With the wave of condominium conversions, not only in the Downtown area but in the suburbs as well, it appears that owners and developers are going for the big payoff of condos to help alleviate the stress of increased building costs, he said. "My guess is that at some point the condominium sales will start slumping, and some projects built as condos will be leased out as apartments until the market picks up again," he said.

Affordable housing, although in demand, has seen starts averaging below 1,500 units each year for the past three years, a trend that doesn't figure to change through 2001, Hamilton saiys. He said the arduous approval process is no doubt a factor in the slow pace of construction as well.

Rental increases, although not spectacular at 3% to 4% per year, have continued to outpace. "Rents are moving about 1% per quarter, maybe a little slower. It depends on the market," Hamilton says.

While the average rent increased to $713 in 2001, mortgage payments in the Detroit area averaged $1,050 per month, a sizable disparity that has kept the area a strong renters market.

The report says vacancies in the Detroit MSA should continue to hover around 3% through 2001. Generally, older buildings and class B and C product are seeing the lowest vacancies across the MSA, with newer, class A properties struggling to attract renters who can more easily transfer their high rental payments into home ownership, according to Marcus and Millichap.

Class B and C product has seen the majority of the trading action over the past 12 months, a trend Marcus and Millichap predicts should continue through the first half of 2001. With class A rents almost mirroring monthly mortgage payments, investors are seeking out class B and C properties that have the potential for higher returns. Demand for these properties combined with the limited amount on the market has led to higher cap rates, however. The current gap between class A and class C cap rates is approximately 1.0% to 1.5%, which is tight compared with a more typical spread of 2.5% to 3.0% as seen in 1998 and 1999.

Although appreciation has been averaging approximately 5% per year, the lower class transaction dominance has kept the average price per unit from realizing any major gains.

Instant Insights /

Multifamily Market Predicted to Remain Tight, Profitable in Detroit

Related Stories

Recommended For You