Remember 2019? That’s when downtown Detroit was in the middle of a revitalization period. It was when investors were sinking their dollars into this oft-maligned Midwest city.
The year 2020 looked to be another strong year for Detroit’s commercial real estate market. Then the COVID-19 pandemic hit. And like the rest of the country, Detroit’s commercial market went in pause mode.
Today? Things are looking strong again in Detroit. Midwest Real Estate News spoke to three local CRE pros – David Wilkins, managing director in the Bloomfield Hills, Michigan, office of Walker & Dunlop; Charlie Krisfalusi, director in the Bloomfield Hills office of Walker & Dunlop; and Jared Friedman, managing director in the Farmington Hills, Michigan, office of Friedman Real Estate — about what they expect to see in Detroit’s CRE market as 2021 turns to 2022.
How has the multifamily market in Detroit performed during the COVID-19 pandemic? Has it been resilient?
David Wilkins: In general, what has happened with our market here has not been unique to what most of the country has experienced. In the spring of 2020, those early months of March, April, May and June, we were on our phones with our CFOs asking them how thing were going, how collections were holding up.
It was a bit like the movie WarGames. You think everyone is getting blown up everywhere else even though it seems like things are going OK in your own little shelter. Then you hear from the outposts that they are doing OK, too. That is what that first spring felt like. We were all waiting for this disaster, but we were all reporting that we were OK. We were all stabilized.
Then into the summer of 2020, there was a bit of a pause in the market. No one was raising rents. It was all about maintaining occupancy as we were still getting our footing in those earlier months of COVID. We came into the fall and it was a little bit of disbelief, but we saw that we had made it through in the multifamily market. Occupancy and tenancy had held. Rents held. And we were seeing increased demand for apartment units. People had been locked up in their parents’ homes. They were ready to get out on their own. As demand rose in the fall, that started to result in rent increases.
Have those positive trends continued?
Wilkins: We are still seeing those rent increases. We are till seeing demand at a very high level. I spoke to a local appraiser recently and he told me he was shocked that multifamily rents aren’t increasing by an even higher level.
Charlie Krisfalusi: Part of the reason why rents aren’t rising even higher is that we had a bit of a rent pause during COVID. There were no rental increases during the earlier months of the pandemic. Now it is almost like the market is in a catch-up mode. We all tend to have short memories. We were just at a conference and people were wondering why rents weren’t increasing at a faster pace. It’s like they forgot that we are still playing catch-up. There is only so much of an increase that renters can take all at once. It is going to take time.
Wilkins: We think demand will remain strong for multifamily units in Detroit because we haven’t added that many new apartment units since the Great Recession. The number of units we’ve added each year has been in the hundreds, which isn’t that much. We haven’t added to our supply greatly, so we can withstand a little more pressure. Absorption has always been very good. The newest product coming out is getting absorbed at record rates. There is certainly a demand for newer, more recently rehabbed products.
Before the pandemic, we wrote a lot about people wanting to rent in urban apartment buildings. That trend slowed during the pandemic. Are you seeing people moving back to the urban areas of Detroit now?
Wilkins: Like the whole country, Detroit went through an urbanization in the last 10 years. People wanted to live in an urban area, so we tried to add a lot of apartment units. The actual completion of units was in the hundreds each year, though. We went from decades of no building to adding 100 units a year. So even as we added units, they were absorbed quickly. So we don’t have a lot of empty apartment space in our urban areas.
Krisfalusi:Just last weekend, I had a friend in from out of town. It was interesting to watch the consumer side of this. Detroit still has low vacancies in its urban apartments. There are few units available. As my friend was looking, he saw that a lot of two-bedroom units were available even during the push toward urban areas. The studios are the ones that are hard to find. A lot of people are having to consider two-bedroom units, and those rents can be high.
There has been a lot of talk about people running out to the suburbs, and it’s true that those suburban markets have rental increases. But those increases haven’t come at the detriment of the urban multifamily market. The challenges to the urban market in Detroit are factors like the short supply of studios and the fact that we don’t have the schools in the city of Detroit itself to keep people in downtown longer. Parking is expensive. There aren’t many grocery stores in downtown. There are certain aspects of our Midwest lifestyle that haven’t gotten to downtown Detroit yet. People live here when they are younger, but then have to move out as they get older and want to start families.
How about affordable multifamily housing? Many Midwest markets are struggling with a lack of apartment units that are affordable to lower-income residents. Are you seeing that in Detroit, too?
Krisfalusi: David and I are passionate about affordable housing, the true affordable housing. What we have found is that too often, companies just develop smaller units and then claim that those units are affordable. The smaller the unit, the lower the rent. But it is still a high rent-per-square-foot situation. There is always a need for true affordable housing. There is a huge shortage of that everywhere in the country. There is only a small portion of affordable units in our market for people to choose from.
Wilkins: To give credit where it is due, the administration in Detroit has brought in skilled people to look at preserving what affordable housing stock we do have. Keeping that stock is just as important as building new affordable units. We don’t want to lose Section 8 and heavily subsidized properties. There are cities like Ann Arbor and Detroit that are working hard to be creative and create public-private partnerships to bring about more affordable housing. That is incredibly important.
Do you think we’ll see developers increasing the amount of multifamily units they add to the Detroit market each year?
Wilkins: No. I think the stock will continue to grow at the rate it has been. We have a healthy flow of new units into the market, but it hasn’t been so many new units that we can’t absorb them. In general, developers will continue to build in the city, but at our typical measured pace. They do have to deal with the challenges you face in an urban environment, too. Not every outdated office building makes for a good apartment building.
