As housing costs rise, the dreaded "missing middle" sector dries up. See what several West Michigan developers and individuals are doing to house this bracket.
Recent dips in housing supply, exacerbated by the combination of flatlined middle and lower class wages and rising costs, have brought to light a longstanding problem in the real estate development industry: the dreaded “missing middle.”
As we explored in April in our discussion about affordable housing
, the “missing middle” refers to housing accessible to middle income earners — this is often defined as 80-100 percent of area median income (AMI), which is about $50-65K/year for Grand Rapids, according to HUD
. These are the individuals and families who make too much money to quality for the majority of low-income housing (much of which is capped at 50 percent of AMI, or about $35K/year in Grand Rapids), but don’t make enough money to afford standard “market rate” housing, which targets incomes at 100 percent of AMI and up (or $65K/year+).
Unfortunately for these middle income earners, when housing demand is scarce, this bracket of affordability is the first to dry up — and the most difficult to replace. Much of the housing that is affordable to the middle market in Grand Rapids’ urban areas right now are one- to two- bedroom rentals, leaving most middle market families out in the cold.
So why does middle market housing go missing? The short answer: there’s no money in it.
The longer answer involves the fact that property developers — particularly large scale, multi-unit developers — rely on a complex combination of equity and capital investment. The simplest deals develop market rate apartments which can be rented at “market rate,” or 100 percent of AMI or higher — as high as the market can bear. Alternatively, developers can offset their costs through a number of local, state, and HUD incentives. These incentives exist to close specific gaps: historic preservation, economic development, and most notably: low income housing affordability. Yet affordable housing incentives come with complex requirements, and they typically target lower income brackets making $35K/year or less.
In other words: there’s no way to make a profit in middle market housing, and therefore no way to develop it.
At least, that’s been the common mentality in the industry. But developers of all sizes across Grand Rapids are using creative solutions to close the gap — solutions which could become models for success.
David Levitt, principal with Third Coast Development
, recalls a favorite bartender at a business on Michigan Street he formerly owned, breaking it to him that she was moving to Wyoming because she couldn’t afford to live in that neighborhood anymore.
“I thought, ‘well, I want people like her to be able to work and play here.’ That was the impetus for the work we’re doing now.”
Although Third Coast Development, formed in 2004, hasn’t historically focused on middle market or low income, all of their projects both under construction and in the pipeline are in fact mixed income, with 70-85 percent of those units either rent or income restricted. Diamond Place, at 1003 Michigan Street, is utilizing Low Income Housing Tax Credits (LIHTC) to make 98 of the 165 units accessible to income levels at 30, 40, 60, and 80 percent AMI, ensuring a broad mix of affordability.
Meanwhile, CityZen, a smaller project at 637 Michigan, is 80 percent rent restricted.
“How does one build new or newly renovated, quality, safe housing you can afford if you’re making $29,000 to $45,000 per year?” muses Levitt. “I’m a father of four with two daughters living in NYC, so I think about what kinds of places I’d feel safe about my daughter living in.”
But the secret sauce, says Levitt, isn’t just about the tax credits.
“We have investors who are looking for social benefit other than wanting a full return [on investment]. They’re willing to take a smaller return in exchange for social good. That’s really it, is finding more flexible equity partners.”
Levitt cites 637 Michigan as an example. “We’ve got tax credits, and NEZ and all that, but we’ve also got an investor who was willing to take a much reduced return in exchange for allowing us to build this type of project.”
Third Coast’s strategy echoes that of Inner City Christian Federation
(ICCF), which, under the leadership of CEO Ryan VerWys, found investors willing to take lower than standard returns for the 177 properties ICCF acquired
for affordable and middle market development last fall, which will enable ICCF to sell these properties at rates affordable to the middle market.
, formerly known as Kent County Land Bank, is approaching the problem from a design angle.
“We’re very excited about this,” says David Allen, former Third Ward City Commissioner and president of the newly branded Land Bank. “This is an opportunity to develop a model that could create rapid, quality, affordable housing across the state.”
In partnership with mobile home manufacturer Champion Homes
, InnovaLab has built modular homes on three of the 125 buildable lots it owns to serve as models for the rest of its lots across the city — and perhaps beyond. The homes were prefabricated inside Champion’s factory as modular blocks, shipped to the prepared sites, and assembled in a matter of days.
“We tried to create affordable housing with stick builds [construction from the ground up] last year,” Allen says. “It costs $150/square foot to build, no matter what you do.”
At that rate, a 1,500 square foot home would cost $225,000 just to build, a cost that’s significantly higher than the home’s value in a distressed neighborhood.
