GRAND RAPIDS — Citing demand for more diverse housing products, developers cautiously have started exploring whether to market new condominiums for sale in Grand Rapids’ downtown district.
The residential building boom that’s taken off in the city in recent years has been focused almost entirely on apartment development, with very few exceptions. But with that market now reaching maturity, consumer demand has started to rise for ownership options as opposed to just renting, according to sources in the commercial real estate industry.
Given that anecdotal evidence of demand, some experts expect many of the apartment developments built over the last few years — or those now under construction — could be converted into condominium units for sale in the coming years.
“Once (more) units get to market, you’ve established a subculture in the urban core (that wants to buy something),” said Mark Augustyn, a senior lender with Grand Rapids-based Mercantile Bank Corp. “That product type hasn’t been offered for sale, so I think there will be many of those projects over the next decade that will start to offer the conversion option from apartment to condo.”
It’s a sentiment that developer John Wheeler wholeheartedly endorses.
Wheeler is president of Grand Rapids-based Orion Real Estate Solutions LLC, a subsidiary of Orion Construction that currently is building the $10.6 million River’s Edge apartment project on the east bank of the Grand River along Monroe Avenue just north of downtown Grand Rapids.
The company plans to begin pre-leasing the 32 units later this year, he said. As those rental agreements expire, his company intends to begin offering units for sale — if there’s evidence of market demand.
“It’s perfect because it’s a great size project for 32 homeowners,” Wheeler said. “They’re nice big units, there’s a restaurant right in the building, indoor parking, that kind of thing. Once they get in there and feel it and they like it, it’s a great way for a homeowner to decide if they want to buy it. It’s the best of all worlds for a tenant to become a resident.”
Wheeler said that the process of master-deeding a whole project and then selling off individual condominium units is one he’s employed at several other developments in the past. He added that as many as 16 penthouse units of the Venue Tower project that opened earlier this summer in downtown Grand Rapids could also be converted to condos. Orion also is exploring condos for other as-yet-unannounced projects in the Grand Rapids area, he said.
“It’s always an ebb and flow between rentals and ownership, and you have to have the right development,” Wheeler said. “We have to appeal to all markets: renters and homebuyers.”
BACK FROM THE BRINK
In the years leading up to the Great Recession, downtown Grand Rapids and surrounding neighborhoods experienced a boom in condo development, including at projects ranging from Bridgewater Place to The Hillmount to Icon on Bond.
Each of those projects struggled through the downturn years — with some changing ownership and others converting to rental properties — but they now approach full occupancy.
Sources in the commercial real estate sector said that financing for condo projects largely dried up in the years after the recession and is only just now coming back.
The long-term success of many of the established condo projects has Wheeler and his peers exploring the option for new urban residential developments.
Both Rockford Construction Co. Inc. and CWD Real Estate Investment Inc. have worked a limited number of condo units into their high-end, mixed-use projects in the city’s central business district.
Sam Cummings, managing partner at CWD, told MiBiz that nine of 10 condominium units have sold at The Rowe, a historic renovation project the company opened last year at the northwest corner of Michigan Street and Monroe Avenue.
Cummings said each of the units sold for around $300 per square foot, making it a profitable venture. But while the real estate firm is open to building more units at future projects, the company would never consider condominium development as a main focus.
“It’s a pain in the ass and it’s capital intensive up front,” Cummings said of building condos. “(The addition of condos to The Rowe) was a way to get back some equity, frankly. There was risk associated, but it was a way to test the waters. It’s a valuable component to have in our urban core.”
Specifically, Cummings said that lenders often will require upfront construction drawings that cost more than $100,000 for condo units that are typically built on speculation.
“Any number of things can impact pricing and they take a long time to deliver,” he said. “I don’t know if we’ll do more.”
At the prices a developer needs to fetch to make a condo project viable, they’re essentially building luxury homes, which often can require specialty builders, according to Cummings.
However, that’s not stopping J.D. Loeks from including condos in the planned second phase tower of the Studio Park mixed-use entertainment district that will be built on two surface parking lots immediately south of Van Andel Arena.
Loeks’ Jackson Entertainment LLC plans to build a nine-screen movie theater, residential units, parking, retail, office space, a hotel and public space at the site. He recently told the board of the Grand Rapids Downtown Development Authority (DDA) that while the market will dictate the types of housing that will be viable in the project, he plans to include at least some condo units.
“Based on new construction costs, (new condo development) puts you at a price that’s a little out of reach for most people. The reality is that most of Kent County can’t afford a downtown condo,” Loeks said. “But if you build the right units in the right location, downtown Grand Rapids is becoming more attractive. I can see a future where we’re expanding on the demand for those units, which makes it more viable.”
HERE TO STAY
While the condo-to-apartment conversion slowly catches on in downtown Grand Rapids, the exact opposite is playing out in larger markets in the Midwest.
Across Lake Michigan to the south, condominium owners in and around downtown Chicago are looking to sell their units to cash in on the city’s red-hot rental market, according to a report last month in the Wall Street Journal.
As urban demographics in that market shift in favor of renters, the developers behind dozens of existing condominium buildings in recent months have converted them into rental units, according to the WSJ report.
That trend didn’t come as a surprise to Mercantile Bank’s Augustyn, who noted that long commutes and increased traffic make Chicago a “have to” market when it comes to people living closer to their jobs. Additionally, selling a pricy Chicago condominium frees up considerable equity for residents, he said.
By comparison, Grand Rapids remains a “want to” live downtown market, Augustyn said.
“The reason our market has been largely rentals is because it’s largely new,” he said. “People haven’t been as likely to buy because they don’t know if they’ll like (downtown living). But a decade in, I think people are seeing it as a permanent thing.”