The Last High-Rises?
The city is pushing developers to build more affordable housing. They say it will get less.
by Trilby MacDonald & John Hilton
From the April, 2021 issue
Ann Arbor's profile has risen dramatically in the past twenty years. As the U-M added 10,000 students, developers raced to house them, launching nearly a dozen high-rises into the campus-area skyline.
But then the pandemic hit. Last spring, Michigan and other universities canceled classes, closed dorms, and sent students home to study remotely. Lenders who'd been betting on the future of college towns suddenly wondered if they had a future--and froze the projects of developers like Howard Frehsee.
Frehsee, who's based in Bloomfield Hills, started his first Ann Arbor project in the late 1990s. After the U-M's last growth spurt, in the 1960s, the city had effectively banned redevelopment in neighborhoods near campus and made it extremely difficult downtown. But by the time Frehsee arrived, density was back on the agenda. When he submitted a plan to replace a fast-food restaurant at State and Washington with another single-story building, city council turned him down--and told him to think bigger.
Frehsee came back with the eight-'story Corner House Apartments, downtown's tallest residence in more than thirty years. Soon after, South University businesses persuaded council to lift height restrictions there, and then a "zoning overlay" made it easier to build high-rise housing anywhere downtown. Corner House is now the smallest of a dozen near campus that house more than 4,000 students.
Frehsee came back in 2019 with the biggest project yet: a nineteen-story tower on Washington and an adjacent six-story mid-rise behind the Michigan Theater. City council approved it, but before Frehsee could break ground, his funders backed out.
The pandemic had caused "great uncertainty in the marketplace," he told the Observer last June, "and the lenders that loan money for projects like this are very concerned what that means going forward."
Over on South U, the pandemic hit just as another veteran developer was about to start his third high-rise. Ron Hughes began with the Landmark at South U and Forest, then worked with the Ulrich Trust, which
owned most of the block between East U and Church, to replace the stores on the north side with the Vic Village North. He'd already cleared out the tenants across the street to make way for its counterpart, Vic Village South, when lenders got the jitters. The buildings stood empty all year before finally being demolished in January.
Hughes says he's now back on track and expects to start building this summer. 'Frehsee hopes to break ground this fall. "It's warlike conditions," he says. "But there's hope and sunshine with the vaccines." And the Standard, another high-rise marketed to students, is already rising on the former DTE office site at Packard and Main.
Together, the three high-rises will add almost 1,000 more beds. Smaller projects have added hundreds more beds in the past twenty years, and the U-M has built just over 1,000. But just housing the increased student population would require 4,000 more.
Hughes controls another site on South U next to University Towers. It's now being used as a staging ground for construction of Vic Village South, but he plans to start work on Vic Village East there as soon as South is done.
What that building might look like, though, is now in doubt. Instead of the thirteen-story building he'd planned, Hughes says, he's now looking at something much smaller.
The reason, he says, is that "the city has changed the [zoning] ordinance to require a high percentage of affordable housing" in high-rises. While he's "totally supportive of affordable housing," Hughes says, he couldn't charge his other tenants enough to pay for it.
Frehsee agrees. "The changes in the zoning are going to compress the amount of square footage that can be built on a site, will raise the cost of construction, and will lead to higher rents as a consequence," he says.
Frehsee's project includes nineteen "microunits" affordable to people making less than 60 percent of the area median income. Under the incentives in place at the time, that allowed him to build two stories taller. To get the same height today, 'Frehsee says, he'd have to have sixty affordable units--but "the building wouldn't be able to subsidize" so many.
Instead of creating more affordable housing with the ordinance, Hughes and Frehsee say, the city may end up getting less. Hughes predicts that unless the law is changed, "you will see no new high-rise construction in the downtown core."
If these are downtown's last high-rises, John Martin Rogers will shed no tears. Rogers, a lifelong Ann Arborite who owns the Goodtime Charley's building at South U and Church, dismounted a tractor to speak to a reporter from the animal rescue farm where he has volunteered for eleven years. "You're talking to a man who hates sprawl," he says. "But is the idea here that by building these high-rises you are inhibiting sprawl and saving our natural land?"
Rogers says he'd hoped the high-rises would pull students out of the South U neighborhood across Washtenaw, which fell into disrepair when they moved in. It hasn't happened yet, and in the meantime, he says, the high-rises have displaced many of the businesses that gave the campus district its charm. "I mean, South U is shot," he says.
Rogers says Hughes offered to buy the Goodtime Charley's building, but he didn't like the terms and felt protective of his tenants. He also owns the Necto building on Liberty and says he's "forgiving a lot of rent, because we like our tenants and want to keep them." Of the high-rises and the chain restaurants and retail that often accompany them, Rogers says, "What I'm afraid of is having Panera Bread and changing the street to an outdoor Briarwood."
