CITY HIGHLIGHT, JULY 2008

DETROIT CITY HIGHLIGHTS
Robert Pliska, Andrew Farbman and Eric Taylor

Detroit Retail Market

Detroit retail continues to be a strong product type, relying heavily on the population of 4.8 million in a metropolitan area that is supported by higher-than-average national income levels. Numerous large-scale developments have recently come online, including Taubman’s 640,000-square-foot development, The Mall at Partridge Creek in Clinton Township, Michigan, and Southfield, Michigan–based REDICO’s 500,000-square-foot Waterside Marketplace in neighboring Chesterfield Township. Many new developments are in the works, such as Developer Diversified Realty and the Harbor Companies’ 535,000-square-foot lifestyle center in Bloomfield Hills, Michigan. Additionally, regional shopping centers by Grand Sakwa Properties, Lormax Stern Development and Ramco-Gershenson Properties Trust are all scheduled to open in 2009.

However, trends have been emerging that are impacting the local market as the nation and Detroit are experiencing a real estate slowdown. There seems to be a definite flight to opportunities closer in to Detroit, a focus on more mature trade areas and a movement towards more value-oriented retail like Wal-Mart. Additionally, there is a growing effort to find new ways to reduce development costs.

The old saying in real estate is that retail follows rooftops. With the impact of the slower housing construction here and across the country, there has been a strong movement towards the rehabilitation and renovation of existing facilities in areas where rooftops are plentiful. Schostak Brothers and Company’s Wonderland Village, on the site of the former Wonderland Mall in Livonia, Michigan, has been redeveloped and a Target and Wal-Mart were recently added. Oakland Mall, a 1.5 million-square-foot mall in Troy, Michigan, has been purchased by Chicago-based Urban Retail Properties, which has announced plans to restructure and expand the property. Ramco-Gershenson Properties Trust has purchased Old Orchard Shopping Center in West Bloomfield, Michigan. A new store from the locally based Plum Market has been added. A joint venture of Konover South, Lormax Stern and Grand Sakwa Properties has been formed to redevelop the 500,000-square-foot Livonia Mall. Twelve Oaks Mall in Novi, Michigan, has added an additional 322,000 square feet of space to take advantage of the high density and upscale demographics of its location.

Some smaller, well-located centers are finding ways to reposition themselves to better cater to market demand. Locally based Etkin Equities has announced a $12 million redevelopment of the Applegate Shopping Center, a 55,000-square-foot, un-anchored neighborhood retail center in Southfield. In addition to a complete exterior renovation, the revitalized center will include a 107-key Hampton Inn & Suites hotel.

Richardson Development Group’s proposed Pavilions of Troy has obtained more than $13.2 million in state and local tax incentives. This reduces the development costs of this $320 million project, which is located on the former Kmart headquarters site in Troy and should benefit from the infill location’s high density and great demographics.

In spite of the economic downturn both in Detroit and across the country, the Detroit retail market continues to thrive and find ways to position itself for a bright future.

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

ARAGONA PROPERTIES EXPANDS ITS NORTH DETROIT OFFERINGS

Aragona Properties, a Clinton Township, Michigan-based developer, is investing heavily in the promise of the retail market in Detroit. The company has a collection of diverse retail and commercial projects in the works across the city and it’s immediate suburbs throughout Macomb and Oakland counties.

According to Paul Aragona, the company’s president, “The growth areas in Michigan were underserved retail-wise to begin with, and they continue to be underserved. There are great opportunities in the growth areas of the Detroit marketplace that the industry is just going back to now.”

Aragona recognized the many opportunities in infill markets in the northern submarkets of Detroit and made an effort to acquire large tracts of land for potential development endeavors that would bring needed retail, dining and entertainment options to the area’s many residents. Currently, the firm has approximately 2 million square feet of retail space in development or in the pipeline.

In Oxford, Michigan, the company is developing The Promenade at Waterstone. The first phase is complete, and includes a Tim Hortons and a Chili’s Grill & Bar, as well as the installation of all infrastructure for a 100,000-square-foot shopping center that will be built on site. A Meijer department store is located immediately adjacent to the project, and Aragona is waiting for a planned Kohl’s department store to open on the other side of the property before building the center.

