National Multifamily Trends Impacting Grand Rapids Market

March 8, 2016

Is the influx of market rate apartment development in downtown Grand Rapids sustainable?  Before answering this question, let’s first take a look at demographic and development trends on a national level.

Demographic Trends

Demographic shifts continue to drive strong performance in the multifamily sector.  There are an additional 6 million people in the 24-34 year-old age range today versus the historical average.  The majority of this age range is comprised of the so-called “Millennial” generation.  This age cohort is typically the most prevalent renter pool of all age cohorts and is the largest contributor to new household formation.  68% of the Millennial generation are currently renting, either by choice (such as those seeking an “urban lifestyle”) or out of necessity (such as those who are burdened by student debt).[1]

There is a second demographic group that is also driving occupancy and rent growth in the multifamily sector, the Baby Boomer Generation (those born between 1945 and 1964).  The Baby Boomer generation is part of a growing group of “renters by choice”, who are financially stable and are choosing to free themselves of the headaches and obligations associated with home ownership.  Joining the Baby Boomers as “renters by choice” are professionals who are perhaps in a transient employment situation, or who are looking for a certain lifestyle offered by higher end and/or urban apartment properties.

Growth in Both Unit Supply and Rental Rates

These factors are helping to drive a new wave of development and additional unit supply.  In addition, due to the high cost of construction, the majority of development projects coming online have been comprised of Class A, and typically urban, product.  This is due to the fact that Class A, as well as urban product, tend to command rents that are high enough to support the cost of construction.  In fact, urban rental housing stock has increased by 19%, which is more than double the growth rate of suburban product on a national basis.

The rebuilding of urban centers has created a new demand dynamic.  While the rental rates that can be commanded for a given product class (in this case, “Class A” or luxury finish) have been a major factor supporting development of urban product, the associated resurgence of the downtown core has also created an appealing environment that offers an exciting lifestyle choice for Millennials, Baby Boomers and professionals alike.  Demand from all three groups has converged on the same product offering, thus supporting continued robust demand for urban units, tenant waiting lists for new projects, and historically impressive annual rental growth rates within the downtown submarkets.  To a lesser extent, this compelling rent rate vs. construction cost equation, coupled with the upscale lifestyle offering, has also created support for new construction of Class A, suburban apartment product.

Contrary to historical expectations, new unit supply is not slowing the annual rent growth of Class A product.  There are many high supply markets across the country that are showing continued absorption, and surprisingly, a simultaneous growth in rental rates.  This is a testament to the strength of the current tailwind provided by strong household formation, growth in the 24-34 year old cohort, and the advent the “renter by choice” phenomenon.  Interestingly enough, this same pattern is occurring in suburban submarkets that offer “urban-like” qualities, such as highly walkable communities that offer close employment and daily life conveniences.  Will these unit supply and rent growth patterns be sustainable forever?  Probably not.  Supply and demand will inevitably reach equilibrium, but this does not mean that demand will die altogether.

The Case for Sustainability

While these demographic and economic events have caused a logical surge in demand in both Class A and urban product, there is an evolving myth that the demand for urban product is a fad, mostly driven by the Millennial desire for hip urban living.  Furthermore, this demand is doomed to wither away as individuals within this cohort grow older, start a family and decide that the urban life is not convenient to the reality and demands associated with raising a family.  However, except for a very small “Moneyed Millennials” demographic group, the majority of Class A, luxury, urban product is not rented by Millennials, but rather is rented by downsizing Baby Boomers and professional “renters by choice”.  This tends to suggest that the revitalized urban environment is not just a fad, but is instead a welcome trend toward more vibrant and active downtown communities across the United States.

This bodes well for the amazingly rapid resurgence of the downtown core, and associated blossoming urban housing stock currently happening in Grand Rapids.  While the current new development trend does bring up questions regarding rental affordability within the downtown area, the increase in the number of downtown residents creates an undeniable benefit to the office, retail and entertainment components of the downtown core.  The synergy between these components makes for a more exciting environment for all who choose to spend time downtown.  What a great time to be living in West Michigan!

[1] Eye on the Apartment Market: Multifamily Dashboard. (2016, January). Panel Discussion at the Apartment Strategies Conference from the National Multifamily Housing Council Annual Meeting in Orlando, Florida.