Detroit had decades of disinvestment. It will take decades of reinvestment to get us to the levels of some of the other big urban areas. But we are doing it. The city has had a solid foundation post-bankruptcy. It is fiscally sound. We have the ability now to invest in streetlights, police, firefighters and all the things that are important benefits to citizens and to making healthy communities.
Why do you think multifamily has been so solid throughout the pandemic?
Wilkins: If you have a pandemic, you need a home. You need a place to stay and be safe. We had work-from-home. People realized just how important their homes were. This pandemic was ideally suited to reminding people of how important their homes are.
Krisfalusi: Even during the Great Recession, renters were paying their rents on time. The resilience of multifamily is not a secret anymore. This asset class has always been a desirable one. COVID made it that much more visible to investors.
Jared Friedman, managing director with Friedman Real Estate, agrees with Krisfalusi and Wilkins that most of the asset classes in Detroit’s commercial real estate market have remained steady during the pandemic.
Here is some of what Friedman had to say about the performance of the commercial real estate market as a whole in Detroit and its surrounding communities.
How has Detroit’s commercial real estate market fared so far during the pandemic?
Jared Friedman: Historically, hiccups in the economy really affected Detroit. The auto industry for so many years was in really bad shape, for instance, and that led to fewer car purchases. COVID was one of those things that changed all industries, including the auto industry. For the first time in 20-plus years, an economic recession actually didn’t affect Detroit in a negative way but in a positive way. Electronic and autonomous vehicles are becoming so important today. Tech companies are coming to Michigan. They are investing in the auto industry.
Because of how strong the auto industry has been, we are seeing signs of positivity in certain commercial sectors. A lot of companies based in Michigan are doing well. And that has had a positive impact on the commercial real estate industry.
Let’s talk about the industrial market. Industrial has been thriving since the start of the pandemic. Has that been the same in Detroit?
Friedman: The industrial market has been great here. Logistics and distribution has seen a massive surge in demand. Our market for those products is extremely strong. Historically, we have not been much of a distribution and logistics market. For the first time, a lot of logistics companies, led by Amazon, have taken space here. Companies in need of last-mile delivery are building distribution facilities to get product to their customers in less time.
The auto manufacturing business is extremely strong, too. We are pumping out cars, and not only gas-powered vehicles but electric vehicles, too. Both sectors – oil- and gas-powered and electric vehicles – are a strength. That is helping the industrial market here, too. With the supply chain shortages, auto companies are looking at onshoring a lot of their production. That will be a benefit for our market going forward.
How important is the electric vehicle market to Detroit?
Friedman: The electric vehicle market is a huge growth area for Detroit. The entire market only accounts for 3 percent to 5 percent of vehicles. So there’s a long way for this market to go. The research and development part of this market is thriving. Car companies are dedicated to it. They think that this is the wave of the future. The way you manufacture and build an electric vehicle is totally different from a gas vehicle. An engine for an electric vehicle takes less than 50 parts. It is really changing the dynamic of the auto industry is a positive way, and this is only going to benefit Detroit.
You mentioned last-mile delivery. Is the need for this only going to get stronger?
Friedman: Yes. From a pragmatic standpoint, more and more people are ordering online. We will need more logistics space and last-mile delivery. A lot of people focus on customers ordering goods online. But they forget about the other end of the transaction. Returns are a huge part of the equation. How do they put that product back in the supply chain and back where I want it to go? The returns matter, too.
What’s interesting today is that ecommerce companies are trying to figure out physical retail. They are determining if they need physical spaces or if they need physical locations that their customers can use when returning products. If you go on Amazon, order something and want to return it, Amazon will sometimes give you a refund and tell you to keep the product because the cost of shipping it and returning it is more expensive than letting you keep it. A lot of retailers need to figure out what they need for their total footprint. Amazon is opening physical locations. This trend will continue to force retailers to optimize their omnichannel approaches.
How about the office market? I know office markets are facing uncertainty today. What is the office sector like in Detroit?
Friedman: Companies are bringing workers back, but they’re doing it at a slower pace than I would have thought. We are almost two years into COVID and companies are not fully bringing their workers back. Because of this, we are seeing negative net absorption across the Detroit MSA, just like the rest of the country is seeing. The pace of that negative net absorption, though, is starting to slow. We are seeing some positive momentum.
The office market here is just like what we see in the rest of the country. There is a lot of uncertainty coming out of COVID. Today, if you’re an owner, you need to have the best buildings in the best submarkets to attract tenants. Quite frankly, lesser-quality buildings in lesser locations are not getting leased. They are not as much in demand.
The work-from-home trend is here to stay. It won’t be a full work-from-home, but a certain percentage of companies will go with a hybrid approach. That will have a big impact on the office market.
Before the pandemic, there was a lot of momentum in downtown Detroit. Has the pandemic changed that?
Friedman: A lot of the momentum in downtown Detroit was driven by Dan Gilbert before the pandemic. The wind has been taken out of those sails a bit because of the pandemic. Gilbert is not as big of a driving force downtown. Some other players are stepping up. Ford Motor Company is transforming the old train station in the Corktown neighborhood. The University of Michigan will be announcing something shortly in downtown. You are seeing some other players stepping up. But we used to have hockey-stick growth in downtown. Now the growth has normalized out to a slow and steady pace. That is probably good. Detroit and downtown is still in a positive direction.
