CITY HIGHLIGHT, JUNE 2010

DETROIT CITY HIGHLIGHTS
Jonathan Dwoskin, Jason Capitani, Mason Capitani

Detroit Retail Market

Michigan officials have begun to take aggressive steps to create a more diverse employment base, which will have far-reaching effects on the Detroit labor market and, ultimately, retail property operations. To relieve some of the economic distress in the metro area, Michigan Economic Development Corporation recently awarded many companies tax abatements that will generate $800 million in capital investments. The influx of capital will allow a wide range of emerging industries, such as life sciences, advanced battery technology, construction and homeland security, to establish local footprints while improving the competitiveness of the manufacturing sector. With more than 40 percent of all manufacturing jobs in Michigan located in the southeastern portion of the state, greater competitiveness would greatly benefit the Detroit market by creating jobs and buffering the local economy from auto industry volatility. As capital starts to be deployed in the metro, the pace of employment cuts will ease, potentially positioning the market for a net gain in 2011. Additionally, household formation will eventually begin to steady and bolster retail space demand, especially in cities where hiring activity by tax incentive recipients will occur first, including Riverview, Ann Arbor, Plymouth, Auburn Hills, Warren and Royal Oak.

Looking at market fundamentals, builders have completed nearly 600,000 square feet of retail space in the Detroit metro, increasing inventory 0.4 percent. In the preceding year, 1 million square feet was added. The only significant project slated for delivery this year is the 325,000-square-foot Livonia Marketplace, which will come online during the third quarter and replace the 650,000-square-foot Livonia Mall in the Detroit/West Wayne submarket. A Walmart Supercenter will anchor the redeveloped shopping center. Approximately 440,000 square feet is under way, including the Livonia Marketplace development. Proposed construction totals 2.8 million square feet, most of which is located in the North and South Oakland submarkets.

Vacancy rose 160 basis points year-over-year to 12.7 percent in the first quarter due to the adverse effects of high unemployment on shopping trips and retail sales. Vacancy has climbed 50 basis points since the third quarter of 2009. Weak tenant demand has pushed up vacancy within neighborhood/community centers 150 basis points during the past year to 13 percent. At 23.9 percent in the first quarter, vacancy in the South Detroit/Downriver submarket was the highest in the Detroit metro, despite improving 90 basis points in the last 12 months.

Well-capitalized, long-term buyers have started to return to the Detroit market, drawn by price reductions that have caused elevated cap rates to trend even higher during the past year. Despite the weakened local economy, current cap rates in the low 10 percent and 12 percent ranges for single- and multi-tenant properties, respectively, have sufficiently priced in the market’s perceived risk. As such, investors have begun to target standalone assets, supporting increased sales activity during the last 12 months. Buyer interest remains particularly strong for properties in Oakland County, specifically in the North Oakland submarket. With retail sales in the area buoyed by an affluent population, the submarket will likely maintain the tightest retail vacancy rate in the metro through the coming quarters.

— Jonathan Dwoskin is the regional manager of the Detroit office of Marcus & Millichap Real Estate Investment Services.

Detroit Industrial Market

J. Capitani

Recent statistics demonstrate that the majority of U.S. metropolitan markets are in recovery mode. Although the Detroit metropolitan market has not quite entered that status, experts believe it is on the near horizon. Detroit has historically been tied to the automotive industry. Now that the nightmares of 2009 are behind us, and the “Big Three” continue to implement cost-cutting measures, better times will surely come. Real estate values may continue to decrease in 2010, but an uptick in activity may have something to do with this. Once we see positive absorption, values will stabilize. Although major improvements will not come to fruition overnight, the market is heading in the right direction.

The Detroit industrial market ended the first quarter of 2010 with a vacancy rate of 14.2 percent, which was slightly up from 14 percent at the end of 2009. Total industrial inventory in the Detroit market area amounted to more than 580 million square feet of space in nearly 17,000 buildings.

Although local downsizing and consolidation is resulting in more vacancy, large blocks of space are beginning to be purchased and leased. For example, L. Mason Capitani/CORFAC International coordinated two transactions in 2009 that totaled nearly 1 million square feet. In July, the former 750,000-square-foot Cadence Innovation plant in Chesterfield sold. Three months later, a three-building complex totaling 221,000 square feet in Harrison Township leased for a 5-year lease term. Transactions such as these will help stabilize the vacancy rate for the months to come.

