Construction and Real Estate

Developers are stuck in the middle

Officials are concerned supply could outpace demand for market rate housing.

January 13, 2017
| By Pat Evans |
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Venue Tower
Orion Construction’s Venue Tower project in downtown Grand Rapids still is under development. Photo by Pat Evans

While not quite yet a wet blanket, there’s at least a damp towel on optimism for future development of market rate housing in downtown Grand Rapids.

Absorption of apartment units coming online has slowed, with hundreds of units still under construction or planned, resulting in a more diligent and hesitant process in considering new projects. Developers, lenders and brokers all told the Business Journal they’re treading lightly into future market rate developments.

One of the largest planned projects in downtown Grand Rapids is Orion Construction’s 150 Ottawa, a proposed 15-story, two-tower building, with one of the towers currently reserved for a housing component with preliminary plans of 123 one- and two-bedroom units.

Orion spokesperson Jason Wheeler said the firm will continue to evaluate the housing component throughout the pre-construction process. The other side will be an office tower, with Warner Norcross & Judd as the anchor tenant.

Housing always has been a core piece of the development, but there is potential that could change, Wheeler said, depending on how the pre-construction phase shakes out.

“If we truly see a freeze in urban core market rate housing, we have options with the housing portions of projects like 150 Ottawa to possibly introduce a hotel component, or additional parking, or even reducing the project size,” Wheeler said. “We have always operated under the notion we will fill a need, not create a want.”

As lending loosened and incentive programs increased, and downtown and near-neighborhood living demand surged in recent years, Orion pushed forward, building Arena Place, Eastown Flats, Seventh Street Lofts, Venue Tower, The Gateway at Belknap and Fulton Square.

Market rate housing projects with a mixed-use component in a good location and a strong developer still are likely to find funding, but Mercantile Bank commercial lender Justin Karl said there will be hesitancy from lenders. Mercantile currently is a lender on six or seven market rate apartment projects that either are finished and filling, or in the process of finishing in the downtown area, depending on definition of downtown.

Karl said there is concern supply could soon outpace demand, and despite current demand in Grand Rapids, it still is tough to open a project and fill 200 units immediately.

“It’s been something on our minds: When do we have too much?” Karl said. “There’s a general consensus they’re in good demand and projects are being absorbed but maybe not as quickly as they thought.”

Downtown might not be the best option for developers moving forward, but Karl seemed more optimistic about near neighborhoods.

Third Coast Development is capitalizing on the near neighborhood areas with its multiple Michigan Street developments, including Diamond Place, which includes more than 150 market rate and low-income units, and proposed mid-market project with 44 units, 37 of which will be low-priced micro units. The firm does have one traditional downtown development with 25 Jefferson.

Max Benedict, a Third Coast principal, said there are a lot of opinions on saturation point of market rate in Grand Rapids and no answer is definitive.

“Grand Rapids is experiencing unprecedented growth, so if for no other reason, the nervousness is from growing this quickly,” Benedict said. “It’s hard to justify the land cost to build big buildings with the high cost of steel and concrete. You really have to charge at least those prices, so transitively, there is that market saturation.”

One belief Benedict and NAI Wisinski of West Michigan multi-family broker Scott Nurski share is there are enough two-bedroom units for the current demand.

To offset the high rent prices in non-low income subsidized housing, developers are moving toward smaller units in the downtown area. Nurski said the price sensitivities are natural for the expenses to build downtown.

“You have to give up some elbow room for a softer price; that’s how downtown works,” Nurski said.

Wheeler said Orion’s studios in Fulton Square, Seventh Street Lofts, Eastown Flats and Arena Place were leased immediately, and Venue Tower includes micro-units for cost control. He also said Orion doesn’t rely on one market segment “to keep the lights on at Orion,” and if housing slows down, the firm might pursue more office, medical or hospitality projects.

“At the end of the day, we will continue to evolve as a company, and we never fear the changing tides,” Wheeler said.

Local lenders might be hesitant when looking at new developments, and developers might see green with other functions, but capital from outside the region still is looking to enter Grand Rapids, Nurski said. He said Grand Rapids was named one of the top three small- to mid-size markets for multifamily investments at a major national real estate conference last year.

“Investors are aware of Grand Rapids, and there is a tremendous amount of capital from investors looking at both urban and suburban markets,” he said.

Nurski said suburban markets will slow because there was a lot of activity in the segment last year with multiple portfolios being sold. But the urban market was and will continue to be slow in building sales, as developers continue to build and hold, for the most part, in Grand Rapids, he added. Investors from coastal cities favor smaller cities, such as Grand Rapids, because of a better value and lack of competition from local buyers, he said, but there are far fewer build-and-flip projects.

“There is way more buyer interest than there are assets for sale,” Nurski said.

Nurski said potential out-of-town investors likely won’t dwindle with additional Fed rate hikes, but Karl said additional rate hikes will add layers to Mercantile’s hesitancy to fund additional market rate housing projects. Still, he said the bank currently is looking at several projects.

“There will continue to be hesitancy on these projects until two things happen,” Karl said. “We need to see: one, more units absorbed; and, two, we see a wage inflation and rent appreciation before we’re more gung-ho again.”

Third Coast still is excited about its near-neighborhood projects and low-income projects.

“We’re very capable with low-income and mid-market product,” Benefict said. “We’re not jumping on any other market rate projects right now. We’re comfortable with what we have, and we’ll continue both of those markets. But as far as another market rate, we have no plans being contemplated right now.”

Ultimately, potential further downtown market rate development hinges on costs coming down without sacrificing much room, which Nurski said is unlikely.

“There is great interest in the middle price point, and there is that challenge of how to deliver that,” Nurski said. “A lot of developers care and want to build something to be a positive for the community. It’s like chasing a unicorn, but a good thing for downtown if they can figure it out.”

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