CITY HIGHLIGHT, JULY 2007

DETROIT CITY HIGHLIGHTS
Robert Pliska and Cameron McCausland

Detroit Multifamily Market

After appearing to bottom out in 2006, the Detroit economy is turning the corner and market fundamentals are beginning to trend upward. This is good news for the multifamily market, which in so many ways is tied to the success of the local economy and job market.

A primary driver of this upswing is Detroit’s shift from an automotive to a technology-based economy. While Detroit may continue to be considered the automobile manufacturing capital of the world — and globally will have auto-related companies that will need to have a presence here in spite of any slowdown — the metro area’s 4.5 million population is a highly trained workforce that can use its training in the auto industry or transfer it to other areas. 

In recent years, as Detroit was navigating its auto slowdown and shift in economic focus, there was very limited multifamily development. In 2006, apartment construction in metro Detroit slowed to only 1,100 units. While difficult at the time, this should be a great positive as the Detroit economy starts to improve, since less inventory will cause higher demand.

The few new multifamily projects that have begun in the area include the Riverfront Apartments towers downtown, which are being converted to condos. However, across the local market, condo sales have been reduced to a trickle. Also downtown, residential units ranging from approximately 1,000 to 1,500 square feet are being added to the top of the landmark Westin Book Cadillac Detroit Hotel and upscale units are being added to the historic Vinton Building. These projects are strengthened even further by a revitalization of the downtown market, which is benefiting from the activities of organizations such as Detroit Renaissance, the Detroit Convention and Visitors Bureau, and the regional chamber of commerce. Great new venues such as Ford Field, Comerica Park, Hockeytown and the Theatre District also help make downtown a much more appealing place to live than in the past.

In the Detroit suburbs — the next big area for multifamily development — new units should emerge in Oakland, Macomb and western Wayne counties, submarkets that offer continued employment opportunities and accessible transportation. As for submarket leaders, southeast Oakland County, with a current 6.5 percent vacancy rate, will remain popular due to its high desirability and upscale areas.  Northeast Wayne County will have higher vacancies, currently at 10 percent, due to renter shifts to more desirable areas.

Like so many cities across the nation, rising interest rates — which have been at their lowest in more than 50 years — should have a positive impact on the Detroit multifamily market.  Fewer people will be able to afford a home and will reenter the apartment market, causing a higher demand for apartments and therefore an increase in rents. With the higher underwriting standards caused by problems in sub prime lending making it more difficult to obtain a mortgage— as well as little to no construction and a reduction in inventory due to conversions to condos over the last several years — demand should increase even further.

Together, interest rates, renter demand, job growth and economic improvement are making Detroit a more attractive investment market for individuals and institutions. Recently, many substantial buyers have come to the Detroit area to purchase a large number of units. This includes a transaction last year of 5,000 units by New Jersey-based Lightstone Group for $216 million and, recently, the purchase of 2,500 units by New York-based GFI Realty Services for $95 million.  Like so many others, these buyers seem to expect Detroit will turn, securing higher cap rates and better returns than the rest of the country. 

— Robert Pliska is the managing director of the Birmingham, Michigan, office of Sperry Van Ness.

Detroit Retail Market

In Michigan, and in Detroit in particular, retail seems to be the area’s strongest commercial real estate product type. Despite the restructuring of the auto industry, many developers and retailers still believe in Michigan, with its strong income base and the shift that is occurring from an auto-related economy to a technology-based economy using the high resources currently available in the marketplace. Backed by renewed job growth and the power of the more than 4.5 million people that call the Detroit metropolitan area home, there is cause for optimism in the local real estate industry.

On the retail front, new developments continue to appear. In Clinton Township — located in one of the state’s fastest growing areas just northeast of downtown Detroit along Interstate 94 — Taubman is opening a 640,000-square-foot, open-air shopping center. In addition to anchors Nordstrom, Parisian and a 14-screen MJR Theatres movie complex, the center will feature dozens of exclusive-to-the-area tenants including such restaurant brands as P.F. Chang’s China Bistro, Bravo! Cucina Italiano and California Pizza Kitchen. Also relatively close to the city center, General Growth Properties is developing a 330,000-square-foot Shoppes at Gateway Park just northwest of downtown. The 34-acre project is located at the southeast corner of Eight Mile Road and Woodward Avenue, and is part of the Michigan State Fairgrounds. It will include a JC Penny, five national junior box retailers, up to five restaurants, and as many as 40 small-size national and local retail shops.

Further out to the northwest, Gershenson Kirco plans to break ground on Village Lakes, a 180,000-square-foot retail center in White Lake Township, MIchigan, and Robert B. Aikens & Associates is expanding its 285,000-square-foot shopping center in Harland Township, Michigan, by another 150,000 square feet.