Industrial building sales activity seemed to mimic the previous quarter. This was the case in terms of volume of transactions, as well as average dollar value per transaction. New construction has virtually come to a halt. Bank foreclosures, auctions and distressed sales in general have had a negative impact on property values rendering build-to-suits and speculative construction irrelevant. Cap rates on investment opportunities held constant for the most part, with a slight decrease from the previous quarter to 9 percent. The problem surrounding investment transactions continues to stem from the lack of available financing. Most lending institutions are not willing to participate in anything that is not at least 51 percent owner occupied.

The strength of the metropolitan Detroit industrial market is predicated upon the strength of the automotive industry. As suppliers continue to employ cost-cutting measures, the industrial sector will surely continue to improve. Furthermore, local companies continue to diversify their business portfolios through defense, aerospace and various commercial industries. Although we will not witness an immediate turnaround, a healthier industrial market is on the horizon.

— Jason E. Capitani, SIOR, CCIM, is an executive vice president with L. Mason Capitani/CORFAC International in Detroit.

Detroit Office Market

M. Capitani

Occupancy rates for office space in the Detroit area have stabilized in the first quarter of 2010, halting a rise in vacancies that has been ongoing since the second quarter of 2008. The vacancy rate for the region currently stands at 23.9 percent for the first 3 months of 2010 as compared to 24.2 percent for the first quarter of 2009. The stabilization of the market is attributable to little or no new office development coupled with a slowdown in corporate downsizing and several recent lease transactions.

Several suburban submarkets have experienced positive net absorption for the first time in several quarters. Southfield, the Detroit area’s largest suburban submarket (approximately 24 million square feet) experienced positive net absorption of 23,298 square feet in the first quarter. Even the submarket that has been hardest hit in recent months has experienced positive growth. Troy’s vacancy rate has been trimmed to 38.1 percent in the first quarter of 2010 from 39.9 percent during the same period in 2009, with a positive net absorption of 41,148 square feet. Other suburban submarkets such as Macomb County, Auburn Hills, Birmingham/Bloomfield Hills and Farmington Hills/Interstate 275 have maintained negligible net absorption in the first quarter of 2010. This is a moral victory given the trend of increasing vacancies during the past 2 years. The market hit hardest in the first quarter was the central business district with a negative net absorption of 296,140 square feet or 1 percent.

Many recent lease transactions are key indicators of where the local market is heading. Most property owners are looking to live to fight another day by filling space and, as a result, tenants are securing major leasing incentives such as reduced rental rates and rental abatements. Although negotiated rates are declining and major incentives are being offered, the increase in leasing activity is encouraging. Recent leases include the lease of 125,000 square feet by R.L. Polk & Co. at Travelers Tower II in Southfield, the lease of 17,000 square feet by Integrated Design Services at 1441 W. Long Lake and 32,199 square feet by Dialogue Marketing in Troy.

Due to increased vacancies, there has been little new development in the Detroit area with few new projects slated for the remainder of 2010. The only new, high profile development is the Greenleaf Trust Building currently under construction in downtown Birmingham. The new five-story, 50,000-square-foot structure will feature retail, office and residential space with Kalamazoo-based Greenleaf Trust moving its metropolitan Detroit offices to the third floor of the building. The building will also feature a restaurant and five rental apartments. In addition to the Greenleaf development, Frank Simon is planning to break ground on his new 63,000-square-foot, Class A office building at the corner of Woodward and Big Beaver in Bloomfield Hills. The new building will feature a restaurant on the first floor, a bank and high-end office space, with Simon relocating his law firm to the new building.

Even with a push to diversify local industry, it is no secret that Detroit’s future is tied directly to the fortunes of the automotive industry. It’s more than a coincidence that the timing of the downturn in the Detroit area office market correlates with the troubles and tribulations of the Detroit’s automakers. However, there is light at the end of the tunnel with positive future forecasts by the auto companies and a stabilization of the vacancy rates in the market.

— Mason L. Capitani, SIOR, is an executive vice president at L. Mason Capitani/CORFAC International in Detroit.

©2010 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.