HEARTLAND SNAPSHOT, OCTOBER 2006

Detroit Retail Market

The Detroit retail market has not experienced a lot of new ground-up development of late, although retail operating fundamentals have remained resilient in light of the region’s recent economic struggles.

Retail spending has posted year-over-year increases in every quarter for the past 3 years and additional growth is expected through the remainder of 2006. Local rents, which have recorded consistent gains during the past 5 years, are also expected to continue growing, even with vacancy trending upward. The greatest challenges to the market are external macroeconomic conditions. With gross domestic product growth slowing and energy costs rising, retail spending is expected to slow nationwide. If these conditions do begin to drag on local retail sales, Detroit retail investors can expect older Class B and C assets to be most impacted, particularly as continuing construction deliveries effectively render many of these spaces obsolete.

Despite persistent job losses, sales activity in Detroit continues unabated. Transaction velocity is stable and prices have appreciated over the past year due to an inflow of out-of-state buyers, who are seeking greater stability and higher yields than can be found in coastal markets. This trend will continue in the coming year as buyers are becoming more risk averse nationwide.

Most of Detroit’s expected development deliveries for the year occurred in the first two quarters. The metro area gained 2 million square feet of retail space in the first half of 2006, well above the 750,000 square feet delivered in the first half of 2005.

Suburban retail projects continue to account for most of the construction in the metro area. Big-box developments make up the majority of square footage expected this year, including an IKEA that recently opened in Canton, Michigan. Fairlane Green, a 1 million-square-foot retail development on a former landfill site in Allen Park, Michigan, continues to progress with an estimated 600,000 square feet of space delivered through the first half of the year.

 During the second quarter, shopping center REIT Ramco-Gershenson Properties Trust of Farmington Hills, Michigan, commenced construction on three new redevelopment projects in Michigan: Hunter’s Square in Farmington Hills, Roseville Town Center in Roseville, and Eastridge Commons in nearby Flint.

In all, developers will deliver an estimated 3.2 million square feet of new retail space to the Detroit market, growing inventory by 1.3 percent. Positive net absorption for the year is expected to approach 1 million square feet.

There are some developments underway in the northwest Oakland County area and in West Bloomfield and Novi, Michigan, as well as the northeast area of Macomb Township, Michigan. These growth markets have demonstrated strong demographics and solid population growth, thus sparking demand for more retail product.

Some of the most active developers in the Detroit area include local developers as well as larger institutions, like Bloomfield Hills, Michigan-based Taubman Centers and the aforementioned Ramco-Gershenson.

Recently closed transactions in the area include Motor City Harley Davidson’s 103,298-square-foot lease at 24800 Haggerty Rd.; The High Point Group’s 32,160-square-foot lease in Oak Brook Square at 3192 S. Linden Rd.; and a 25,398-square-foot lease at Roseville Towne Center at 28774-28890 Gratiot Ave.

Retail vacancy in Detroit has increased 90 basis points in the past year to 12.2 percent in the second quarter of the year. The current vacancy rate is 60 basis points higher than the rate at the beginning of the year. Since the first quarter, vacancy in neighborhood and community shopping centers has decreased 60 basis points to 8 percent, though vacancy for this property type has actually increased 30 basis points in the past 12 months. Macomb County was the only submarket to show a reduction in vacancy in the past year, dropping 270 basis points. Macomb’s current rate of 12.8 percent, however, remains the highest of the suburban counties.

For future development, conservative investors should target suburban neighborhood shopping centers, particularly those in affluent areas such as Troy and Bloomfield Hills, where tenant demand will enable consistent rent growth regardless of metro-wide market conditions. More aggressive investors may want to target older properties in quality locations, using under-performance to demand cap rates well above the metro average.

— Steven R. Chaben is first vice president and regional manager in Marcus & Millichap’s Detroit office.



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