Remember those days before the COVID-19 pandemic? The commercial real estate market in Detroit – in both the city’s downtown and suburban markets – was in the middle of a sustained hot streak. Flash forward about two years to today: Detroit’s CRE market is regaining that 2019-era momentum.
This is in part because the Omicron variant of COVID-19 is starting to loosen its grip on the country. But it’s also because Detroit’s commercial real estate market did not collapse during even the worst days of the pandemic. Yes, commercial activity slowed and some sectors – such as retail and hospitality – were hit hard here.
But overall, Detroit’s CRE market has remained resilient throughout the pandemic. And now as hope again emerges that the worst days of the pandemic are over, commercial activity in Detroit again appears ready to soar.
Midwest Real Estate News spoke with Andrew Ledger, managing director of brokerage services with Farmington Hills, Michigan-based Friedman Real Estate, about the state of Detroit’s commercial real estate market. Ledger said that the forecast here is largely positive.
Let’s start with what has been the strongest commercial sector for a long time: industrial. How is industrial real estate performing in the Detroit market?
Andrew Ledger: That is the strongest commercial sector in the Detroit MSA. There is a pandemic-driven need for logistics locations. And it’s not just the Amazons of the world. The bigger retail players are now opening logistics facilities. Retailers like Target are opening locations with smaller footprints. They don’t have the need to carry that much inventory in-house. These retailers, then, are driving the need for more logistics facilities. They need more places to store their inventory so that they can get it to their retail locations more quickly.
When you look back at Detroit, it’s typically not been a spec industrial market. Very rarely do you see spec industrial buildings here. Our rental rates were not growing at a rate that justified new construction costs if you did not have tenants in tow. We have seen that change in the last 18 months. We are now seeing more spec industrial, and that’s something I think we will continue to see in 2022 and 2023.
That is a pretty big change for the industrial market in Detroit.
Ledger: Take, for example, Assembly Park in Wixom, Michigan. It used to be an old auto-manufacturing facility. A developer bought it and is now putting industrial buildings on the site. It is almost 100 percent pre-leased. The rents in our industrial market have climbed from $6 to $7 a square foot now up to $9, $10 and in some instances $11 or $12 a square foot. Because our industrial rents are rising, spec development is justified.
The industrial vacancy rates are so low. There is not enough product. Users need more product here. I tell my brokers, if you can get industrial-zoned land, list it. If you can list industrial buildings even if they are functionally obsolete with low ceiling heights, still list the buildings because the zoning is already in place. Someone will come in and demolish and retrofit the buildings to meet their needs.
Industrial-zoned land in good locations trades rapidly. Industrial buildings trade rapidly and for prices that continue to increase.
How is the retail sector doing? That sector has been hit far harder by the pandemic.
Ledger: Everyone thought retail would die. We didn’t see that in Detroit. Those retailers who were able to adapt during COVID got even stronger. Those that were weak prior to COVID saw their demise accelerate during the pandemic.
We have not seen a drastic increase in retail rental rates last year, and we don’t expect to see that in Detroit in 2022. Bu the demise of retail as predicted in 2020 hasn’t played out as we move into 2022.
The office sector has obviously been hit hard by the pandemic. How is this sector performing in Detroit?
Ledger: The new variant that came out around the holiday season has forced office tenants to postpone their return-to-office decisions again. Companies still have to determine if they are bringing back their workforce and in what capacity. Are they bringing them back full-time or hybrid? And what will that do to the amount of square footage that they need?
There are some opportunities, though. Some office tenants have been very proactive. They understand that office rents have dropped for both urban and suburban assets. If their leases are up, they are considering a move to a higher-quality office space that they can lease at a lower rate. They can move from a C-class building to an A-class space that is fully amenitized at a lesser cost than they would have been able to get before the pandemic.
What worries me more is the B-class and C-class office spaces. What happens with them? With rental compression, why should an office tenant move into those properties?
How about the multifamily market? That’s been a strong market across the country even during the pandemic. Is it still doing well in the Detroit market?
Ledger: First-time homebuyers are often priced out of single-family homes today because their prices are rising so quickly. Because of this, many are turning to apartments when otherwise they might have looked to buy a single-family home. The demand for multifamily, because of this, is not going away. Occupancy rates are so high. And because rents are going up, the income for owners is rising, too.
Before the pandemic, downtown Detroit was on a hot streak with plenty of CRE activity. What is happening downtown now?
Ledger: I won’t say downtown Detroit is suffering. But it has lost a little bit of the momentum that was happening before COVID. That’s through no fault of the property owners. It’s the nature of what has happened with the pandemic. But downtown, while activity has slowed, is not suffering.
How about in the suburban areas? Are renters seeking out multifamily properties in suburban Detroit?
Ledger: During the start of the pandemic, people were trapped in their residences. A lot of them figured that if they were going to be in their residences and maybe working from home on a longer-term basis, they wanted as much room as possible. That extra space is easier to provide in the suburbs than it is in a high-rise apartment development in an urban setting.
It’s important to realize, too, that in Detroit, the suburbs are closer to downtown. You can get to the city of Detroit from the suburbs without too much hassle. You can rent in the suburbs and easily get to the museums, sporting events, restaurants and all the other activities of downtown. