Detroit’s office and industrial sectors have been highly impacted by the automotive industry’s poor performance. Both sectors are currently experiencing high vacancies, and a slowdown in new construction. Developers seem to be waiting for the automotive industry to regain steam before bringing new product to the market. However, job growth toward the end of the year should increase occupancy in the office and industrial sectors. The multifamily sector has also been performing poorly due to job losses and the strong activity in the single-family housing market. A rebound in this sector is not expected until 2004 or 2005. Fortunately, the retail sector has improved, with some retailers growing in the Detroit area.

Office

Most of the Detroit area’s commercial real estate performance is directly related to the automotive industry’s overall performance, which has been lackluster at best. As a result, the office sector has experienced a contraction in its supply pipeline, and plans for new office projects that were announced in 2002 and before are being put on hold.

The important performance benchmarks for the office sector in the Detroit metropolitan area tend to mirror the Midwest’s benchmarks in general and slightly trail the nation’s benchmarks overall. For example, Detroit closed out 2002 with a vacancy rate of about 16.5 percent. However, the vacancy rate has increased in 2003 by about 2 percent. This is generally in line with national vacancy rates that are in the 15 percent to 18 percent range.

In addition, approximately 600,000 square feet of space is expected to come online in 2003 versus the nearly 1.1 million square feet that came online in 2002. Most developers are waiting for positive growth in the economy and the automotive sector before developing new office product.

The backbone of Detroit’s office market has always been the submarkets in Farmington Hills, Troy, Southfield and Bloomfield. Prior to 2 years ago, these submarkets boasted vacancy rates of less than 7 percent. The high occupancy levels stimulated some development activity, which has tended to come online in conjunction with layoffs in the industrial sector during the past 2 years. Troy and Southfield, which have both experienced strong office demand and have delivered prestigious addresses, have also produced about 1.8 million square feet of negative absorption, according to a recent Marcus & Millichap report. All of the strong Detroit metropolitan submarkets are expected to endure some near-term challenges but should thrive in the long-term.

While overall vacancies have risen in the Detroit central business district (CBD), two major international companies recently made the commitment to move back to Detroit. Compuware Corporation is relocating approximately 6,000 employees from Farmington Hills to a newly constructed headquarters building in the Campus Martius district (a five-block, mixed-use development in downtown Detroit’s CBD). Additionally, EDS recently relocated several thousand employees from the suburbs to the General Motors’ Renaissance Center building. Employment trends in the Detroit market are expected to pick up toward year-end 2003, thereby lifting occupancy, rental rates and absorption.

Industrial

The industrial market also tends to closely mirror the automotive industry’s performance. Detroit is home to one of the largest industrial markets in the country with nearly 300 million square feet of industrial space. The automotive industry’s woes, plus the sluggish U.S. economy and lessened consumer spending, have challenged Detroit’s industrial sector.

The market began fighting its recent challenges in 2001 and 2002 when negative absorption rose to 7.6 million square feet, and 7.7 million square feet of new space came online. According to a recent Grubb & Ellis report, the initial vacancy rate of 6 percent in 2001 rose to 11.1 percent at the beginning of 2003.

However, most analysts are forecasting a medium to strong rebound in demand for the industrial sector in 2003. New product is expected to reach a modest amount of about 1.3 million square feet in 2003. In general, year-end vacancy is expected to be flat. Several reports indicate that there will be considerable growth in this sector in 2004 and 2005. Thus, in both the office and industrial sectors, Detroit is experiencing a market-driven tightening of the supply of new product, and fairly strong pressures on absorption and rental rates.

Multifamily

Detroit’s multifamily sector tends to mirror the performance of the Midwest. Job losses and a strong single-family housing market have challenged rental demand. As a result, this sector has been performing with market sensitivity (i.e. patient ownership and restricted new construction). Yet, in downtown Detroit, the construction and/or rehabilitation of 1,000 new loft and condominium developments has added to the momentum of the thousands of Compuware and EDS employees who now work downtown while creating new living options for those interested in living closer to their workplaces.

