Why No Respect For Rentals?

When the best and brightest are young and struggling, where do they live in a region that only promotes ownership as a lifestyle expectation? Rental options are scarce.

Richard Florida, author of "Rise of the Creative Class," argues that a positive "Bohemian Index" is a catalyst for urban development. This is largely a rental population which infuses an area with vitality and creates demand for amenities. Metropolitan Detroit is among the areas cited by Florida as suffering a "brain drain" of people in this population segment.

Some say that one way of stopping the brain drain is creating a cool residential environment for young talent – who may have poor credit ratings and meager savings accounts. Detroit has prided itself on having the highest per capita home ownership in the nation. So, if you can't buy, where can you find a decent place to rent?

Colin Hubbell, a Detroit-based loft developer suffering the fallout of the credit crisis, anticipates a "robust" market for rental properties in the region. His "Lofts at 55 West Canfield," in Midtown, Detroit, were set to open with more than half of the units committed through purchase agreements. Then financing became tight and his prospective buyers couldn't get loans – the very population, he says, one would look to as comprising the "creative class."

"It's the group that's challenged when it comes to raising a down payment or getting the credit score that will qualify," he says. "Some of those folks were good legitimate buyers who needed a couple years of life to get their down payment or get their credit score up."

Now, they're shut out of the for-sale market, but prime for rentals. Hubbell's gearing "Lofts" to accommodate them. Half of the development will soon be offered for rent. It's not for a lack of "appetite" to own a loft, he says. It's because they can't get loans.

Detroit, he says, has espoused the home ownership "ethos" for generations, based in large part on the ability of well-paid factory workers to buy their own homes. "Today's realty is that there is a robust rental market and part of the reason is that so many rental properties have been flipped over into for-sale," Hubbell says.

Howard Perlman, of The Friedman Real Estate Group, recently sold Wayne State University's Shapiro Hall to a developer who plans to redevelop the building into rental units, but isn't convinced that the market is "robust." The poor residential real estate market, coupled with tight credit and poor job prospects has created a large number of renters, he says. But the rents remain low.

There is no new apartment construction and some, such as Detroit's Park Shelton, have converted to condominiums. The long-term prognosis for apartment development, however, is "pretty good," Perlman adds.

Walter Cohen, a Southfield-based developer who has converted nearly 70 percent of the Park Shelton apartments to condominiums, isn't so sure. While his 3,000 rental properties are doing well in the region, flat rental rates and high costs of managing rental properties are discouraging. Yet, he admits it may be time to reassess the market.

"It's not a question of demand – you can't get enough rent," Cohen says. "I'm sure I could rent them (new apartments), but I couldn't get enough rent to justify doing them. Now that interest rates have dropped, I'd need to recalculate it. Maybe it's getting closer."

A cool city requires more than rental properties, he contends. While Boston, New York, and Chicago may appear to be cool urban environments with considerable rental options, many apartments have converted to condominiums, Cohen says. "What creates a neat city is density. But density doesn't mean renting. You can have a lot of density and own – either mid-rise, or high density town houses, or small-lot single family, or cluster.

"You need people out in the streets. You need mixed neighborhoods with more than just housing in them. You need to be able to walk a block and a half to get a fresh bagel, croissant, whatever… I'm not saying they should be all for sale, but the issue in the Detroit area is the density. I've been having that argument in suburban cities for 40 years."

Royal Oak, now a dense urban environment with apartments, hasn't always been that way, Cohen says. As a result, it's a vibrant, arguably "cool" environment with rental options. Urbane Apartments is capitalizing on the sense that "everybody wants to live in an urban setting," notes owner Eric Brown. Urbane has retrofitted old apartments in Royal Oak, Clawson, Troy, and Ferndale with smart contemporary interiors (Ie. stainless steel counter tops, hardwood floors and industrial lighting)that have captured the imagination of young adults.

"We're now kicking off a 'green' concept – bamboo flooring, low emission paint, low emission carpeting," explains Brown. "That's going to be a huge marketing feature as well as being the right thing to do."

Brown knows who his target market is and he listens to them. For example, some move to the area for contract jobs. "They certainly don't want to buy a home because they'll be moving somewhere else in nine months. They don't want to sign a 12-month lease." As an option, he offers a "freedom lease," allowing commitments of three, six, nine, 12, and 18 months, with a flat fee required for leases of less than 12 months.

The region is not a deterrent to the creative class, according to Brown, who has redeveloped 10 small apartment buildings. "The only thing that is deterring them from coming here is a lack of jobs."

He says there may not be a market for large, new apartment complexes, but well-redesigned and creatively marketed niche apartments will do fine. Brown admits that he can claim rents that are "significantly higher" than other apartments because of location and lifestyle appeal.

"There haven't been a lot of new apartments built (recently)," he says. The absence of new apartment construction and condo conversions have "created an opportunity for smaller, niche developments to flourish."

A critical marketing question for Metro Detroit real estate development, Brown contends, is "do people really want to buy a house in the Detroit area and live here long term, and are there enough apartment buildings?"

The rental market is strong in downtown Detroit, where 97 percent of recent residential development has been rental – but not necessarily because there is a demand for rental. It's more a case of the poor for-sale market, according to David Blaszkiewicz, president of the Detroit Investment Fund, which provides gap financing for development projects in the city. Many downtown developments have taken advantage of historic tax credits, which require the owner to manage the building for a period of time before selling it. "Projects like the Kales Building and Merchant's Row are now coming for the sale market. My guess is that they will stay rental. Rental is strong and for-sale is tough," says Blaszkiewicz.

In the end, Detroit remains an ownership market, he says. "Here, our (housing) product, relatively speaking, is so affordable, it pushes people toward acquisition."

What is it about Detroit that remains so stubbornly adverse to rental development? Is it the "realities" of the market? Or the absence of public policy?

Not having rental options, especially in urban environments, dissuades people like Florida's "Bohemian" group from helping to create density and vitality, explains Francis Grunow, executive director of Preservation Wayne. "Maybe you need a more enlightened development class," he says. "Maybe you need developers working alongside government to create spaces that are more amenable to this kind of living."

Unlike most major cities, the idea that someone may want to live in a cool space for a certain period of time and move on is alien to Metro Detroit culture and tends to be an underground concept, Grunow says. Renting is merely the absence of a favorable for-sale market, not a way of living. In this, and other ways, Detroit, he explains, is "an enigmatic place."