown Grand Rapids.
Oosterman is trying to solve the local approval problem by pushing zoning reforms. Changing property zoning can be expensive for local governments because of consulting and legal fees. That’s why Kent County used ARPA funding to establish a countywide Equitable Housing Initiative, a $500,000 grant program to support local municipalities in changing their zoning regulations to better facilitate housing projects.
“When we’re talking about things that we can control in the housing market, we can control some of the regulation that makes building new developments harder,“ Oosterman said.
Local governments also are using tools to make borrowing more favorable for investors. Both Kent and Ottawa counties have set up revolving loan funds that offer lower interest loans to investors to expand affordable housing. The Kent County fund is starting as a $17.5 million investment that’s expected to grow to a $58 million community development financial institution (CDFI) fund. Ottawa county’s similar investment starts at $10 million.
Investors get creative
Scott Nurski, senior multifamily investment specialist at NAI Wisinski Great Lakes, is seeing investors get creative to make deals happen.
“We’ve got a large transaction that we’re working on where we’re doing a loan assumption,” he said. “The dynamics there are that we’ve seen rates go from low or sub 3 percent to as high as 6 percent.”
With a loan assumption, the buyer can take on the old mortgage at a lower rate and fund the remainder of the purchase with a second mortgage. Nurski says this is a good path forward if both parties can agree to the terms of the deal.
Nurski also is seeing investors using a 1031 exchange to pay for a new property. With a 1031 exchange, owners can sell their property and defer taxes on the sale as long as the proceeds are reinvested within six months.
“That’s causing them to do a deal that would otherwise not get done,” Nurski said.
However, Nurski also suspects that the 1031 money that was used in 2022 to avoid higher interest rates is dwindling and will become less common further into 2023.
Wheeler is seeing similar efforts to bring properties to market.
“Every project has to be attacked from all fronts,” Wheeler said.
He believes that investors should take advantage of every tool they can to make deals happen. They also need to be decisive and deliberate on which projects they pursue, he added.
“We’ll look at 10 projects for every one we end up pulling the trigger on,” Wheeler said. “It’s a hard thing to make happen.”
‘A lot of work to be done’
Even with the collective efforts by investors, nonprofits and governments to grow the state’s housing stock, rental housing costs will likely remain steady after rising in recent years as demand remains strong and supply catches up.
A recent study by the Grand Valley State University Seidman College of Business shows that since 2017, the Grand Rapids metro area has significantly lagged behind the national average in new housing unit building permits. Supply is still trying to catch up to demand.
“We don’t anticipate the market (in 2023) being where we’d like it to be,” Oosterman says. “We don’t expect that we have built enough new supply in the market to really meet that critical demand. There’s a lot of work still to be done.”
From the real estate investor side, Nurski agrees.
“It’s a supply and demand issue in terms of causing elevated rents, which is a challenge for tenants,” he said, though he noted some positives from this dynamic. “Owners have capital to be able to put back into properties, so we’re seeing property conditions are better now than in prior decades. We don’t see that changing a whole lot.”
Wheeler believes housing cost increases will slow based on the amount of new properties being brought on the market.
“I don’t anticipate the same sort of rent increases that were seen in 2021 and 2022,” he said.
Overall, housing experts see long-term positive momentum for investors, buyers and renters, even with rising interest rates over the past year.
“The first quarter of (2023) is really going to tell us what the year is going to hold,” Wheeler said. “I’m still pretty positive about the housing market in the years to come.”