CITY HIGHLIGHT, APRIL 2006

SUBURBAN DETROIT CITY HIGHLIGHTS
Randall S. Thomas, Dennis J. Dilworth, Jeff Buckler and Todd Szymczak

Suburban Detroit Retail Market

In the first half of 2005, metropolitan Detroit’s retail market continued to build on the momentum generated throughout 2004. Retailers were active and lease rates remained strong, averaging $14 triple-net per square foot. Toward the end of the year, several major retailers, concerned with reports about the potential negative impacts of Detroit’s changing economy and the recent oversupply of residential product in certain market sectors, slowed their expansion plans. However, the year ended with an overall vacancy rate of 10.4 percent, nearly one point lower than it was year-end 2004, and more than 2.3 million square feet of positive net absorption.

 Fast-casual restaurants such as Qdoba Mexican Grill, Chipotle, and Del Taco are taking market share from traditional fast-food giants McDonald’s, Burger King, Taco Bell and Wendy’s. These concepts have become some of the top payers for in-line and pad sites. Banks, particularly Fifth Third, Chase, Flagstar, and Citizen’s, also became more aggressive in their growth strategies throughout 2005 and are seeking prime locations for pad sites.

Dated, traditional indoor malls seeking an image boost have become prime targets for redevelopment. Tel-Twelve, Northland, Summit, and Wonderland malls are either in process or have successfully transformed into power centers. Meijer, a local supercenter, is in heated competition with Wal-Mart to anchor these developments. Their expansion plans, coupled with specialty food markets like Whole Foods Market, Westborn Market and Nino Salvaggio, have exerted additional pressure on traditional grocery stores such as Kroger, which has been slow to expand, and Farmer Jack, which has closed numerous stores throughout the region.

Several new lifestyle centers are in development throughout the metro area. Wal-Mart is set to anchor two of these sites, one located on 300 acres near the GM Technical Center in Warren, Michigan, and another in northern Oakland County at the M-59 and US 23 interchange. Three additional developments are underway in the Downriver submarket to support the recent increase in residential population. Lormax Stern Development Company, REDICO, Archon and Ford Land are the primary developers creating this burgeoning hub in Allen Park. Ann Arbor’s recent growth in the research, technology and medical sectors, and resulting population migration, may prompt retailers to Washtenaw and Livingston counties.

Among the big news is the debut of IKEA, which is scheduled for a spring opening. One of the largest leases signed during 2005, the store is located in Canton at the Interstate 275/Ford Road interchange. This area will be the one to watch during the next few years, as the presence of this regional superstore will change the dynamics of the Canton market and create potential for adjacent lifestyle center developments. Developers are already scouting the area for vacant land.

The metro Detroit community is in the midst of a major restructuring of industry, lifestyle patterns and workforce. While this evolution is creating a negative perception of the market for some businesses and professionals, any ill effects will most likely be short-term. The market may be flat for a few years, but dramatic downturns are not expected. Detroit will be a major market to watch as the area reinvents itself.

— Randall S. Thomas is the director of retail and land brokerage at Colliers International’s Detroit office.

Suburban Detroit Office

Metropolitan Detroit’s office market throughout 2005 virtually mirrored the previous 24-month period, with little change in overall vacancy rates and continued positive net absorption. While slight improvements were reflected in the year-end statistics, one could argue that this market has been holding its own.

While positive net absorption of 2.6 million square feet occurred in the past 3 years — 1.1 million of which occurred in 2005 — it was not significant enough to drive vacancy rates downward. This is primarily due to the 5.6 million square feet of new supply delivered to the market during the same period. The overall vacancy rate has hovered between 15 percent and 16 percent for several quarters.

A wait-and-see attitude prevails in this market, while developers, owners and users remain cautious and conservative. Rental rates, currently averaging $20.24 per square foot, are approximately 2 to 3 percent lower than least year and rates are anticipated to decrease further throughout the year.

In spite of what may be considered somewhat weak fundamentals, demand for investment properties was rather strong throughout 2005. Most of this interest is coming from out-of-state investors, which are attracted to the better yields available in this market as opposed to those in the Northeast and West Coast markets. In Detroit’s CBD, two landmark buildings, the Penobscot and First National buildings, were recently sold to a New York investor for an undisclosed sum.

Development of new office product has been steadily decreasing. Less than one million square feet of product was delivered to the market in 2005, which is significantly less than the annual average of 2.5 million recorded during the previous 4 years. For the most part, new construction has been limited to build-to-suit projects; very little product is being developed on a speculative basis.

Approximately 1.7 million square feet of office space is currently under construction, most of which is in the western Oakland County submarket. Northern Equities is developing the Haggerty Corridor Corporate Park and Etkin Equities recently completed a build-to-suit project for Schoolcraft College in Farmington Hills, Michigan. REDICO recently constructed a building in Detroit’s CBD next to Ford Field, where PricewaterhouseCoopers is now a major tenant.

Kmart’s announcement to vacate its corporate headquarters in Troy, Michigan, spread uncertainty about this market sector, which currently has one of the highest vacancy rates in the area at 17.3 percent. The recent purchase of the site by an out-of-state developer, and its plans for conversion of the property into a mixed-use project, will help prevent a significant increase in office vacancy rates.

While several markets are currently experiencing increasingly positive conditions, the metropolitan Detroit market is recovering from the impact of several local factors, and it is anticipated that this recovery will continue for the next few years. Several Detroit-based employers are undergoing restructuring and the short-term effects are likely to surface throughout 2006 and 2007, while state and local municipalities are focusing their efforts on attracting new industries and jobs to the area. Long-term, the metro Detroit office market is one to watch as it reinvents itself. In the short-term, the goal will be to stay the current course.