Retail space in the high-rises is expensive, and some had trouble keeping tenants even before the pandemic. "We had very little impact on the residential side," Hughes says, "but our ground-floor retail tenants have been badly impacted. We don't offer rent forgiveness, but we work with our tenants to reschedule their rent payments."
Frehsee's tower will have almost 6,000 square feet of ground-floor commercial space. "It's a flexible space," he says, but when developers look for tenants, they often favor restaurants over stores, because they have the potential to bring in more revenue per square foot.
Frehsee says that profit is not his primary motivator in choosing a commercial tenant. "I know this might flip some people out, but the market determines for itself," he says. "You want to put something in that will make it and that the community will like."
U-M students often ask for a campus grocery store. Would he consider that?
Frehsee agrees the need is there but says a food store wouldn't bring in enough income to cover his building's construction cost and taxes. If the city wants a grocery, he says, it would be better placed in a publicly owned building on publicly owned land. "When it doesn't work with the private sector but there is a public need, well, let the public sector fill the gap," he says.
The city has done that with housing since the 1960s, when it grew its own public system using federal funds, and nonprofits built vast townhouse co-ops. Most of those were built on the edge of town, where land was cheaper, but now the city is looking at downtown, too. In November, voters passed an affordable housing millage that's estimated to bring in $126 million over twenty years. The city plans to leverage that money to build a mix of affordable and market-rate housing on city-owned parking lots (see Inside Ann Arbor, p. 11).
The need for housing at all income levels is acute. As the U-M's student count grew--to 48,086 this school year, from 38,103 in 2000-2001--it also added nearly 3,000 campus jobs, bringing that total to 20,928. Another 23,544 people work at Michigan Medicine. Private-sector jobs in the city have grown even more.
That was the backdrop against which council unanimously approved new affordable housing requirements in 2019. They offer what look like generous incentives: in the downtown core, if 15 percent of the apartments in a new building are affordable, the developer can build 150 percent more floor space. If 20 percent are affordable the bonus increases to 300 percent, and 30 percent affordable earns five times the floor area.
But the law also eliminated bonuses for building market-rate housing, and tightened the definition of affordability, from 80 percent of the area median income to 60 percent. Since rents on those units are based on the tenant's income, that meant each would generate 25 percent less revenue. The bottom line, Hughes and Frehsee say, is that they can't build enough 'market-rate units with the bonuses to subsidize the affordable units required to earn them.
Frehsee says his project wouldn't be financially viable under the 2019 requirements. Councilmembers "don't look at it using economics," he says. "You don't put affordable housing on Rodeo Drive."
When Hughes' Vic Village North opened in 2019, MLive reported, rents ranged from $1,000 to $1,890 per bed. The twelve-story building right off the Diag is entirely student housing, with no subsidized units. If it were built under the current rules, Hughes says, 20 percent of the units would have to be affordable. Those would cost more per person to build, because they'd have fewer bedrooms, but their rents would be capped at 60 percent AMI. To make up the difference, he says, he'd have to charge everyone else 20 percent more--and "renters would go elsewhere."
The thirteen-story Vic Village South, which was approved under the old rules, will have 350 beds, twelve to fourteen of them affordable. "That's doable," Hughes says. But "if we had to comply with the  ordinance, 30 percent of the new building would have to be affordable, and we'd have to increase rents by 30 percent to offset the cost of those rents. There is no way," he says, to make that work.
He was planning to build Vic Village East on the same scale as the others, but says "the ordinance has stopped any work on the site for now." If he had to go ahead today, he says, he'd build no more than four times the lot area, because that's the threshold where the requirements kick in.
Councilmember Ali Ramwali voted for the 2019 changes, but says he was never convinced that it was the best way to deliver affordable housing. He didn't voice his doubts at the time, he says, because "the issue has been politicized, and you can't have an honest discussion about it. I didn't have any political capital at the time to object to it. It was a train, and I was going to get plowed by it."
Though lenders have regained their confidence in the student housing market, Ramwali wonders if the U-M has hit peak enrollment. "Is it now necessary for folks to be on campus to be able to gain their degrees?" he muses. "It'll be interesting to see what happens in the next five or ten years."
Mayor Taylor says the ordinance was intended to make it possible for people of all income levels to live downtown. "We want people who work in Ann Arbor to be able to live in Ann Arbor," he says.
Told that Hughes says it will instead kill high-rise construction, Taylor responds, "It's not in anyone's interest to prohibit downtown development. We are always open to making our ordinances better. If experience tells us that the current regime is prohibitive, then we'll need to consider that."
Sharing Taylor's comment with Hughes brought this response:
"I look forward to the mayor's call."
[Originally published in April, 2021.]
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