CITY HIGHLIGHT, JULY 2006

DETROIT CITY HIGHLIGHTS
Jim Roberts and Linda Pietryga

Detroit Office Market

The predominant trend within the Detroit metro area office market is the development of build-to-suit and mixed-use buildings accommodating a variety of users. A build-to-suit property allows a tenant to specifically develop leased or purchased space for its particular needs, and development costs are partly paid by the landlord. In mixed-use properties, landlords are combining office, medical, retail and/or residential. According to Costar, out of 130 office buildings that are either under construction or proposed in metro Detroit, 124 can accommodate medical users. To attract tenants by offering lower lease rates, landlords are cutting their development and management costs by redeveloping existing buildings and offering fewer amenities in order to transfer savings onto the tenant.

According to Costar, in first-quarter 2006, 11 buildings totaling 715,841 square feet were completed in the Detroit area, and approximately 1.1 million square feet of office space was under construction. With growing government incentives and lower than average nationwide rental rates, the metro Detroit office market should experience a positive net absorption rate, which should result in job growth in the area.

According to Costar, the first-quarter 2006 vacancy rate in the Detroit office market was 16 percent, which reflects a 10-basis-point increase since fourth-quarter 2005. Class A office buildings reported a vacancy rate of 15.8 percent, Class B properties reported 16.7 percent vacancies and Class C space reported a vacancy rate of 13.8 percent. The vacancy rate in Detroit’s central business district increased 60 basis points since the fourth quarter of 2005 to 17.5 percent. Vacancies in the Detroit suburban office market for both fourth quarter of 2005 and first quarter of 2006 stayed at 15.7 percent. Net absorption for the overall Detroit office market was positive 431,027 square feet in the first quarter of 2006, compared to positive absorption of 613,647 square feet in the fourth quarter of 2005.

Due to increased residential development in the metro Detroit area, the demand for medical buildings has increased resulting in the development of approximately 30,000-square-foot office buildings throughout the market. Seven of 11 buildings delivered in 2006 totaled less than 50,000 square feet. Several submarkets that are seeing growing interest in development because of extraordinary increases in residents and residential development are western Wayne, Livingston, and west Oakland counties. According to Costar, so far this year, developers have delivered 187,600 square feet of office space in Livingston and West Oakland counties, with an additional 370,800 square feet of office product under construction. Western Wayne County has 194,200 square feet of office property under construction. Combined office construction for these two areas accounts for about 51 percent of all office development in the Detroit metro area, and approximately 33 percent of this first-generation office space is already pre-leased.

Because of its close proximity to up-and-coming residential communities such as Novi, Livonia and Canton, as well as the Detroit Metropolitan Airport, downtown Detroit and all major highways, the Western Wayne market should remain an attractive location for office space users. There are currently six new buildings under construction in the area, totaling 194,196 of rentable square feet, with 30.7 percent of the product pre-leased. Due to the boom of the research and development industry, high quality of life, and two major universities continually expanding, the Washtenaw area is becoming a premier location for real estate developers. In the first quarter of this year, 110,000 square feet of office space was delivered and there is currently 320,900 square feet under construction.     

Despite Troy’s affluent residential neighborhoods, there is an increasing vacancy rate in the office market.  Class A buildings recorded a vacancy rate of 18.1 percent and Class B buildings reported vacancy rate is 17.3 percent. This trend is mostly due to Delphi and Intermet filing for bankruptcy, K-Mart closing its Troy headquarters, and the automotive companies downsizing their facilities. Another factor for the decline in tenancy in the Troy market is the availability of more cost-effective office space in other submarkets. Many Troy office tenants are in the process of relocating to different submarkets, such as Collins & Aikman, which will vacate a 95,000-square-foot building at 250 Stephenson Hwy. in Troy for a new location in Southfield.   

In the healthcare arena, many hospitals in the metro Detroit area are constructing satellite locations with ambulatory surgical centers and medical office buildings. William Beaumont Hospital is planning a 90,000-square-foot facility in Rochester Hills and another facility consisting of 75,000 square feet in Clarkston. Another healthcare provider, MacLaren Health Systems, is planning a new campus in Clarkston. Henry Ford Health Systems is developing a 200,000-square foot-expansion in West Bloomfield, and Providence Hospital is working on 116,000-square-foot expansion in the Novi market. 

The two biggest deliveries in 2006 in metro Detroit area were Redico Management’s One Kennedy Square, a 240,000-square-foot office building, and 1900 Saint Antoine Street, a 115,000-square-foot office building developed by Etkin Equities. One Kennedy Square is 66 percent occupied, with Ernst & Young as its largest tenant occupying 53,597 square feet. The building at 1900 Saint Antoine Street is 81.3 percent occupied, with PricewaterhouseCoopers occupying 84,500 square feet of space. With the recently developed Compuware Corporation headquarters, the two new buildings mentioned above and conversions from office space to lofts, downtown Detroit is taking slow steps toward becoming a modern metropolitan center.

