Construction, Economic Development, and Real Estate

Market rate rent: ‘a problem that needs to be solved’

Study finds the number of severely cost-burdened renters is at record levels.

January 1, 2016
| By Pat Evans |
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Arena Place is one of many new structures in downtown Grand Rapids that will offer apartments. Courtesy Orion Construction

With thousands of new apartment units coming on line in downtown Grand Rapids in the next year, the “market rate” rent attached to them has created much discussion, and not just among renters.

Apartment rents in downtown generally are well over $1,000 a month these days, but seeing rent prices on the increase is not unique to Grand Rapids.

Nationally, rent increases largely are attributed to vacancy rates being near a 20-year low. In Grand Rapids, there’s a 98 percent occupancy rate, not including income-restricted units, according to a study by Zimmerman/Volk Associates in 2015.

The already high and still rising rents are a matter of discussion among developers, said Max Benedict, Third Coast Development principal.

Providing affordable apartments is also a key goal for GR Forward, the city’s master plan amendment by Downtown Grand Rapids Inc. that was approved last month. GR Forward would like to see a diverse array of earners living in downtown, in part because it will help attract a wider selection of retailers to the market.

“It’s a problem that needs to be solved,” Benedict said. “If a developer figures it out, that’s the Holy Grail.”

The median rent of a newly constructed apartment in the United States is $1,290 — near where many of the new downtown Grand Rapids apartments are priced. For the newly constructed and renovated apartment buildings, the rents can’t be much lower than that, Benedict said.

“You need that cushion. If you go below that, your bank has issues,” he said. “If you go below $1,000, you can’t pay your mortgage and you have issues.”

Some developers do see relief, thanks to government programs that provide assistance, subsidies and tax credits for low-income housing. Low Income Housing Tax Credits, or LIHTC, provide new housing for certain lower-income brackets, often capped in the low $20,000s.

Benedict said the missing piece lies with income earners that fall between $20,000 and $40,000. He also said LIHTC developers can afford to build nicer buildings because they aren’t working against a budget as much as market rate apartments.

One of Third Coast’s new projects, Diamond Place on the corner of Michigan Street and Diamond Avenue, will be mixed income, utilizing some LIHTC benefits.

“One year, one unit could have a market rate renter and the next a low-income earner,” he said. “It’s the same unit, same finishes. A renter walks out of the building and you don’t know if they’re a high- or low-income earner.”

Michigan’s average rent is near the middle in the U.S., at $980 per month — in line with states such as North Carolina, Wisconsin and Ohio. The average is lower in 27 other states, with only Mississippi, Arkansas and Alabama much lower, in the $700 range.

Average rent in the United States sits at $997 for a one-bedroom and $1,220 for a two-bedroom. Unfortunately for renters across the country, those prices could go up by 8 percent in 2016, according to a report from Rent.com.

One trend that might make living downtown affordable for more people is smaller units. Third Coast currently has several “micro-units” of about 375 square feet for a one-bedroom apartment. At the “market rate” of $2 per square foot, those apartments come in at $750 a month.

“It’s a matter of if you want the big one with lots of storage,” Benedict said. “Developers equate their construction costs to square foot, so all rents are, too. We try to (compare) apples to apples, but that’s opposite of tenants.

“If you’re searching Apartments.com, you’re not searching this size to this size; you’re searching ‘one-bedroom apartments,’ so a micro-unit comes up and is on the low end of the prices.”

The average rent within 10 miles of downtown Grand Rapids is approximately $900, and while prices closer to downtown are higher, that shouldn’t come as a surprise, said Sam Cummings, managing partner of CWD Real Estate Investment.

An average earner in Chicago wouldn’t expect to be able to live in the heart of downtown, and Grand Rapids is no different. The higher downtown rents are indicative of the proximity to the amenities — which continue to grow in Grand Rapids, Cummings said.

Benedict agreed and said as Grand Rapids continues to mature, perhaps the middle-income demographics will continue to settle in near-downtown neighborhoods such as East Hills and the west side, which is a reason Third Coast is focusing on the Michigan Street corridor.

“The conversation ends as Grand Rapids’ problem of the ‘missing middle,’ but if you go to Chicago and you’re a middle-earner, you can’t live in the heart of Chicago,” Benedict said. “It can be attributed to growing pains, but look at Chicago: People who had middle income moved to Lincoln Park and made that the place to be.”

While rents are climbing, pocketbooks are tightening. American households spending at least half their income on rent will likely reach 14.8 percent in the next decade, according to a study conducted by the Enterprise Community Partners and the Harvard Joint Center for Housing Studies. The median rent takes up 30 percent of a median American income, according to the study.

The study also found as rents are increasing, income is not, adding to the strain renters will continue to feel in the future. In a report by the Pew Research Center, unadjusted minimum income has grown from $0.25 per hour in 1938 to $7.25 this year, while, adjusted for inflation to 2014 dollars, the wage went from $3.25 to $7.25. Adjusted for inflation, minimum wage peaked in 1968, at more than $8 an hour.

Pew Research Center also released a study based on Bureau of Labor Statistics data that average hourly wage purchasing power has gained just $1.49 since 1964, based on constant 2014 dollars. According to the study, 56 percent of Americans said their family’s income was falling behind the cost of living, up from 44 percent in 2007.

With no end in sight, it’s time for the government to step in, said Christopher Herbert, managing director of Harvard’s Joint Center for Housing Studies, in a press release.

“Our analysis shows that even in the unlikely event that income growth greatly outpaces rent gains, the number of severely cost-burdened renters will remain near current record levels,” Herbert said.

“Given these data, it is critical for policymakers at all levels of government to prioritize the preservation and development of affordable rental housing, as there are simply not enough quality, affordable rental units to provide housing for the millions of households paying over half their income in rental costs.”

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