Through these and other developments, new retailers continue to enter and expand in the Michigan market. In Birmingham, Michigan, Portland, Oregon-based Lucy — recipient of the 2007 Hot Retailer Award by the International Council of Shopping Centers — will enter the market with its sports and active apparel for women. Plum Market, a new offering in the fast-growing organic and specialty food business, also is expanding into the area, along with Wal-Mart, Meijer and Target.

This interest among retailers of all sizes bodes well for the investment market. Also providing great support is local cap rates, which seem to hover in the 8 percent range and provide a much better rate for investors than coastal markets such as California and New York, where cap rates may be in the 5 percent range. As a result, many out-of-state buyers are bringing capital here to take advantage of Michigan’s higher rate of returns. As an example, Center Line Shopping Center, an older, 75,000-square-foot center in Center Line, Michigan, was just sold to a West Coast investor for an approximately 8 percent cap rate.

Driven in part by strong retail interest in the area, older retail markets in and around Detroit are also being revitalized. The Lakeside Mall area in Macomb County, Michigan, north of Detroit, is working with the city of Sterling Heights to solidify the submarket as a premier shopping destination. In addition to refurbishing the tenant space in the area, the goal of the project is to create a themed environment that will be integrated with new street lighting, landscaping and signage. With sales in this area doing well, this seems to be just one of many projects that point to a continued, vibrant retail market in Detroit.

— Robert Pliska is the managing director of the Birmingham, Michigan, office of Sperry Van Ness.

Detroit Office Market

The downturn in the automotive industry has affected no sector of Detroit commercial real estate more than the office market. Until the auto industry stabilizes and shifts back into a growth mode, the office market will struggle. Leasing activity remains weak, with the majority of the space being taken by companies moving within the market, not from tenants new to the area. It is a good time for existing tenants to move and upgrade their space, with incentives readily available.

Rental rates actually increased slightly in the first quarter of the year to $20.31 per square foot. Local landlords continue to offer significant concessions, sometimes decreasing the asking rate by as much as 20 percent. Approximately 432,000 square feet of new office product came online in the first quarter, a significant increase over the amount delivered fourth-quarter 2006. The majority of the new development is focused in the Washtenaw County and suburban Detroit submarkets. Notable projects delivered in the first quarter include the 60,360-square-foot 5220 South State Street building and 325 North Old Woodward Avenue, a 183,884-square-foot office property.

The vacancy rate at the end of the first quarter was up to 16.8 percent, a 1.4 percent increase from the start of 2006. Expect vacancy to continue to rise throughout the year, due to slow absorption and obsolete facilities.

The bright spot in the office sector is the investment market. Investment sales have been robust for buildings with good income and term left. Cap rates in Detroit are very attractive — at 8.5 to 9.5 percent, compared to 6 to 8 percent in coastal markets — and are drawing the interest of a wide swath of out-of-state investors. Sales are averaging approximately $40 to $155 per square foot, compared to a national average range of $200 to $240.

— Cameron McCausland is the director of brokerage services in the Southfield, Michigan, office of Colliers International.

Detroit Industrial Market

The outlook for the Detroit area industrial sector is rosier. There was some positive absorption in the first quarter; many opportunities exist for potential users, though many are born out of the consolidation of numerous auto industry suppliers. Because of the uncertainty surrounding the auto industry, many manufacturing users are demanding shorter lease terms, and forcing landlords hands in regards to concessions and rental rate reductions.

Rental rates rose in the first quarter, coming in at $6.77 per square foot. The rates in the flex/R&D market are strong, but continue to fluctuate sharply, up as high as $12 per square foot in the western submarkets and as low as $7 per square foot in the Interstate 275 corridor.

Vacancy in the warehouse/distribution market has decreased since the start of the year, equaling 12.7 percent at the close of the first quarter. Vacancy for flex space remains at approximately 20 percent.

Detroit began the year with 650,172 square feet of positive absorption, which is a significant change compared to the approximately 4.4 million square feet of negative absorption in 2006.

As in the office sector, a majority of the new construction activity is occurring in the Washtenaw County submarket. Approximately 1.2 million square feet of product is expected to be constructed this year, all of it warehouse/distribution space. That is down from the 2.7 million square feet of space delivered last year.

Presently, the Detroit industrial investment market is a little sluggish. Sales are averaging approximately $45 to $55 per square foot compared to national averages of approximately $65 to $75 per square foot.

— Cameron McCausland is the director of brokerage services in the Southfield, Michigan, office of Colliers International.


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