New CBREGR survey looks at rental housing market

August 7, 2009
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While the Grand Rapids Association of Realtors reported that the average price for a single-family home hit the year’s high in July and sales rose that month by 32 percent from January, a survey done in June revealed that occupancy in the rental housing market was above the national average and local rents were well below the nation’s standard.

The survey from CB Richard Ellis/Grand Rapids found that the occupancy rate for the market’s 24,393 rental units was 94 percent at the end of the second quarter and the average monthly rent was $599.96. Occupancy was 92.7 percent nationwide and the average rent was $742 a month.

The second-quarter look at the local multi-housing market was the first one conducted by CBRE/GR and the first one done here in recent memory.

“Because commercial real estate transactions are down a little bit, we thought this would be a good service to our clients to try to do some groundwork research in the field and see how the market is really performing,” said Ed Mikolay, CRBE/GR vice president of investment properties. “We intend to do this at least a couple of times a year.”

The commercial real estate firm gathered occupancy and rent data from 109 market-rate, multi-housing properties in five sectors throughout the county, including downtown. Each property CBRE/GR surveyed had to have a minimum of 24 units.

One finding uncovered by the survey surprised Mikolay somewhat because of the current economic conditions, and that was rent concessions are on the decline. Only 22 percent of the property managers reported offering allowances equal to a month’s free rent in exchange for a year’s lease.

“Maybe this speaks to the conservative nature of not only landlords but also of consumers here. If they can’t afford to buy a house, they’re going to wait and sit in their apartments longer,” said Mikolay.

Rent concessions, though, were higher in the northwest sector as half of the managers in that submarket reported offering a concession equal to a month of free rent.

Other key findings were:

**Fifty-four percent of the managers said they have raised rents over the past six months, while just 2 percent said they lowered rents over that period. (Rents have fallen by 1 percent nationwide this year.)

**Class A buildings were 87 percent occupied, Class Bs were 95 percent full, while Class Cs were 94 percent occupied.

**Downtown had the highest occupancy rate, least number of units and highest average monthly rent of the five sectors. (See related chart.)

The downtown district will get 91 new rental units next year when work is finished at the Gallery on Fulton at Fulton Street and Division Avenue, and at Thirty-Eight at 38 Commerce Ave. SW. The Gallery will offer 56 units, while Thirty-Eight will deliver 35. Mikolay didn’t think the new units would create too much supply for the sector, and both should find enough demand as long as the rents are right.

“I think it’s hard sometimes for new construction — especially in a high rise — to be priced appropriately. Can you get a rent that supports construction costs? So as long as they’re not trying to get rents that are $2 a square foot, and trying to get rents from $1.25 to $1.50 a square foot, I think they’ll find some demand for those units.”

Unsold condominiums, known as “shadow space” in the rental market, are expected to have an impact on the downtown sector. Icon on Bond, which went into receivership earlier this year, is now leasing 108 units previously for sale.

“It’s hard right now to determine what the impact will be. Those aren’t cheap rates that they’re getting at Icon, those are expensive, and they’ve had a pretty good time leasing it up. I think they’re somewhere around 70 percent occupied at this point. So that kind of indicates to me that there is a pent-up demand for downtown housing. But it’s got to be priced right,” said Mikolay.

If the recent sales gain in the single-family market doesn’t transfer to the condo market, more downtown homes may be converted into rental units. Mikolay said that could appeal to younger professionals, especially those who work downtown, if the units are appropriately priced. And he said new downtown units would compete with higher-priced apartments in the suburbs.

“The rent at Icon is probably comparable — maybe a smidge more expensive than some of the nicer suburban stuff. There is a project called River Oaks that is south of the airport. It’s really nice, but the rent is just a little bit cheaper than what you can get downtown. But if you work downtown, there are a heck of a lot more benefits from a cultural and a social point of view than being out on 54th Street.”

“The higher-end projects might be the ones that are impacted. But those, quite frankly, are already impacted. That is probably the worst performing segment of the market because if you’ve got the money to afford an expensive apartment, you might just as well go buy a house,” he added.

Outside of downtown, abandoned and foreclosed homes in the four other sectors are being acquired by investors at deep discounts and renovated, then entering the market as rental units. Mikolay thinks that transition is a good thing, as the change improves the overall quality of housing in the metro area.

He doesn’t believe these rental homes will have a negative effect on the larger apartment complexes because many of the potential tenants for the renovated houses probably won’t have good enough credit to qualify for a lease at a complex.

Mikolay also felt rental rates would remain flat for the remainder of the year because the area’s unemployment numbers are too high to warrant an increase.

“Until there is significant recovery in the job market, that is going to limit the rent growth that can happen,” he said of the next six months.

The CBRE/GR survey reported only one local apartment transaction occurred during the first five months this year because credit is tight and will remain that way for the foreseeable future. The report concluded that any deals that might occur within a year or so would likely be distressed sales or transactions for under $2 million.

At the same time, though, the survey said there were some lenders willing to finance multi-unit deals, and Mikolay said now is a good time to buy.

“If you can get your hands on the money to do it, I think it’s a fantastic time to make the investment because two or three years from now, as the job market recovers, you’re going to see some rent growth,” he said.

“When you look at our market-average rent compared to Detroit and the nation, we are significantly under-priced. So we’ve got some room to move that up.”

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