By Pat Evans
With homeownership rates at the lowest point in more than 50 years, apartments are the focus for many developers nationwide.
The main issue with the apartment needs, however, is the high cost of construction, according to Scott Nurski and Craig Black, multifamily investment advisors at NAI Wisinski of West Michigan.
“Developers are building what economics will allow,” Nurski said. “Developers are building Class A product, because the cost of construction is so high, and you have to have high rent. If you need to have high rent, you need a high level of finish to attract those who will pay it.”
The majority of new apartment development is concentrated in downtown areas, including Grand Rapids, where cranes are popping up with more regularity. The cost of the market-rate apartments downtown are approximately $2 per square foot, meaning an 800-square-foot apartment will cost $1,600.
The supply of market rate housing in downtown Grand Rapids still is building to reach the pent-up demand of years without nearly any available housing, Black said.
“There’s all sorts of activity now, and it looks like, ‘Oh no, they’re going to overbuild,’” he said. “But when you have no supply and an ever-building demand, there’s a catching up that needs to occur. There was no reason to come downtown before, and as those reasons increase, people want to be here, and for those that can afford it, there’s inventory available. Eventually, however, we’ll see a more mature market.”
Developers also noticed the demand for cheaper living spaces, and the high construction costs means smaller spaces. Black said if renters are willing to give up space, they can have cheaper units downtown that fit paychecks.
Still, Black and Nurski expect development in downtown Grand Rapids to continue for two to three years before the market matures.
Demand for two-bedroom apartments already is softening, Nurski said, meaning more choices for one-bedroom apartments soon could be the focus for developers.
The drive for apartments coincides with the struggle to afford the more upscale apartments, Nurski said. People are putting off the purchase of their first home, largely because first-time homebuyers desire homes under the price of $200,000, and there is a lack of inventory for the price range, Nurski said.
“Many younger folks don’t have the wage growth, or they don’t have the employment stability they want before jumping into a home,” he said. “They’re not achieving the wages new grads were 15 years ago, and they want more flexibility in where their careers might take them.”
Nurski’s observation of stalling wage growth isn’t unfounded. The Economic Policy Institute released data last month showing a 2.6 percent year-over-year wage growth, while a target for nominal wages is between 3.5 and 4 percent to stay above the 2 percent inflation target.
The EPI said the rates are an indicator of a less than complete rebound from the Great Recession, and until rates begin to grow like they did prior to 2008, workers won’t see the benefits of the recovery.
Potential first-time homebuyers also could be scared off from what they saw nearly a decade ago, where parents and older siblings might have been negatively impacted by the Great Recession, Nurski said.
With prices high downtown, renters looking for a less expensive home must head to the suburbs, where rents are approximately 60 percent of those in the urban center, Black said.
Some of those suburban apartments have additional space to expand, which alleviates some of the high construction costs, as the land already is owned, so there’s a cash flow along with staff, marketing and utilities in place. Without starting from scratch, Nurski said the construction costs can be 70 percent of new costs.
The rising cost of apartments brings the industry up, but there is some detriment, Nurski said.
“Even people who aren’t doing much with their properties are still able to raise their rents and remain fully occupied,” he said. “Folks living in those properties don’t have much of a choice when unit availability is so limited.”
Nurski said NAI’s global economist said the recovery from the Great Recession is approximately 60 percent complete despite nearing the end of a full normal seven-year economic cycle.
The slow growth is a combination of multiple factors, including stringent lending requirements, lack of wage growth and housing cost growth.
“It is a slow chug,” Nurski said. “If housing costs continue to grow like they are, fewer people will be able to afford homes and will instead rent apartments, and that’s the risk of our market right now. Still, we need more gradient in rental pricing, outside of building for $2 a square foot rents. Grand Rapids has been looking for that, but it’s hard to make those numbers work.
“If they could do (Class) B at B prices, there is loads of demand for that. But demand is not the problem.”