CITY HIGHLIGHT, APRIL 2004

DETROIT ENJOYS INCREASED LEASING ACTIVITY
John Boyd

The industrial and office real estate market in southeastern Michigan is in the process of recovery. The retail market continues at a steady pace, following the path of a robust suburban residential market. As the metropolitan Detroit area continues the transition into a worldwide center of automotive technology, the industrial and office real estate market will adjust and become stronger as a result of the structural change.

INDUSTRIAL

During the last half of 2003 and the first half of this year, industrial activity increased in a number of submarkets throughout the Detroit metropolitan area. Industrial users and tenants are signing more deals. Tenants with subleases have been aggressive in negotiating reduced lease rates and have made the sublease market the most active. However, as additional space continues to become available, downward pressure will remain on lease rates. As this happens, developers will be forced to become more aggressive in attracting users to their vacant spaces.

The industrial sales market has not been as negatively impacted by the economic slowdown thanks to the pent-up demand for good, clean and well-located buildings, and the current financing market being at a 40-year low. Sale prices were somewhat stable last year, and this trend should continue throughout this year. Some firms in the north corridor (Interstate 75/M-59) have purchased buildings to take advantage of the market.

In general, many large corporate users are choosing to renew their existing leases, even after a thorough examination of the market. However, there is still new activity in Auburn Hills.

With a plentiful supply of existing buildings, speculative construction remains scarce. However, those few developers that moved forward with their projects have had success. The lack of new construction has severely limited demand for vacant land sales, and prices have remained steady due to the scarcity of parcels available to purchase. Most landowners are long-term investors who prefer to wait and develop their land once the economy recovers and the number of vacant buildings declines.

The heavily automotive-related east corridors (Mound and Groesbeck) experienced an influx of properties hitting the market for sale, lease and sublease. Current land prices have held their value, but the activity is light due to the abundance of buildings on the market.

The south corridor market (Interstate 94/I-75) experienced a slight increase in vacant space in the second half of last year. The market, however, experienced a surge in high-cube distribution transactions during this time period. Even with these sizable transactions, the absorption was offset by considerable relocations out of the area, coupled with new construction developed by Ashley Capital in Brownstown Township.

There is continued activity from logistics companies, freight forwarders and metro airport support service companies in Romulus. The residents of Romulus have approved a horse track and gaming casino at the exit along I-94 and Vining Road. These developments will help jump-start the south region.

The west corridor market (Interstate 275/M-14/Interstate 96) saw steady activity in the second half of last year. Sublease space slowly was eliminated either by new tenants or existing tenants. More qualified prospects are entering the marketplace for land and existing buildings. The Van Buren Township corridor has seen increased exposure with the development of the 1.2 million-square-foot Visteon World Headquarters Campus.

The I-96 corridor in Novi has seen increased speculative building, specifically in the Haggerty Corridor Corporate Park and Beck North Corporate Park. Anson-Dembs is moving forward with the last phase of Beck North Corporate Park, which will provide an additional 60 acres of improved lots on the market that will accommodate users from 10,000 square feet to 600,000 square feet.

Novi should be a hot bed of industrial activity this year with the availability of improved land. Additionally, the reconstruction of the Beck Road interchange at I-96 will ease congestion and promote more activity. Prices in Novi should slowly increase throughout the year.

OFFICE

Troy and Southfield, two of Detroit’s major suburban markets, are struggling with vacancy rates of more than 20 percent. However, leases are starting to be signed, and vacancy rates should slowly decline this year.

The Motor City is pushing development forward in the central business district as at least three major sporting events are set to take place in downtown during the next few years. Comerica Park will host the 2005 All-Star game, and Ford Field will host Super Bowl XL in 2006 and the NCAA Basketball Final Four in 2009.

The lower Woodward Improvement Program, a city initiative that focuses on areas near Woodward, Broadway and Washington Boulevard, is the key initiative that will measure downtown improvement. Corporations are already helping to turn this area around including Compuware, which recently moved 4,500 employees into its new headquarters in the Campus Martius project. This was downtown’s first new Class A office building in years.

General Motors’ (GM) OnStar Division is moving to the Renaissance Center Tower 400 taking 200,000 square feet. OnStar will become the third high-tech employer to relocate a significant number of employees to downtown Detroit. This move coincides with EDS’s decision to relocate 1,500 workers in the Renaissance Center Tower 500 last year.

The Southfield market continues to prove its desirability in the face of tough economic times. Southfield recently retained one of its largest tenants when Blue Care Network, a subsidiary of Blue Cross Blue Shield, leased 193,000 square feet at the Allied Center, a REDICO-managed project. In addition, REDICO has completed extensive renovations to the American Center, a 25-story office tower.

Lear Corporation, a Southfield, Michigan-based automotive seating producer, purchased adjacent parcels and buildings surrounding its headquarters near 8 Mile and Telegraph roads. It simultaneously announced plans to significantly expand its headquarters.

