CITY HIGHLIGHT, AUGUST 2004

DETROIT ANTICIPATES START OF RECOVERY LATE THIS YEAR
Kevin Dillon, John Boyd, Cameron McCausland and Mary Grace Wilbert

Although the Detroit market has been hurt by the recent national economic slump and its close ties to the depressed manufacturing industry, its economic recovery is anticipated to begin late this year. According to University of Michigan economists, Detroit’s late 2004 recovery will be based on the growth of professional business services rather than that of the more traditional manufacturing sector. Projections call for a 1 percent gain in employment in 2004, and population growth will remain tepid, inching up to 0.1 percent in 2004 and 0.2 percent in 2005, as the economy continues to expand.

Office

After nearly three years of depressed conditions, metropolitan Detroit’s office market seems to have stabilized. Overall vacancy, at 16.71 percent, has remained relatively unchanged during the past two quarters and is nearly .5 percent lower than 12 months ago. Sublease availability, at 2.2 million square feet, represents 1.69 percent of this total.

Most office projects underway are build-to-suit corporate headquarters, such as those for Borg Warner in Auburn Hills and Visteon in Van Buren Township, or expansions for Hyundai Motor America in Ypsilanti, and Nissan in Farmington Hills.

Some corporate users have chosen to renovate existing buildings. ThyssenKrupp will occupy an existing 65,000-square-foot building in Southfield, while Brose North America will renovate an existing building in Auburn Hills. Some are motivated by state and city tax incentives, such as Mitsubishi, who will receive a $1.3 million tax credit to renovate a building in Sterling Heights.

Some developers have site and plan approvals for speculative office projects but will not break ground until significant pre-leasing is in place. Etkin Equities, one of the largest local developers, has two such sites. In Auburn Hills, the 13.9-acre Auburn Ridge project is ready for build-to-suit projects. In Livonia, construction has begun on a mixed-use project that may include up to 470,000 square feet of single-tenant or multi-tenant office buildings. Pitcairn Properties of Pennsylvania is planning a 450,000-square-foot office campus in Auburn Hills.

Trends indicate that developments will continue to stretch to the north suburban areas of Auburn Hills and the Interstate-75/M-59 corridor, and the west suburban Interstate-275/M-14 corridor, from Plymouth and Livonia, towards Ann Arbor. Real Estate Interests Group Inc. (REI), a local developer, was the winning bidder for the former 422-acre Northville Regional Psychiatric Facility site, which lies in this corridor and was sold by the state of Michigan.

Leasing activity has increased throughout the metropolitan Detroit office market, but many transactions represent shifts from one submarket to another, creating positive net absorption of only 125,765 square feet through the first quarter. The suburban markets experienced negative absorption as EDS employees relocated from various locations to the General Motors headquarters in the CBD. This is expected to shift again by year-end as several professional firms, including ThyssenKrupp, MSX International and Jaffe Raitt Heuer & Weiss, move from the CBD to suburban locations. Many of the recent corporate relocations have resulted in space contractions as employers reduce the number of walled offices and allot less than the 180 to 200 square feet per employee that was the norm during the space planning and build-out process.

While steel prices rise, corporate mergers continue and space requirements shrink. A full recovery of the Detroit office market may be at least 18 to 24 months away. Landlords will continue to be aggressive in efforts to retain occupancy, which may translate into further reductions in rental rates. The overall office rate has dropped 56 cents to $20.71 per square foot during the past 12 months; while the average Class A rate has decreased $2.44 to $22.29 per square foot during the same time period.

— Cameron McCausland is director of brokerage services with Colliers International – Detroit.

Multifamily

Apartments in the Detroit multifamily market have been hit hard by the recession, which forced many laid-off workers to seek employment outside the region. The market also has faced accelerated home construction and sales. Single-family home sales in southeast Michigan gained 4 percent in the first quarter of 2004, with the average price rising marginally by 1.5 percent to $170,940. Consequently, apartments have continued to lose tenants — pushing vacancy rates up and rent growth down in the first quarter of 2004.

The pace of apartment development in the Detroit market has slowed in response to weakened demand. No new apartments came on line in the first quarter of 2004, following a 70 percent decline in deliveries last year. Developers and owners are focusing more on the renovation of existing apartment communities with new amenities packages, unit interiors, exteriors and landscaping. This allows owners to more effectively compete for tenants for less than the cost of new construction. Historically, Detroit has had extremely high barriers for entry of new apartment communities’ construction, and the return on investment has become weak in today’s rental market.

