The suburban Detroit real estate market has held up well considering the downturn the national economy has experienced during the past year. Three and a half million suburban residents are watching the metro Detroit area evolve from a manufacturing center of motor vehicles to a worldwide technological center for the $500 billion automotive industry. The impact on the commercial real estate market has been significant during the last 10 years. Hundreds of national and international automotive-related companies have established or enlarged their presence in the area, providing a base of support to local industrial, high-tech and office markets, especially during the last couple of years.

During the last 3 years, annual motor vehicle sales have averaged in excess of 16 million units, enabling the suburban Detroit market to fare better than other national markets. When General Motors (GM) helped lead the country out of the shock of September 11, with its zero percent financing offers last October, consumers took advantage of decreased prices to buy motor vehicles, energizing the national economy and keeping the local economy from falling into a recession.

Industrial

The suburban Detroit industrial market has experienced a number of trends during the last year. An increasing supply of space has raised vacancy rates, forcing down lease rates. However, low interest rates have kept a floor under values of buildings available for sale, as some space users take advantage of the opportunity to lower their real estate costs. While the strong demand for motor vehicles has kept many firms in business, the industry has not been profitable enough to allow for companies to expand. Thus, most of the demand for industrial space has come from non-automotive related companies. With the surplus of space, vacancy rates are averaging almost 10 percent. In some of the smaller submarkets vacancy rates have gone over 20 percent. There is little speculative construction. However, with the scarcity of new construction, there is a surprising amount of build-to-suit activity in some submarkets, as some firms have been unable to find buildings to meet their needs.

Some developers are taking advantage of this lull in the speculative market to bring new business parks to the Interstate 75 corridor. Infrastructure is underway, or just completed, on three parks in Auburn Hills, where government incentives have made it attractive for developers to undertake brownfield developments: Auburn Hills Commerce Park by General Development; Auburn Business Park, a Farber-Roth project; and Dutton Technology Park, a project by Fred Gordon that involves the transformation of almost 200 acres along Lapeer Road, opposite The Palace of Auburn Hills. These developers are seeking build-to-suits similar to the recent deals by Unique Fabricating (150,000-square-foot facility at Joslyn Commerce Park) and Dana (98,000-square-foot building at Auburn Hills Corporate Center). Currently, some international companies are exploring build-to-suits in these parks. In addition, Burton-Katzman has jumped in with two speculative office/research buildings along the Lapeer Road corridor. Further east, along the 23 Mile Road corridor in Shelby Township, The Kojaian Companies has completed two additional speculative buildings in the Cross Creek project.

On the west side, the Novi/Wixom market is experiencing a surge in activity as many developers compete for companies expanding from Farmington Hills. Anson-Dembs just purchased 90 acres from Northern Equities in the Beck-West Park in Novi. In Plymouth, Stuart Frankel started work on the two-building, 100,000-square-foot first phase of the Plymouth Technology Park facing M-14. In Van Buren, Opus just completed its two-building, 400,000-square-foot speculative bulk distribution project and is waiting for tenants. Ashley Capital continues its active campaign in Brownstown, just completing a 750,000-square-foot speculative distribution building, which is its ninth building in the park. Ashley built more than 1 million square feet in Livonia. Etkin Equities is proceeding with infrastructure work in the Livonia Business Park, a 125-acre park on the site of a demolished GM plant in western Livonia. Finally, Northern Equities is seeking build-to-suits and tenants at its 300-acre Haggerty Corporate Corridor Center in Novi, along the new M-5 connector.

Office

Vacancy rates in the major suburban office markets have remained at more than 16 percent. Many corporations have downsized or consolidatedlocations, freeing up large blocks of space for sublease and forcing owners to become more competitive with their economic proposals. Lower lease rates, staggered deals, free rent and larger tenant improvement packages are being offered by owners and sublessors to attract tenants. Most of the activity in the market is occurring in deals with 5,000 square feet of space. Larger deals are few and far between. As with the industrial market, there are a number of sales to tenants taking advantage of the rare opportunity to purchase desirable, recently completed buildings in prime suburban markets such as Troy, Southfield and Farmington Hills.