The most significant projects that are still under construction are Earhart Corporate Center, a 200,000-square-foot office building in Ann Arbor, and Columbus Corporate Office Centre, a 130,000-square-foot office building in Novi. When complete, Earhart Corporate Center should provide more options for tenants seeking office space, which is in short supply in the Ann Arbor area. Thriving residential developments in Novi are aiding activity in the office sector, as shown by development of Class A Columbus Corporate Office Centre, which is already 15 percent pre-leased.   

— Lynda Pietryga is an account manager in Corporate Services at Southfield, Mich.-based NAI Farbman.

Detroit Industrial Market

As we have reached the mid-way point of 2006, numerous issues between the big three domestic automotive companies, tier-one automotive suppliers and the United Auto Workers have continued to cast a shadow of uncertainty and hesitation throughout the area. Much of metro Detroit’s industrial real estate market continues to be in a holding pattern. This uncertainty has resulted in shorter-term leases, which has accounted for much of the leasing activity so far this year. 

Also responsible for this trend is the shorter-term contracts being released by original equipment manufacturers (OEM). Gone are the days of 4- and 5-year contracts with little or no changes. Today, contracts have become much shorter due to continuous improvements in products and demand from the OEM’s ever-changing quality standards that must be met. 

According to the U.S. Bureau of Labor Statistics, unemployment rates, which were down to 6.7 percent at the beginning of the year, have crept back up to approximately 7.2 percent. Currently, the national average is close to 4.7 percent. Forecasters predict that total employment in the Detroit area will grow 1 percent annually during the next couple of years. This information may sound bleak to some professionals in the market, but the truth of the matter is that the Detroit industrial sector is positioned to rebound sooner rather than later. Indicators seem to point to strong activity in other markets, which will eventually aid in the strengthening and stabilization of the greater metropolitan Detroit economy.

Overall, building sales and prices have continued to remain active and steady. However, lease rates have continued to fall and landlord concessions have continued to increase.  While interest rates are expected to continue to rise for the rest of the year, this may still have little to no effect on the sales market. For the last 4 years, these trends have become the status quo and will most likely not change for the remainder of the year.

While reasonable concerns exist regarding the current state of metro Detroit’s commercial real estate industry, signs point strongly to an improving market. The Detroit economy is in the midst of a fundamental and structural shift in the way business is conducted, which may result in a more productive and globally competitive Detroit.      

— Jim Roberts is an industrial associate at Lee & Associates of Michigan.

Detroit Retail Market

The retail sector is growing at a steady pace in the Detroit metropolitan area, and is showing no signs of slowing down like the office and industrial sectors. “People are continuing to build and retailers are continuing to open,” says Steven Beale of Southfield, Michigan-based The Beale Group. “It takes a little more work from us as brokers, but that’s part of the business. The tenants are there, you just have to find them.”

The biggest area of growth is coming from various restaurants and food concepts. These retailers are locating within strip centers throughout the market. Retailers remain very active, but are being diligent when seeking out new locations. “[Retailers] are cautious of what they’re spending right now,” Beale says. “They want good quality, but want to watch their dollars and cents.”

One of the reasons retail has remained such a strong part of the area’s economy is the fact that Oakland County is one of the wealthiest counties in the country. The affluence and population growth, always attractive to the retail sector, remain a huge draw to new and expanding companies.

The Detroit metro area’s vacancy rate is slightly higher than it was a year ago, but still not hitting the 10 percent vacancies, says Beale. “Vacancies area a little bit higher that what the landlords would expect,” he explains. “We are between 5 and 7 percent vacancy rate for the centers we handle, which are between 10,000 and 150,000 square feet.”

Rental rates vary widely across the market depending on location and product type, but the overall trend is positive. “We’re continuously able to get our rental increases each and every year,” Beale notes. “We have not seen rental rates flatten out. We do see some landlords giving minor concessions when acknowledging new leases, but we don’t see rental rates decreasing.”

As far as new developments, Taubman Centers is developing the Mall at Partridge Creek, a 600,000-square-foot shopping center in Macomb County. The project will house more than 90 retailers and restaurants when it opens in fall of 2007 in the northeast Detroit market. Also in Macomb County, the $1 billion, Washington Park Village open-air shopping center development has been proposed on the site of the former Romeo Golf Course. An entire mixed-use community is being planned for the more than 500-acre site. Construction is scheduled to begin in 2007 for the 1 million-square-foot lifestyle center.

Beale expects “the H’s,” towns like Highland, Hamburg, Hartland and Howell just west of Detroit, to experience the next surge in retail activity. “When you get to the outskirts of Oakland County, there are a lot of submarkets to watch for the next boom,” he adds.

Highland Park, which is essentially the gateway down Woodward (a main thoroughfare through Detroit) into downtown, is seeing a tremendous amount of activity as well. As far as Detroit proper, there is some absorption occurring with new tenants entering the market, but there aren’t many new developments underway since the Super Bowl was held there in February.

“Everybody was on the fence waiting to see what would happen after the Super Bowl,” Beale says. “There is a lot of money out there, a lot of people waiting with property, but not much activity at the moment.”

One new development, which may signal a turning point for the city, is Mack Alter Square. Mack Alter LLC developed the 60,000-square-foot center, which is located in east Detroit bordering Grosse Pointe, and it is anchored by Aldi’s.

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