Several apartment communities recently have been acquired because owners and operators are finding new financial opportunities in condominium conversion projects. For example, New York-based Blue Rock Real Estate recently purchased the Townhomes of Meadowbrook, a 230-unit townhome community in Auburn Hills. The buyer is anticipating converting the community to condominiums in the second half of 2004.

Blue Rock also is closing on two additional properties totaling 566 units in Southfield. One property is slated for immediate conversion, while the second will be converted in a few years. Also in Southfield, locally based Kaftan Enterprises recently converted the 150-unit Autumn Ridge Townhomes community, which was purchased in early 2003. This project was well received by the market and has reported strong sales activity.

Harbortown, a 272-unit community in Downtown Detroit on the Detroit River, is the most successful conversion in the area. The developer, Farmington Hills, Michigan-based Slavik Murray Investment Co., reported outstanding sales in the opening weekend.

Overall, the Detroit apartment market has a strong outlook for investors because of an upcoming economic recovery and the potential for condominium conversions. Several new job-creating developments uphold the city’s confidence in an economic rebound. General Dynamics recently received a $1.9 billion defense contract that will support the hiring of 120 engineers, mainly in Sterling Heights (Macomb County), and Citizens Bank plans to hire 170 employees to staff new branches in Oakland County. IKEA is building its first local store in Canton Township (southwest Wayne County), and a developer has proposed a new $40 million, 300,000-square-foot outlet mall in Detroit. At the Detroit Metropolitan Airport, construction is continuing on a new $175 million expansion of the McNamara Terminal to be completed in 2006, and a designer was recently selected for a $428 million development of a new North Terminal. Local transportation improvement projects slated for the region this year total $478 million, including improvements being made in anticipation of the 2006 Super Bowl, 2005 All-Star Game and 2004 Ryder Cup at Oakland Hills Country Club in Bloomfield Hills. Other Detroit projects geared around the Super Bowl are making progress, including new housing, hotel rooms and the goal of drawing 34 new downtown merchants. All of this progress will attract or retain residents in the Detroit area.

The Interstate 96 corridor, between Oakland County and Livingston County in the western suburbs of Detroit, also is experiencing substantial development. Milford and South Lyon will see development in excess of $150 million, including new residential, business and retail centers. The new Lyon Towne Center, at the interchange of Milford Road and I-96, will include hotels, offices and neighborhood services and will be anchored by Wal-Mart and Lowe’s Home Improvement Warehouse. An additional retail development of more than 120,000 square feet will be anchored by new grocery and drug stores. Pendleton Park Apartments, a 240-unit luxury apartment community, was recently developed in South Lyon by PM Group Investment Corporation of Michigan, and is further testament to investor confidence in the Detroit metro area.

— Kevin Dillon is an associate partner with the Detroit office of Hendricks & Partners.

Industrial

Detroit’s suburban industrial market, which consists of more than 290 million square feet of space, has seen an increase in activity during the first 6 months of 2004. Net absorption rates have stabilized and lease rates have bottomed out — both of which should move in a positive direction as the year progresses. Vacancy rates have risen to more than 14.5 percent, which has led to aggressive deals in many markets as users have taken advantage of property owners’ desires to make a deal.

Developers are finding it difficult to rationalize speculative new construction with the significant amount of available space, high land prices and the increasing cost of construction due to a rise in material costs. In fact, total new construction activity is at its lowest point in more than 20 years.

The build-to-suit market is seeing more activity as some users have been unable to find existing buildings that meet their requirements. Build-to-suit activity has been concentrated in Shelby Township, Warren, Auburn Hills, Novi/Wixom, and in fast-growing Livingston County. Recently, Total Filtration Services occupied a 55,000-square-foot build-to-suit in Auburn Hills Commerce Park, and Continental Fragrances moved into a 57,000-square-foot build-to-suit in Joslyn Commerce Park. Developers at the Warren Tank Plant are finishing up construction on a 145,000-square-foot speculative building, and they believe the tax advantages will attract a new tenant.

Despite the build-to-suit market’s current popularity, deals on existing buildings are being made. Along the Interstate 275 corridor, the Valley Forge division of SPX leased 63,000 square feet in Canton, and Grand River Printing is moving to an 86,400-square-foot building in Van Buren Township. In northern Oakland County, the Oakland County Road Commission leased 62,000 square feet in Holly, while Sota Technology leased 76,000 square feet in Orion. In Troy, Vehma, a division of Magna, leased 46,500 square feet.