In Lenox Township in Macomb County, the company is developing Bay River Market Place at 26 Mile Road and Interstate 94. The site is also anchored by Meijer, and currently features a collection of outlots that will house Tim Hortons, Taco Bell, a bank and other small tenants in a multi-tenant strip center. Bay River boasts three-quarters of a mile of signage frontage along I-94. With 34 acres of undeveloped land remaining, Aragona is targeting a hotel, another big box user, a car service tenant and additional restaurants.

The master plan for Chesterfield Towne Centre in Macomb County, Michigan.

Along M-59, the popular retail corridor stretching through Macomb County, Aragona is developing its most ambitious and unique project, Chesterfield Towne Centre. The 123-acre site will serve as an anchor to the M-59 corridor at the north end along I-94. Aragona plans to complement the existing retail centers in the area, and is focusing less on service-oriented users.

The plan is to develop a 150,000- square-foot consumer-focused convention center, as well as up to four hotels, a health center, theater, comedy club, and numerous bars and restaurants. The convention center will serve the 840,000 people in Macomb County, as well as Canadian residents living on the border just 40 minutes from the project.

The convention center at Chesterfield Towne Center will focus on consumer-oriented trade shows, serving the expansive Macomb County and Detroit population, as well as attract visitors from Canada.

Aragona is working to obtain TIF financing for the project, and has been encouraged by the response from the community and local government.

“It is really in the Main-and-Main location, and the community needs it,” Aragona says. “I think the state is very much in the mood to work with us for the convention center.”

— Kevin Jeselnik

From Brownfield to Green Lane: Ford’s Landfill Transformation

Fairlane Green

Bio-swales, 3.5 miles of trails and a 43-acre park are just a few of the many sustainable features that set Ford Land’s Fairlane Green brownfield development apart from other environmentally sound projects throughout the Midwest. Located between Oakwood Boulevard and Outer Drive, and Interstate 94 and the Southfield Freeway in suburban Allen Park, Michigan, an abandoned Ford landfill has been transformed into a sprawling 243-acre retail and recreational development.

“If you look around the country at what’s been done on other landfills, for the most part, you would see recreational type activities,” says Roger Gaudette, director of Asset Management for Ford Land and Fairlane Green’s project manager. “There was a tremendous need for retail and that’s what drove us to that as the highest best-use.”

Fairlane Green is the most recent development of Ford Land, which was established in 1970 as a subsidiary of Ford Motor Company.

“Our charter was essentially to take a look at the best use for the property that Ford Motor Company owned,” Gaudette explains. “Over time, we’ve had a number of different types of developments in the Deerborn area.”

Originally a clay mine, the landfill below Fairlane Green was acquired by Ford Motor Company and used as a disposal site for non-organic material. The nature of the non-organic material — it produced limited settlement, odor and methane gas — and the site’s location in the inner-ring of Detroit, made the landfill an attractive area for redevelopment.

Over the years, Ford capped the landfill in accordance with the requirements of the Department of Environmental Quality, which slowly began filling the hole. In order to prepare the landfill for the project, Ford Land added additional soil or engineered fill that solidified a construction surface.

“There was certainly an engineering aspect that had to be dealt with,” Gaudette says. “We actually used a product called Geofoam, which is a Styrofoam-type material that, in concert with our geotechnical people, was used to help adjust loading on the landfill itself so that as you constructed buildings, you didn’t end up with differential settlement.”

In the first two phases of the three-phase project, which began in 2002, approximately 850,000 square feet of retail space has been constructed. Each phase of the project is developed differently. As part of the first phase, Ford sold property to ArCon, which constructed build-to-suit facilities for different retailers. Phase II was a combination: While Home Depot and Meijer built their own facilities, Ford Land constructed the stores for Best Buy and Sports Authority, which leased the spaces.

Because many retailers are wary of taking on the added responsibility that inevitably goes along with building on a landfill like Fairlane Green, Ford mitigates concerns through the utilization of a unique three-dimension legal description of the property: Ford Motor Company still owns the landfill, and property was only sold from the cap of the landfill up.