With Champion’s new line of urban modular designs, however, that cost drops to $100/square foot, bringing homes within a more manageable range. Allen estimates final homes, which will have a wide range of scalable finish, design, and size options, will sell for between $160,000 to $230,000.
A big part of that savings comes from the reduced timeline. Once a contract is inked, a house is ready for move-in within 90 days, with installation itself taking as little as one day. Traditional construction timelines coordinate between construction workers, electricians, plumbers, and other skilled tradesmen, stretching on as long as a year and racking up labor hours. Homes created on an assembly line, fully wired and plumbed, enjoy significant economies of scale.
“I was really skeptical at first,” says Allen. “But what I saw at the [National Modular Home Expo] blew me away. If I had to rate the quality of products from 1 to 10, it would be a 15.”
Champion Homes’ new line of urban designs is being developed exclusively for InnovaLab, using Grand Rapids-themed names and mimicking the design character of local neighborhoods. Designs are available in a wide range of styles, including one-, two-, and three-story single homes, townhouses, and even multi-unit buildings. Unfinished basements and attics give homeowners opportunity to increase their home’s value.
An affordable housing project by the Land Bank at 836 Sigsbee St SE.
Financing for the modular development of InnovaLab’s Grand Rapids lots is being backed by the State’s Land Bank
, which is eyeing 4,000 lots around the state they’d like to be developed using this model. InnovaLab is helping to bring this same modular product to projects in Muskegon, Holland, and Inkster, near Amazon’s new Livonia fulfillment center.
“We view ourselves as a catalyst to bring much needed housing inventory statewide,” Allen says.
While developers like ICCF, Third Coast, and InnovaLab are generating large-scale solutions, these are far from the only ongoing efforts being made to address middle market housing.
“What is happening here in West Michigan is not a bubble, but a market correction. If it costs you a quarter million dollars to build a house, and the house isn’t worth that, then we have a problem. Modular building is only one piece of the puzzle,” says Allen.
Individual property owners and small property managers across Grand Rapids continue to rehabilitate vacant homes in distressed neighborhoods—and even adding units of housing to their own residences.
“I’m currently working on adding a unit of infill housing [to my property], which I believe I can do for $85K, or $5.70/square foot,” says Adam Tauno Williams, a resident of Highland Park. “If it survives the permitting process, I intend to put all the costs and paperwork online, to help add some realism to this overly intellectualized subject.”
Small for-profit contracting and property management companies are also a piece of the puzzle, as they often maintain a rotating portfolio of rehabilitated houses targeted to the middle market. A small, five to 15 person company like All In One Builders completes about 12 flips across Kent County each year.
The historic house next to the author’s own house in South Hill is currently being renovated by a retired contractor who flips houses as a hobby. Depending on the finishes and time of year of the sale, the house will likely sell for $190,000-250,000, according to a recent market analysis of the neighborhood.
Individuals like this retired contractor, Williams, and a host of small property management companies represent a quiet but industrious segment of Grand Rapids that is using case-by-case creative solutions to create what industry gurus would call naturally occurring affordable housing, or NOAH. According to Urbanland
, NOAH is “…housing that is affordable without being supported by public subsidies such as low-income housing tax credits.”
In real terms, NOAH refers rather ubiquitously to creative development solutions — like cutting building costs with modular design and offsite fabrication, using your company’s at-cost construction services to flip houses that middle class people can afford, or rogue hobbyists who like the satisfaction of turning derelict houses into quality homes for young working families. While these types of projects produce a much smaller number of housing units per developer, by volume they represent an important part of Grand Rapids’ solutions to middle market housing.
“What we have is an income inequity problem,” says Allen. “If I put my city leadership hat on: we cannot force employers to pay more money, but there are creative incentives we can come up with to get people to pay more.”
But Allen, echoing Levitt and many of the city’s nonprofit developers, holds a lot of optimism based on the ingenuity he sees in other developers in the city. “Both in the nonprofit sector and in the for profit sector, we have some of the most creative developers I’ve ever seen,” says Allen. “I see everybody hitting on all cylinders.”
This article is part of a nationwide series on housing across the many publications of Issue Media Group. As cities grow and the population as a whole becomes more urban, housing is an ever-pressing issue. Tackling the tough topics at the heart of where and how people live, IMG invites you to explore housing in all its iterations over the next year.
Marjorie Steele is a poet, journalist, publisher, and boomerang West Michigander. Currently teaching at KCAD of FSU, Marjorie’s works can be found at medium.com/@creativeonion and cosgrrrl.com.
Photography by Adam Bird of Bird + Bird Studio.