The investment market remains strong, and investors, who are seeking higher returns than money market rates, are showing significant interest in leased buildings in newer communities. Tower Automotive’s sale of a 290,000-square-foot plant in Plymouth, ASC’s sale of a 54,000-square-foot building in Auburn Hills, MCI’s sale of a 43,000-square-foot building in Southfield and Ford Land’s sale of 169,200 square feet in Dearborn earlier this year are examples of this trend. Ford also sold a 1.1 million-square-foot distribution building in Redford to local developers, who plan to convert it into a multi-tenant complex.

Users also are choosing to purchase, instead of rent, industrial buildings. Brose recently purchased the 72,000-square-foot North American Headquarters and Technical Center in Auburn Hills, and Macomb County purchased a 106,000-square-foot building in Clinton Township. Kar Nut purchased Sennett Steel’s 131,000-square-foot building in Madison Heights and is converting it into a food manufacturing plant.

In the future, the Shelby/Macomb, Auburn Hills, Novi/Wixom and Canton submarkets should see increased activity because of their available land and excellent freeway access. Some of the more active developers in the area are General Development Company and Jared Roth in Auburn Hills, Ryan Dembs and Northern Equities in Novi and Ashley Capital in Brownstown.

— John Boyd is an executive vice president with Southfield, Michigan-based Signature Associates.

Retail

Borders Books & Music in the Compuware World Headquarters.

Detroit recently has seen a growth in retail and hospitality development, and the area will see even more during the next few months. Borders Books & Music is located on the street level of the Compuware World Headquarters, overlooking Woodward Avenue and the Campus Martius Park. Cingular Wireless and Heritage Optical are scheduled to open in Compuware this fall. A new Hilton Garden Inn recently opened — targeting the upscale, mid-price market segment. A new $4 million, Junior Achievement of Southeastern Michigan Finance Park is scheduled to open this fall in downtown Detroit, complete with a pretend bank, car dealership, restaurant, supermarket and various storefronts.

To continue the downtown revitalization, Detroit has embarked on a major initiative, The Lower Woodward Improvement Program (LWIP), to improve the downtown business district. This program is a collective priority of the local private business community and Mayor Kwame M. Kilpatrick’s office and is being spearheaded by the Detroit Economic Growth Corporation (DEGC). DEGC is a private, nonprofit corporation devoted exclusively to Detroit’s economic development.

DEGC plans to complete the LWIP in time for Super Bowl XL, which is coming to Ford Field on February 5, 2006. The Super Bowl has the potential to generate an estimated $372 million in new business. The project’s goal is to add 900 additional residential units, attract 50 new small businesses, establish safe and attractive public areas and improve the overall image of Detroit and the entire region. Leasing rates average at $18.50 per square foot with average NNN charges of $4.50 per square foot. Other investments in the area are helping to make Lower Woodward very attractive, such as the newly renovated Rose and Robert Skillman Branch of the Detroit Public Library and a new $70 million, 110,000-square-foot YMCA developed by Barton Malow Company.

In terms of big box development, The Home Depot has opened as store on 7 Mile and Meyers in northwest Detroit. Eight Mile and Telegraph roads are seeing development with the addition of a Super Kmart and plans for a $70 million, 27-acre shopping center.

Restaurant development is booming in downtown Detroit with several recent successful openings, including Small Plates Restaurant and Detroit Beer Company located on Broadway Street. Bookies Tavern is located on Washington Boulevard, which is undergoing streetscape improvements such as new street lighting, traffic signals, landscaping and on-street parking areas. The owners of popular Café Détroit on Library Street have been so successful they may open an additional downtown location. Vicente Cuban Restaurant, which will have Cuban cuisine and Salsa dancing, is scheduled to open later this year. The Compuware World Headquarters currently features Hard Rock Café and will add Jimmy John’s as a tenant in the fall.

The Renaissance Center, a key component to downtown Detroit, also is seeing restaurant additions with the newly opened Seldom Blues, which provides fine dining with views of the Detroit River, and it will be the future home to Andiamo Italian Bistro.

— Mary Grace Wilbert is a principal account manager with the Detroit Economic Growth Council.



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