Although the legal description of Fairlane Green is innovative, the development is most recognized for its environmental accomplishments. Unlike many projects, Fairlane Green preserves more land than it develops. When Phase III is complete, approximately two-thirds of the site will be natural green space.

Most recently, Fairlane Green was awarded the national Phoenix Award for excellence in brownfield development at the National Brownfields Conference hosted by the Environmental Protection Agency and the International City/County Management Association. The Phoenix Award, which recognizes projects that remediate environmentally challenged sites while stimulating economic development, was presented to Ford Land in May.

“We are really happy to have been chosen as national winners for the Phoenix Awards,” Gaudette says. “I think it’s indicative of the success of the project and the impact on the community.”

The award has come just as Ford Land seeks tenants for the final phase — Phase III — of the development. Depending on how the area is divided, there is approximately 150,000 square feet of space available. Retailers and special-use facilities such as a fitness center or a movie theater are the tenants being pursued for this phase.

While Phase III, which is the smallest part of the development, is still being conceptualized, all elements of this part of the development are clearly in-line with Ford’s environmental consciousness. For example, bio-swales for storm water run-off and a continuation of Phase I’s hiking trail are an integral part of the final phase’s design. Primarily because of the way the site was prepared for development, the 43-acre park will be part of the last stages of the project.

“We had to do something called surcharging of the site, so we had to bring in roughly 12 to 13 feet of dirt, pile it on top of the site, and let the site compress,” Gaudette explains. When compression occurs, excess dirt is transferred to the future park area rather than carried off-site. When Phase III surcharging is complete, Ford Land will decide on a plan for the park that will complete the project.

“You certainly have the financial aspect any time you’re going to build on a brownfield site and this one was obviously special because it was a landfill,” Gaudette says; nevertheless, the benefits of Fairlane Green clearly outweigh the costs. “What it [Fairlane Green] did was take a piece of brownfield property that could have sat there for a number of years without any development, and essentially turned it into a successful project for both the community and the developers that were involved.”

— Ashley Ball

Detroit Office Market

In many ways, Detroit’s office sector mirrors that of the national market because of the tremendous slowdown in real estate sales activity. As the region works to diversify itself from an automotive-based economy to one built on new energy/fuel technologies, life sciences, homeland security and cutting-edge manufacturing, the market shows a pattern of leveling off. This relative lack of movement in vacancy and rental rates, when examined together, may in fact indicate that the Detroit office market is approaching a positive turning point and foreshadow new growth that could escalate in a controlled fashion over the course of future quarters.

Industry reports support the assertion that the rate of all combined classes of office vacancies in the metro Detroit region have remained relatively unchanged, fluctuating between 17 to 17.4 percent from second-quarter 2007 through the first quarter of this year. The city’s central business district occupancy rates have likewise remained unchanged during consecutive quarters. With a slight increase compared to last year, asking rental rates for the first quarter closed at $20.15 per square foot, an increase of 0.3 percent from the last quarter of 2007. The asking price for for-sale space averaged approximately $92.50 across all classes in the first quarter

For Class A space, the Detroit region achieved a 0.4 percent first-quarter decrease in vacancy rates, from 16 percent in the last quarter of 2007. Office sector categories experienced a small increase in quoted rental rates — 5 to 50 cents per square foot — compared to 2007.

Michigan landlords appear to be trading tenants; however, many area business owners are opting to extend leases rather than relocate to new spaces, negotiating with their existing landlords to obtain a “best rate” on leased space, with emphasis on value over price. Class B and Class C properties recently experienced slight decreases in occupancy, as more business owners sought to move upward based on the perceived advantages of being in a Class A property while paying prices that often were reserved for the lower category space.

Additionally, entrepreneurs are investing in established office buildings. In several cases, these investors are rehabilitating existing buildings to make the property increasingly attractive for current tenants and be an asset in the aggressive pursuit of new tenants. The Southfield, Michigan, submarket has been a hotbed of activity in recent quarters, absorbing approximately 20,000 square feet in the first quarter of this year. Some recent deals in Southfield include the sale of the 638,615-square-foot First Center Office Plaza, which was purchased by First Center Southfield LLC for $66 million. Also, DRA Advisors LLC sold the low-rise, 259,340 square-feet Onyx Office Plaza for $25 million to Argus Realty Investors.

