HEARTLAND SNAPSHOT, FEBRUARY 2005

Detroit Industrial Market

The Detroit industrial market is slowly improving as national and local economies gain steam, according to Steve Chaben, first vice president and regional manager of Marcus & Millichap’s Detroit office. However, the health of the local business environment is inextricably linked to the automotive industry, which continues to struggle. “The good news is that conditions in the Detroit industrial/warehouse sector are stabilizing as net absorption increases and new construction remains modest,” Chaben says.

Detroit and its Rustbelt neighbors are experiencing weak demographic trends that are adversely affecting long-term growth prospects. Detroit has experienced net out-migration during the past several years, and its employment growth and population growth rank below the national averages. The unemployment rate is around 7 percent, and the manufacturing sector has recorded approximately 7,000 job losses during the past 12 months. “Employment growth is expected to pick up in 2005 with an increase of 22,500 jobs — a 1.1 percent bump,” Chaben says. “Most new positions will be in the construction, hospitality and leisure industries.”

The warehouse vacancy rate for Detroit’s metropolitan area stands at 9.7 percent, which is relatively high compared to its long-term average of 6.1 percent. “Space demand has softened in recent years as Ford, Chrysler and General Motors have cut back on production and inventory,” Chaben says.

However, net absorption has turned positive, totaling 276,000 square feet during the past 12 months, and is expected to increase to 1.1 million square feet during the next year. As a regional warehouse market, Detroit should see an uptick in demand for space as the national economy gains momentum. Vacancy should tighten to approximately 8.7 percent by year-end 2005.

Average rents in Detroit’s industrial market are approximately $5.04 per square foot, down 2.7 percent from a year ago. Rents remain weak, but improvement is expected in the near term. As demand for space heightens and pushes down vacancies, rents should climb about 1.5 percent in 2005.

Major developments under way in Detroit include the 1 million-square foot Pinnacle Logistics Park in Western Wayne. The site was formerly a Ford Motor Company parts plant that is being redeveloped by General Development Company and Premier Equities Inc. “Overall, the construction pipeline has thinned considerably,” Chaben says. “In 2004, about 298,000 square feet of new product was delivered, down 67 percent from the previous year.”

On the investment front, properties worth more than $5 million that traded in the past 12 months averaged $46.41 per square foot. The average cap rate is 9.2 percent. Last year, HRPT Properties Trust acquired two industrial properties in Dearborn for $48 per square foot.

“While the Detroit industrial market appears to be responding to an improving national economy, recovery will be slow paced until the automotive industry shifts into a higher gear,” Chaben says.


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