As we head into the final quarter of 2024, Michigan real estate remains in a transition period. While interest rates remain high, they are expected to come down through the remainder of the year and into the next. If you are considering buying or building a property, you might wonder if the time is right to jump into the market. Here, we’ll take a closer look at a specific component of the local market: the Michigan multifamily market.
Traditionally, higher borrowing costs result in more buyers sitting on the sidelines, waiting for interest rates to drop. This results in lower demand and the potential for lower prices. If you’re considering investing in the Michigan multifamily market, it’s important to understand the state of interest rates, current rental demand, and the pros and cons of jumping in.
At JB Donaldson, we have decades of experience building a variety of multifamily developments for both operators and investors. We specialize in creating multiple housing units within single or complex building structures, creating communities that integrate amenities and enhance the quality of life for residents.
The State of Rates
The U.S. Federal Reserve has lowered and raised rates dramatically over the last five years. First, the Fed responded to the onset of the Covid-19 pandemic by reducing rates. Fears of recession, compounded by the complexity of new economic pressures, drove the Fed’s effective rate from 1.58% in February 2020 to .05% in April of the same year.
By April 2022, the Fed’s effective rate had climbed to .33%, when supply chain challenges and inflation had started to take hold. Over the next two years, rates rose steadily. By July 2024, the Fed’s effective rate stood at 5.33%.
Now that inflation has eased, rates are expected to come down over the remainder of 2024 and throughout 2025. What does this mean for you, as a buyer or investor? Many considering entering the Michigan multifamily market ask the same question—is this the right time?
Impact on Real Estate Markets
When interest rates are expected to change, investors often take a step back to assess their next move. Higher rates increase borrowing costs, which prices some buyers out of the market. Others aren’t forced out but decide to sit out, hoping to take advantage of lower rates in the future. While there isn’t a single answer for every buyer, sitting out during a period of higher interest rates isn’t always the best strategy.
First, there is a rate lag to consider. Even when the Fed announces it will lower rates, mortgage rates do not always shift immediately. If you plan on buying or investing soon, waiting for mortgage rates to change may not make sense.
Second, while interest rates are higher, there is less competition in the market. Home and lot prices may be lower before a drop in interest rates, when competition will likely drive them higher. If you can afford to enter the market before interest rates drop, you may experience lower overall costs.
If you are planning to enter the Michigan multifamily market as a buyer or with a new build project, consider the benefits of being proactive. Depending on the location, size and appeal of your investment, it may be worth making a move ahead of expected changes in interest rates. Similarly, if you’re considering a new build, you’ll likely find less competition for land ahead of rate drops.
The Rental Market
Of course, if you are considering buying or building property within the Michigan multifamily market, it’s important to understand more than the cost of buying or building. You’ll need to have an idea of your income potential, too. Owners of multifamily properties, including apartments, condo buildings, town homes, mixed-use homes, duplexes and similar structures, rely on rental income to pay for mortgage, overhead and operational costs.
So, what is the state of the rental market overall? According to Moody’s CRE, vacancies for multifamily properties sit around 5.6% nationwide, while asking rents are expected to grow by 2%. The Michigan multifamily market continues to provide value to investors. Data from RentHop reveals that rental rates dipped slightly in July 2024 when the average price of a 1-bedroom apartment was $1,267 per month. They have since climbed to $1,746 per month for the same-sized unit.
With rental rates stabilizing and expected to make a modest climb, multifamily projects have the potential to be more profitable. Let’s look at other variables that could influence the Michigan multifamily market in the coming years.
Other Factors
Outside ongoing changes in interest rates and local trends in rental income, other factors impact demand for multifamily housing. For example, population trends impact demand for rental properties and the homebuyer’s market. And this is the case with Michigan multifamily market too.
According to the U.S. Census Bureau, Michigan has experienced population growth over the last year, including 23,000 moving to Michigan from other countries in 2023. In the longer term, the state is expected to experience slow population growth, followed by decline. According to the Michigan Center for Data and Analytics, from 2022 to 2034, the state expects the population to increase by 2.3%, followed by a decline of 1.3% from 2034 to 2050.
Another critical factor in the demand for rental properties is the actual or perceived state of the economy. Fears of recession have recently softened, thanks to the release of positive national data. According to U.S. Bank, the U.S. economy grew 3% in the second quarter of 2024, partly thanks to resilient consumer spending.
In Michigan, the local economy has followed suit. Researchers at the University of Michigan expect steady job growth through 2025, with lower unemployment. Generally, they expect the trend toward lower inflation to continue, giving workers more flexibility to save and spend as they wish, with more confidence to sign rental agreements and a greater ability to pay their rent on time.
Looking Ahead to Your Next Build
If you’re considering joining the Michigan multifamily market as an investor, you have plenty of variables to consider. To make a project profitable, you’ll need to consider everything from input costs, overhead and repairs to your property’s appeal and the stability of rental income.
You’ll want to keep an eye on economic indicators, the state of the housing market and key demographic trends. For example, the demand for luxury units has remained steady in the apartment market over the last few years. In parallel, there has been persistent demand for smaller, more affordable multifamily units, especially in urban areas.
If you plan to build a multifamily project, working with a trusted builder with extensive experience is essential. A multifamily project is more complex than a single residential build. Your builder needs to work effectively with a wide range of vendors and will need to plan and build with efficiency in mind.
At J.B. Donaldson, we have extensive experience in the Michigan multifamily market, creating inviting spaces for everything from cozy family units to luxurious apartments. As design-build contractors, we anticipate and account for challenges, helping our projects run on time and within budget.
We are a premium design-build contractor with over 20 years of experience in a wide range of industries. With extensive in-house expertise, we collaborate with our clients, helping you navigate every aspect of your project, from pre-construction to final design.
We value quality, consistency, and predictability, which allows you to count on schedules, costs, and project integrity. Our commitment to excellence allows us to provide creative designs, practical solutions and innovative ideas while keeping your goals and objectives as top priorities.