The “golden corridor” of Troy continues to prove fruitful for investors. Several substantial properties, such as Sheffield Office Plaza, Troy Tower and Wilshire Plaza, have changed ownership, seeking to drive occupancy in the area perhaps through a property improvement strategy as well.

In the quarters ahead, landlords will need to aggressively pursue tenants by providing incentives such as free rent within term, attractive improvement allowances and other enticements such as signage rights in an effort to both attract new tenants and retain existing ones.

— Andrew Farbman is president of Southfield, Michigan-based Farbman Group/NAI Farbman, which offers real estate services including, brokerage, property management, development and construction.

*Data compiled from CoStar Office Report and Farbman Group.

Detroit Multifamily Market

The local multifamily development market appears to be in a hold pattern at the moment, due to what has transpired in the credit markets combined with the state of the local economy. Several high profile riverfront condominium developments that were slated to break ground this year such, as The Watermark and The @water Lofts, are now taking sales reservations as opposed to beginning construction. The majority of the apartment development in the metropolitan Detroit market consists of additional phases being added to existing developments primarily in the suburban locales. Several ambitious new projects have been announced for the downtown Detroit market such as Northern Groups’ $150 million Cadillac Centre project, which will include a 24-story apartment tower and Belmar Developments’ conversion of the former Federal Reserve building into an 84 unit apartment complex.

The most significant development for the Detroit market will be the completion of the Westin Book-Cadillac hotel and condominiums, which is slated to open in October 2008. The redevelopment of the hotel, which originally opened in 1924 and is an iconic structure within the city, will serve as a huge milestone for the downtown market. Additionally, the new Book-Cadillac will further serve the gentrification of the surrounding neighborhood. The Ferchill Group, based out of Cleveland is undertaking the redevelopment.

The majority of new development is currently taking place in the downtown Detroit submarket. This area has lacked new multifamily development for decades and all indications are that the demand is there for individuals that are seeking to return to a more 24-hour urban lifestyle. This trend is also being driven by several large employers such as Compuware and Quicken Loans that have committed to the city by relocating their headquarters in the heart of downtown, bringing thousands of employees with them.

The suburban and downtown markets appear to be stabilized at the moment. The only area that appears to be currently underserved by an adequate level of multifamily housing would be the districts surrounding the downtown Detroit educational facilities such as Wayne State University and The University of Detroit Mercy, which have both been working aggressively to expand enrollment.

Developer Marcel Burgler of Grand Rapids, Michigan-based Prime Development has begun construction on his first Detroit development. The $21 million project is going to be known as the Studio One Apartments, and will consist of 108 apartment units and approximately 30,000 square feet of potential retail space. The project is being developed in the direct vicinity of the Wayne State University Campus, and is expected to cater to students and faculty seeking to reside in the city.

According to Hendricks & Partners most recent research for the first quarter of the year, the average rental rate was $836 in the tri-county area consisting of Wayne, Oakland and Macomb counties. The overall vacancy rate for the region is estimated to be 6.4 percent, which is the lowest first quarter showing since 2003. Occupancies have continued to climb primarily due to the unavailability of mortgage funds for potential homebuyers, therefore driving these individuals back into the rental market.

The Woodward Corridor in Oakland County remains and is expected to be a continued favorite among young renters due to the proximity to retail, dining, and entertainment destinations. This sub-market is considered to be completely in-fill and, with the exception of Amber Developments’ addition of nearly 100 units to the Royal Oak area of this submarket, no significant development of any apartment units has taken place for decades.

— Eric Taylor is senior investment advisor in the Birmingham, Michigan, office of Hendricks & Partners.

Brownfield Redevelopment: ULI Helps Change the Conversation

The Detroit District Council of the Urban Land Institute (ULI Detroit) acted as a tri-sponsor of the signature dealmaking event held in Detroit in May. During the National Brownfield Conference, 2008 Brownfields Transaction Forum, the largest event of its kind in the world, more than 6,000 conference attendees learned about and observed first hand the maturing of this economic development and investment option.

