Detroit’s multifamily marketplace has been a bright spot for the last five to 10 years, both benefiting from and contributing to the city’s larger economic and civic renaissance. We saw the return of quality market-rate housing to the downtown Detroit market as the city navigated through bankruptcy, followed by an insurgence of businesses moving to the central business district, and a moniker of “Comeback City” from publications like Forbes, NPR and The Wall Street Journal.

Comeback or not, we know there’s still great potential and progress to be made. As we look at the state of multifamily development in Detroit today, plenty of questions remain about what comes next. 2020 isn’t just a new year, but a new decade. What will these next 10 years look like?

I continue to believe demand for quality multifamily housing in Detroit exists, with new challenges facing the market today that didn’t factor into play 10 years ago. Rising construction costs and labor shortages are certainly impacting developments. National institutional investments are also needed to further progress, as well as identification of prime locations in popular neighborhoods beyond downtown and Midtown.

The last quarter of 2019 was quiet. To some extent, we attribute it to a seasonal slowdown. Supply is still relatively limited, so oversupply isn’t an issue. Could it be early signs of a slowing economy or lack of consumer confidence? Perhaps. It’s probably premature to speculate — and certainly too early to draw any definitive conclusions — but it does bear consideration in the months and years ahead.

From a strict supply-and-demand standpoint, the demand for more multifamily product is there, but uncertainty about what’s next creates a potential lack of traction.

Challenges, opportunities Incentives in the 2010s were not necessarily plentiful, but they were available. There are fewer options today, with little sign of an incentive spike in the years ahead. That might be exactly what’s needed to keep multifamily momentum going. An overhaul of those incentives — and the current real estate tax structure — would almost certainly spur additional development.

There’s no question some of the challenges facing the Motor City multifamily extend well beyond Detroit itself — larger national trends have an impact here locally as well. What is unique to Detroit (or at least distinctive and noteworthy) is the convergence of these issues, especially the lack of outside institutional presence in our marketplace. To be clear, there is plenty of interest, but not a corresponding amount of action. Some out of-market investors are still keeping Detroit at arm’s length, despite our optimism and demonstrable success. One potential bright spot is integrating retail into multifamily projects (or vice versa). Where quality opportunities exist, a well-executed mixed use project can provide a synergistic boost helping to activate and animate communities. Those select opportunities are still out there in Detroit.

There have been a handful of high profile projects that never made it out of the planning phase, due in part to the obstacles presented from lack of affordable construction and skilled laborers. Rents aren’t keeping pace as residential construction costs rise, and developers have been less aggressive as a result.

While there’s been a healthy and consistent rise in market rental rates (especially for newer product), it’s being overrun by the increase in cost of construction. To put it into perspective, one ground-up project developed just four years ago would cost $18 million more to build today — an increase of about 30 percent, which is huge.

Moving forward Over the course of 2020 and the next decade, the ideal scenario for Detroit multifamily would be to see increased housing density of all kinds — including neighborhoods with the greatest potential to mirror the success of the last 10 years. This includes Lafayette Park, where new developments are planned and breaking ground, and Corktown, where Ford Motor Co. plans to establish its autonomous vehicle headquarters in the former Michigan Central Station. In other words, we can and should continue to build on the progress already in motion while beginning to expand into new areas.

A more resident- and developer friendly tax structure would go a long way to making that happen, and to providing a boost to community-building across the city. New incentives, tax breaks, grants and abatements will likely be needed to incentivize developers sufficiently; we know it was a driving factor to development in the 2010s. Detroit will also need to solve its transportation issues. Detroit stands alone as a unique city of its size that is desperately in need of a greater public transit infrastructure, and it’s an issue for multifamily development.

Finally, we need to solve the affordability issue. Affordability is a nationwide challenge, but it is especially prevalent here in Detroit. The rules surrounding affordable components of market-rate developments have to be settled, but the best way to go about that remains up for debate. It’s a longstanding and ongoing issue — and a critical one for the city’s sustainable long-term success. I suspect we’ll see a great deal of effort in this arena, and hopefully alignment with the development community on effective strategies going forward.

The evolution in the investment in Detroit over the past 10 years has been part of the city’s turnaround, but there’s still work to do. We’re actively engaged in determining how to make Detroit’s progress sustainable for the long haul — and we are not alone. Detroiters and their communities are engaged, marking real momentum in and around the city. If we can overcome some bumps in the road, there is reason for optimism that the long term future of Detroit and its multifamily marketplace will be very bright and stable for generations to come.

Read Full Article