As in most major cities across the United States, Detroit is in the middle of a slight industrial sector slowdown. New construction starts are down in Detroit’s industrial market. Leasing activity has slowed.
Despite this, the brokers and developers working in this market say that Detroit’s industrial sector remains a resilient one, a sector that offers plenty of opportunities for investors and tenants.
These CRE professionals say, too, that better days are ahead for this sector. They expect new construction, leasing activity and investment sales to each increase in the coming months as developers and investors work through the challenges of an uncertain economy.
John Boyd, executive vice president and principal with Southfield, Michigan-based Signature Associates, said that the biggest challenge with investment sales in the Detroit market is the disconnect between the prices that sellers want for their industrial assets and the prices that investors are willing to spend.
This doesn’t mean that industrial sales aren’t happening in and around Detroit. Boyd said that deals are still happening, just not as many as during the industrial sector’s boom years in 2021 and 2022. Some of the industrial deals happening in the Detroit market are confidential, Boyd said, while others involve national REITs that are buying properties along the I-275 corridor. Local investors are also occasionally closing sale-leaseback deals.
“There are opportunities in the market,” Boyd said.
You can learn more about the Detroit industrial market by attending Midwest Real Estate News’ Detroit Industrial Real Estate Summit held Aug. 21 from 7:30 a.m. until 11 a.m. at The Community House in Birmingham, Michigan. Click here to sign up for the event.
Boyd said that rising construction costs have played a role in limiting investment sales. These higher costs have slowed new construction starts. There aren’t as many properties, then, for investors to buy. The demand among buyers for existing properties, especially those under 40,000 square feet, remains strong, Boyd said. But because of the lack of new supply, the cost of these smaller properties continues to rise, making it more difficult for many investors to afford such purchases.
Boyd said that properties of 10,000 to 20,000 square feet are selling for up to $100 or $120 a square foot.
“That is up significantly from the pre-pandemic days,” Boyd said. “It’s the basic economics of supply and demand. There is more demand than supply.”
Tariffs, and the uncertainty surrounding them, is also slowing industrial leasing activity in the Detroit market, a market that still relies heavily on the automotive industry. Boyd says that the suppliers working in the auto industry are hesitant to lease large swaths of space until they see the impact from tariffs.
Automakers also face challenges from a presidential administration that doesn’t seem as enamored with electric vehicles as past administrations.
“We are waiting to see the impact of EV policy decisions,” Boyd said. “This is causing significant heartburn with suppliers who geared up to meet the volumes of EV production anticipated by GM and Ford, volumes that did not happen. That is continuing to have an impact on Tier 2 and Tier 3 suppliers.”
Again, though, these challenges haven’t shut down all industrial activity in the Detroit market. Fisher Dynamics plans to build a 300,000-square-foot factory at the Former Eastland Center mall site in Harper Woods.
And in another big deal, Magna completed construction on a 285,000-square-foot EV seating plant in Auburn Hills, while Piston Automotive is building a 715,012-square-foot logistics center in Auburn Hills to supply GM’s EV Orion assembly plant.
On the positive side, the demand for data centers has continued to grow in the Detroit-area market, Boyd said. The state of Michigan still has a limited number of data centers. That is starting to change as the country’s appetite for these centers only grows.
Boyd said that he expects to see several announcements for new data centers throughout the state in the next six to 12 months.
“Overall, there is still good demand and absorption across the market,” Boyd said. “The market is normalizing slightly, but the demand for industrial space is still solid.”
What has to happen, though, to see an increase in new industrial construction in the Detroit market? Boyd said that vacancy rates need to fall again first.
This might happen sooner rather than later. Boyd said that he is working with several large users who are looking for 300,000 to 500,000 square feet. That type of property is limited today, and the rents on existing industrial properties of this size are increasing. This might eventually lead to a jump in new construction.
The Detroit market also faces a lack of quality land parcels suitable for industrial construction.
“There are build-to-suits going on,” Boyd said. “There will be infill projects. But I think the scarcity of good land parcels is contributing to the higher costs of existing industrial properties.”