Not far from the downtown Detroit conference location at Cobo Center, there are developments illustrating great accomplishments in brownfield development, including the Clark Street Industrial Park, built on the site of a former GM Cadillac plant; MotorCity Casino, which restored and incorporated a former Wonder Bread factory; and the metamorphosis of the locally famous Vernors Bottling Plant into apartments and retail services for the Wayne State University campus. In the Downriver community of Allen Park, Fairlane Green exemplifies what the viability of turning a brownfield site into retail space. Built over a closed and sealed industrial landfill, it was the nation’s first multi-tenant retail development to earn LEED certification.

Drawing from Michigan’s solid roster of brownfield experiences from the last decade, several factors have been identified that have allowed investors and communities to understand, and then exploit, the economic opportunities presented by specific sites.

The first factor is the volume of undervalued real estate, a legacy of Detroit’s industrial roots, and well-located, attractively priced buildings with infrastructure already in place.

Another major factor in the growth of brownfield development is the myriad state-sponsored environmental programs and directives keyed to a system of baseline environmental assessments and practical, end-use-directed cleanup standards. Such programs must be accompanied by well-defined standards of liability protection for the new user. In Michigan, this was principally accomplished during Governor John Engler’s administration, with the 1995 rewrite of the state’s Polluter’s Pay laws (PA 451 and Part 201 Rules). A Brownfield Redevelopment Financing Act (PA 381), with tax capture provisions, followed in 1996, to be administered by a Department of Environmental Quality (DEQ). Without getting into a complex environmental discussion, the net result has been more cleanups, new investment, new tax base and jobs in Michigan than any other state in the country.

Next, reasonable, market-driven incentives to new investment and reuse of brownfield sites have been developed. These include Michigan Business Tax (MBTs) credits for approved projects, which recently doubled from a maximum of 10 percent to 20 percent for urban zones (PA 36).

Another contributing factor has been latitude in the definition of brownfield districts to include obsolete or blighted buildings. This flexibility aids strategic land assemblage and has expanded brownfield redevelopment to accommodate districts primarily thought of as green, such as examples in downtown Grand Rapids, or even suburban residential. An excellent example is Troy’s Midtown Square multi-use project, where Troy’s brownfield redevelopment authority was used by the city to facilitate redevelopment of Ford Motor Company’s former New Holland facility.

Also of note is the growth and involvement of regional and national firms specializing in the financing of brownfield redevelopments, which includes expertise in applying for grant monies; setting up tax recapture schemes; and dealmaking achieved through the trading of brownfield credits. In fact, $7.4 million in EPA Brownfield assessment grants was awarded to 18 Michigan communities.

There are no slam-dunks in brownfield redevelopment — there is hard-earned progress, improved economic outcomes based on new modes of public/private cooperation and a reinvigorated, more practical environmental stewardship. Now, in the current economy, where costs of new infrastructure in fast-growth areas increasingly impede further development, the economic equation is tilting back to mature urban areas, where there are many well-located brownfield sites available for redevelopment.

When the sites make sense for market-driven real estate purposes, today’s brownfield community knows better than ever how to assess the comprehensive potential of a given site and accomplish the transformation needed to achieve long-term investment goals. The result is a boost to the economy and the environment.

— Robin Boyle is a co-chair of ULI Detroit, as well as a professor of Urban Planning and the chair of the department of Geography and Urban Planning (GUP) at Wayne State University. Doug Brown is the membership chair of ULI Detroit and director of development at ASTI Environmental.

Schostak Given ULI Detroit Lifetime Achievement Award The Detroit arm of the Urban Land Institute has named Jerome Schostak the recipient of its 2008 Lifetime Achievement Award. Schostak, chairman and CEO of the Detroit real estate firm Schostak Brothers & Co., is the second generation of his family to run the company, and his three sons currently serve as president. ULI Detroit has donated the entire ULI library, in Schostak’s name,  to a school of his choice. Schostak Brothers & Co.’s current developments include the Armory, a master-planned, mixed-use project in Oak Park, Michigan, and Gateway Park, a vertically integrated mixed-use property in Royal Oak, Michigan.

©2008 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.