Even with economic uncertainty, a few bold developers have continued their development plans, as it takes 12 to 18 months to complete a major project. REDICO just finished two buildings: Phase II at Oakland Towne Square, a 190,000-square-foot, nine-story addition to the successful Oakland Towne Square project in Southfield; and Phase II of Oakland Commons, a 175,000-square-foot, five-story office building. In addition, REDICO recently completed the renovations to the American Center, where 200,000 square feet became available when DaimlerChrysler Financial purchased the Michigan National Bank Headquarters last year.

The Kojaian Companies is finalizing construction on two major projects, a 325,000-square-foot, two-building complex overlooking Interstate 696 at the Farmington Hills Corporate Center and the 275,000-square-foot Maple Corporate Center in Troy. Kojaian recently signed Allstate Insurance for 100,000 square feet in its first building in Farmington Hills. Also, at Farmington Hills Corporate Center , Motorola (200,000 square feet) and GDX (75,000 square feet) moved into their new automotive headquarters. The company also is renovating the Banc One Tower in North Troy.

Competing with these new projects are several large blocks of space coming online as EDS and GM consolidate operations into three main campuses in Detroit, Pontiac and Auburn Hills. The large vacancies are in Southfield at the Travelers Tower II and in Troy, at the Troy Officenter.

Users are still active in the market, such as Delmia, which signed a 40,000-square-foot lease at Koll Corporate Center in Auburn Hills. Visteon has a new corporate campus of over 1 million square feet in Van Buren Township along Interstate 275, north of the new airport.

Retail

The suburban Detroit retail market has been remarkably steady during the last year. Development is occurring along the major growth corridors of I-75, I-96/I-275, around the regional malls of Lakeside, Great Lakes Crossing and Twelve Oaks, and in the booming residential submarkets of Shelby/Macomb, Lake Orion/Independence, Commerce/Novi and Canton/Van Buren.

Major trends in the market include:
• Expansion by discount chains, including Kohl’s, Target, Wal-Mart and all the Dollar Store locations.
• New retail bank branches by TCF, 5th/3rd, Standard Federal, National City, Flagstar and Comerica.
• Major surge in activity in fast casual food such as Panera Bread and Baja Fresh, along with the chains such as Champs, Bahama Breeze, J. Alexander, P.F. Chang’s China Bistro and Bucca di Beppo. New market entries include Trader Joe’s, Whole Foods and Lifetime Fitness.
• New urbanism/lifestyle centers such as Fountainwalk, developed by PLC in Novi, and Main Street in Rochester Hills by Robert Aikens.
• Development and redevelopment of suburban downtowns in Birmingham, Royal Oak, Rochester Hills, Mt. Clemens, Northville, Plymouth, Dearborn and Warren.
• Continued battles between Home Depot and Lowe’s Home Improvement Warehouse.

Recently completed major projects include Grand/Sakwa’s Midtowne Market Square on the Troy/Birmingham border, 600,000 square feet, with Home Depot, Kohl’s, Target, Dunham’s and Farmer Jack as anchors. The Kojaian Companies has finished Lyon Town Center at I-96 and Milford Road with Wal-Mart and others. The next major development will be the demolition of Veteran’s Hospital in Allen Park and construction of an 800,000-square-foot power center.

Lease rates range from $7 per square foot, triple net for “big box” users, and up to $14 to $16 per square foot, triple net for small spaces in neighborhood centers. Rates are dependent on location, credit of the tenant, tenant improvements and store size.

Retailers are encouraged by the growth of the market and national retailers are looking to expand into the metro area. Many chains are surprised by the strength and performance of their new locations, especially during the last 12 months. With a standard metropolitan statistical area approaching 5 million residents, any national chain looking for growth needs to seriously consider the major submarkets and future growth markets such as Chesterfield, Clarkston, Milford and Canton.

Visitors coming to Detroit are no longer surprised by the economic vitality of the region. Suburban Detroit continues to provide excellent returns to owners and developers of all types of real estate. Significant investments during the last 5 years throughout the region include:
• $1.2 billion world-class McNamara Airport, with Northwest providing air service from Detroit throughout the world.
• $800 million investment by the Ilitch and Ford families, with assistance from the city of Detroit and the state of Michigan, in the new Comerica Park (Tigers) and Ford Field (Lions), both in downtown Detroit.
• $750 million investment by Detroit’s three casinos.
• More than $500 million of investments in new facilities in Ann Arbor by the University of Michigan.

As the area continues to develop, residents are encouraged by unemployment rates below the national average and an abundance of natural resources, including the Great Lakes.

John Boyd is executive vice president of Signature Associates.


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