— Dennis J. Dilworth, SIOR, CCIM, is a sales associate at Colliers International’s Detroit office.

Suburban Detroit Industrial

The metropolitan Detroit industrial market appears to have turned the corner after more than 4 years of sluggish activity. Leasing and sales activity has increased for three straight quarters, resulting in a positive absorption of vacant space. Michigan’s unemployment rate decreased to 6.7 percent; however, it is still higher than the regional level of 5.3 percent and the national rate of 4.9 percent. Unfortunately, the Detroit market is still anticipating the effects of Delphi, Northwest Airlines and Loan Giant, all of which filed Chapter 11 in late 2005.

The southeast Oakland County market, including cities such as Auburn Hills, Orion Township, Rochester Hills, Troy, Madison Heights, Hazel Park, Ferndale and Royal Oak, has experienced a decrease in vacancy of 50 basis points to 12.5 percent. Some recent transactions in this area include the sale of 146,900-square-foot building in Ferndale, a 92,000-square-foot lease in Troy and a 160,000-square-foot build-to-suit deal in Auburn Hills. Lease rates in southeast Oakland County range from $3 to $7 per square foot on a triple-net basis for warehouse/manufacturing space and $9 to $14 per square foot triple-net for high-tech space. Developers such as Ashley Capital are hedging their investments into warehouse/distribution facilities. Currently, Ashley Capital is constructing two warehouse/distribution buildings in Orion Township on a speculative basis. The project will total approximately 900,000 square feet when completed this year.

The southwestern Oakland County market has also experienced positive absorption. The increased activity has helped lower the vacancy rate 50 basis points to 12.8 percent. Lease rates in this area range from $4 to $7 per square foot triple-net for warehouse/manufacturing space and $10 to $14.50 per square foot triple-net for high-tech space. The recent announcement regarding the closing of the Ford Wixom Assembly Plant has left some uncertainty for the immediate area, but the corridor as a whole should still experience growth throughout 2006.

The Macomb County industrial market has also experienced positive absorption, resulting in the lowering of the vacancy rate to 12.9 percent. Recent transactions include a 150,000-square-foot lease in North Macomb, a 78,000-square-foot sale in Warren and a 264,000-square-foot sale in Fraser. This market has also experienced non-traditional industrial activity such as dance studios, gymnastic training centers and food caterers, as well as home improvement related businesses. Lease rates in Macomb County range from $3 to $6.25 per square foot for warehouse/manufacturing space and $9 to $13 per square foot for high-tech space. Quiet for approximately 3 or 4 years, Northern Macomb County is experiencing the onset of spec development again.

As the Michigan industrial sector moves forward, it must rely on the recovery of the automotive sector. Failure to do so may cause the big three automotive corporations — Ford, General Motors and DaimlerChrysler — to squeeze suppliers, which could result in the need to reduce costs through consolidations or additional plant closures. This would raise unemployment and continue to have an impact on how sale and lease transactions are consummated in Michigan.

— Jeff Buckler is a principal in Lee & Associates’ Novi, Michigan, office.

Suburban Detroit Multifamily

The answer to questions about the health of the southeastern Michigan multifamily market varies. There are currently some pockets of strength and yet more pockets of weakness. On the bright side, there is very little new development of new multifamily rental product to increase market competition. The trouble for existing properties is the vast amount of new multifamily condominiums developed and converted throughout the past decade.

Due to low interest rates and available land, the most credit-worthy and stable tenants have migrated to condominiums and single-family homes. The most significant additions of supply are occurring on the west side of the metro area, in the cities of Farmington Hills, Novi, and Canton, Michigan, and are fueled by the shift of employers such as Toyota and Nissan to the area.

In addition, the northeastern Detroit suburb of Macomb County has seen rapid growth fueled by residential developments. Factors such as affordable land and low barriers-to-entry for new development have allowed numerous people to migrate outward from Detroit to buy more home for their dollar. This has come at the cost of the inner-ring suburbs, although some Detroit’s inner-ring submarkets such as Ferndale, Royal Oak, Birmingham, and west Troy are performing well. These areas are fully developed and can only add new supply by redeveloping older properties. This is being seen in Royal Oak in a major way. There are more than 700 condo units currently under construction and another 260 units on the drawing board. Royal Oak’s success has a lot to do with location and progressive city management. Its thriving downtown serves to stimulate demand for housing of all kinds. The city is a draw for new college graduates and young families that are looking for a lively, urban setting.

Many of the other inner-ring suburbs have struggled with the outward population migration. Because the Detroit area is not producing enough new jobs to stimulate population growth, many older properties are fighting over fewer and more credit-challenged tenants. In addition, multifamily properties in older suburbs are competing with more single-family home rentals, which are harder to track and measure. While it is hard to definitively measure the vacancy rate for the overall market, the quality product is struggling to maintain occupancy levels of more than 90 percent. For those properties that have been starved for capital, there really is no lower limit on occupancy.

Recent trends that may improve the fate of the multifamily industry, such as higher interest rates and an improving demographic mix, may be tempered in the near term for the suburban Detroit markets because of the challenging times facing the city’s largest manufacturing-related employers. Whatever the state of the market, property owners cannot move the location of their properties, but reinvesting in maintenance and smart improvements can help to retain the best tenants, improve cash flow and realize more profit when it comes time to sell. If owners don’t compete with the quality of their amenities and services, they will be competing on price, a value-destroying strategy.

— Todd Szymczak oversees the Multi-Housing Investments division of NAI Farbman. He is based in the company’s Southfield, Michigan, office.

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