In the Troy office market, things are looking better. Although GM will have vacated more than 750,000 square feet during 2003 and 2004, other firms are stepping up leasing activity. Due to current high vacancy rates, low absorption rates and a protracted lack of demand, the office market in Troy still has a long way to go before vacancy and rental rates return to more stable levels.

In Birmingham, McCann Erickson is preparing to move into the 110,000-square-foot former Jacobson’s Department store on Maple Road. The building has undergone a complete renovation, including many structural changes.

Activity in the Rochester Hills and Auburn Hills office markets is steady. Borg Warner is moving its headquarters from Chicago to Auburn Hills. The 60,000-square-foot building will be built and owned by Etkin Equities. Borg Warner will occupy 40,000 square feet early next year.

While vacancy in Farmington Hills and West Bloomfield peaked during 2003, leasing activity has started to recover with large deals coming to completion.

Lease rates were steady in Livonia last year, with free rent attracting users to make deals. No significant land transactions were consummated, but a couple of properties coming online this year will spur new interest. Etkin’s 500,000-square-foot College Park project at 6 Mile Road and I-275, and Burton-Katzman’s 350,000-square-foot Park Place project at Victor Corporate Park, will provide two significant development sites for users looking for high-profile locations in this submarket.

The Ann Arbor market experienced a positive change in momentum during the second half of last year. There were still several significant vacancies created, especially in the South State Street corridor, when UUNet Technologies, LG Philips Displays, Whatman and Acuson Corporation either vacated or significantly reduced their presence. However, there were also numerous leasing transaction consummated in all of Ann Arbor’s submarkets.

In Ypsilanti Township, Hyundai announced that it will build a 150,000-square-foot technology center at LaForge and Geddes roads.

RETAIL

Restaurant and discount category tenants were the most active retailers in Detroit last year. Drugstores are still vying for sites at a more cautious pace, and banks looking for new branches are still active. Flagstar, Comerica, Fifth Third, TCF and Standard Federal banks are all in the market. Prices for potential sites are rising steadily as multiple banks compete for the same sites.

Rental rates held steady throughout 2003. There were no significant increases in any category with the exception of a few mixed-use developments. Since these developments are costly with streetscapes, finished walls on all sides and heavy landscaping, the rental rates are typically about $25 per square foot. This price is compared to conventional new centers in the $16-per-square-foot to $18-per-square-foot range. These mixed-use rents can be challenging if the project is unanchored, located mid-block in a saturated area of retail or it lacks the daytime population needed to sustain these rents. Suburban communities, such as Dearborn, Novi, Rochester Hills and Warren, are each searching for an identity or a “downtown,” and they are turning to developers to deliver their visions. The biggest challenge is to find an anchor with a draw other than the theme of an urban or pseudo downtown project.

Grocery-anchored centers are active but at a slower pace. Kroger is the predominant player, and it is taking advantage of the uncertainty surrounding Farmer Jack. (Farmer Jack recently announced that it is closing 13 stores in the metropolitan area, 10 of which will reopen in its Food Basics format.) Several Kroger-anchored centers are currently under construction, such as in Independence Township and in Springfield Township.

Due to a lack of viable sites, and the increasing demand for land from competing users such as banks, restaurants and developers, the largest increase in retail pricing last year was for land. Prices for corners that were once shopped by drugstores are commanding prices of about $8 per square foot to $12 per square foot for other users. Neighborhood shopping center properties that would cost $200,000 to $250,000 per acre 3 years ago can cost $300,000 to $350,000 per acre today.

F&M put all of its stores on the market, and many of the stores were older leases and undervalued. Landlords then had the opportunity to either re-lease the property or divide it up at much higher rents. Rio Bravo had the same success with multiple offers on its properties. The same will hold true for Zainy Brainy, which is currently closing all of its stores.

New store openings, such as Lowe’s Home Improvement Warehouse in Sterling Heights, Costco in Commerce Township, Lifetime Fitness in Canton, and The Home Depot and Sam’s Club in Farmington Hills, are just a few of the retailers still expanding in the Detroit market.

Restaurants like Panera Bread, Noodles, Pot Belly, Roly Poly, Maggiano’s and Bravo are also pursuing the market. Restaurants should continue to be one of the most active segments this year. With all things being considered, 2004 has an upbeat outlook for retail.

MULTIFAMILY

Metropolitan Detroit’s multifamily market is still struggling. Residential growth has continued in the traditional growth corridors. Apartment tenants have continued their exodus to affordable single-family homes. As long as interest rates remain low, multifamily construction will pale in comparison to single-family activity.

The multifamily activity that does exist is occurring along the Van Dyke corridor in Shelby, the I-75 corridor in Clarkston, the I-96 corridor in Novi and the I-275 corridor in Canton. Other significant trends include multifamily construction in downtown areas like Royal Oak, loft redevelopment in Detroit and extensive condominium conversions. q

John Boyd is executive vice president of Southfield, Michigan-based Signature Associates.

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