Southeast Michigan: The Road to Recovery

Back in 2010, when I headed up a broad-based analysis of the Metropolitan Detroit real estate market, conditions throughout Southeast Michigan were, to say the least, moribund. “Frozen” may be a more apt term. Many new home communities had gone dormant, often forced into foreclosure. New construction activity – at least in the single family sector – was virtually non-existent. And many of the builders and developers who had operated successfully for years in Southeast Michigan were forced to scale back operations or had simply gone away.

This came as no surprise: the region had shed more than 470,000 jobs between 2001 and 2010; unemployment had reached as high as 14.5 percent (on an annual basis, in 2009); and foreclosures were a scourge nearly everywhere one looked.

Now, though, Southeast Michigan has finally turned a corner. New jobs are once again being added to regional payrolls, dormant new home communities are being restarted, demand is up, and new land is being developed. And even some of the hardest hit areas of the region are seeing renewed development in the form of rental apartments.

Yes, it is far too soon to say the region is back up to racing speed. For now, the pace of recovery is more like a slow bike ride. But the velocity is bound to increase, as market fundamentals are turning around and signs of renewal are popping up all over the region, including the following:

  • Employment recovering. After a decade of devastating job losses, the region began once again adding jobs in 2011. Over the last two years, roughly 70,000 jobs have been added to area payrolls. Most notably, the vital manufacturing sector is once again expanding, adding nearly 29,000 jobs since hitting bottom in 2010. Granted, the region still has a long way to go to make up for losses during the 2001-2010 period, but it is now on the right track, and a slow but sustained job market recovery now looks likely.
  • Construction activity strengthening. When the final numbers are in, we expect that approximately 4,900 residential building permits will have been issued throughout the region in 2012, including 4,350 single family permits and 550 multifamily permits. This represents a 27 percent increase over 2011 volumes and a whopping 209 percent increase over 2009, when construction activity hit bottom. (On a more cautious note: while this is great upward momentum, it must be taken in context, as volumes remain severely depressed relative to those seen prior to 2005.)
  • Existing home sector rebounding. In the resale market, the Michigan Association of REALTORS® reports solid sales volume increases in most areas of the metro region (as of November of 2012), with two digit year-over-year increases for Washtenaw, Livingston, Macomb, and St. Clair counties. Oakland County experienced a 5.81 percent increase, while Greater Wayne County (excluding the City of Detroit) saw an increase of 7.13 percent.  In addition, price stabilization has begun occurring in all areas, while foreclosure activity is on the decline. All these factors combined should further fuel the resale market and provide existing homeowners who want to purchase a new home with a clearer pathway for doing so.

A Cautious Recovery

New homes are selling, particularly in certain “hot” areas such as Northville, South Lyon, and in parts of northern Oakland County. Certainly sales volumes are nowhere near those achieved during the housing boom years. But they are vastly improved from the moribund days in the pit of the housing depression. Several stalled communities have been reopened, and land is currently being developed for new phases in others. Spec homes, where they are being built, are hard to keep on hand, and in some communities inventory tightness is becoming a drag on sales.

National builders Pulte and Toll Brothers maintain the largest presence in the area, together with several active regional builders, principally Lombardo, Robertson Brothers, Singh, Moceri, and Pinnacle. Many others, however, who have not had the financial resources or wherewithal to evolve or restart marketing efforts, continue to languish. In addition, the recovery is not reaching all portions of the region equally, and in fact much of the recent activity is concentrated in a handful of areas, such as those mentioned above.

Still, optimism is warranted – particularly as the automotive sector revs into higher gear. Just recently, for instance, CNN reported that in 2012 U.S. car sales experienced their best year since before the recession and largest one-year jump in 28 years. Moreover, analysts expect another robust year ahead for auto sales, which can only help spur Southeast Michigan’s recovery.  

In other areas, success is measured in new multifamily units. These include Ann Arbor’s new student-oriented rental programs, downtown Ypsilanti’s newly renovated (and fully occupied) urban lofts, and Detroit’s extremely popular Live Midtown and Live Downtown residential initiatives that have spurred a rental boom and resulted in near-100 percent occupancy levels in those two neighborhoods.

Planning for the Near Term

Over the near term, creativity and market savvy are called for in Southeast Michigan’s new home sector, along with new product initiatives. Sadly, many builders are holding fast to outdated and outmoded home plans such as those built in the early 2000s – and even the late 1990s – that do not necessarily speak to, nor meet the needs of, today’s eager, but ultra-cautious buyers.  

New products that speak to changing demographics and new market realities are needed.   One example: Pulte’s new Crestwood plan, being offered at Pinehurst in Lyon Township. This plan breaks down the walls (literally) of the traditional boxy layout by opening up a multiuse living, dining, office, and entertaining area with an open kitchen, along with additional flex spaces on both first and second floors. The result is a plan with “loft” appeal that is particularly well-suited to younger buyers who crave open space and flexibility.

Finally, great caution must be exercised among builders and developers not to out-build the recovering market. While pockets of opportunity are beginning to emerge and great land deals are still to be had, the depth of new home demand remains thin in most areas. Builders and developers – as well as municipal planning authorities – should plan strategically for the long haul and pay careful attention to changing market dynamics on a submarket by submarket basis.

In the multifamily sector, meanwhile, it is almost certain that demand for rental apartments will increase over the near term throughout the region as members of the massive Millennial Generation continue to come of age and tenure remains skewed (relative to historic norms) towards rental occupancy. Savvy apartment developers and property managers will be on the lookout for developing multifamily opportunities throughout Southeast Michigan over the next one to three years.

 

At Residential Planning Partners we can help you discover and take advantage of new opportunities in today’s housing and commercial markets.  For more information, please contact us today.