On the macro level, however, Detroit began 2003 with a 6.6 percent vacancy rate as compared to 7 percent overall in the Midwest, according to Reis. Somewhat like the industrial sector, many believe that the Detroit multifamily sector has hit its bottom with a rebound imminent in 2004 or 2005. Historically, the vacancy rate has been much closer to 4 percent or 4.5 percent.

Employment is expected to improve by year-end 2003, helping the multifamily market recover. Another important positive factor is the highly restricted growth of new supply. Only about 1,000 units are expected to come online in 2003 — a 17 percent decline from 2002 — and only 900 units are expected in 2004.

Retail

While Detroit’s overall economic health certainly impacts the area’s retail sector, its status as a retail expansion market is often as dependent upon the health and growth goals of chain stores. Although 2002 was weak overall, with a small center vacancy rate of about 7.1 percent, 2003 has already outperformed last year with vacancies reduced to less than 7 percent. Reis anticipates that the final 2003 vacancy rate will fall to about 6.5 percent, which shows a decline from the 8.4 percent vacancy rate reported by Marcus & Millichap at the start of 2003.

Only about 110,000 square feet of retail space is expected to come online in 2003, and between 250,000 square feet and 300,000 square feet will be absorbed in 2003. Several major national retailers have been looking to grow their bases in Detroit:

Von Maur has purchased the Jacobson’s store at Laurel Park Place Mall in Livonia, Michigan, and will be moving into the location in October.

• Von Maur, a new player in the metropolitan Detroit traditional department store sector, purchased the Jacobson’s stores in Briarwood Mall in Ann Arbor and in Laurel Park Place Mall in Livonia.

• IKEA has announced that it is scouting locations in metropolitan Detroit for its first two stores in Michigan. The stores are scheduled to open in 2005.

• Lord & Taylor will be opening a new store in Oakland Mall in Troy. The opening, which was originally set for late 2003, has probably been pushed back due to the retailer’s recent major closing announcement.

• The new Sears store at Eastland Mall in Harper Woods is under construction and will be opening later this year.

• Lowe’s Home Improvement Warehouse is opening a new flatbed supply center in Grand Ledge, and it will serve roughly 100 stores in the Midwest. Lowe’s has also committed to opening about 25 new Michigan stores — some of which will be in the Detroit area.

The retail renaissance of Detroit’s CBD is finally reaching critical mass. Detroit Mayor Kwame Kilpatrick and his city of Detroit development team attended the 2003 ICSC National Leasing Convention and supported the efforts underway in Campus Martius.

Schostak Brothers & Company and several partners have been working to redevelop the Campus Martius area. The mixed-use project includes retail tenants such as Borders Books & Music and Hard Rock Café.

Several national retail trends, such as de-malling, are occurring in the Detroit region. For example, Ramco-Gershensen Properties Trust began with the Tel-Twelve project and created a big-box center on a former mall site. Schostak Brothers & Company plans to de-mall Wonderland Mall and create several new village-type retail outbuildings that will better serve the site, the area and the consumers.

The Village of Rochester Hills is a 375,000-square-foot shopping center in Rochester Hills, Michigan, and was developbed by Troy, Michigan-based Robert B. Aikens & Associates. The center is anchored by a 120,000-square-foot Parisian and a 55,000-square-foot Food Emporium.

Another hot trend among the regional malls and closely associated communities is the long-term impact of lifestyle centers. The Village of Rochester Hills, which opened in late 2002 and is nearing its 1-year anniversary, continues to attract interest. Most retailers that are a part of the center report sales that exceed projections, according to Bruce Aikens, president of Robert B. Aikens & Associates, which developed the center.

In the final analysis, retail remains active in the greater Detroit market with strong absorption in most vacant boxes and strong community/neighborhood center development activity throughout the region.

Mark London is vice president and director of leasing for Southfield, Michigan-based Schostak Brothers & Company.

©2003 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.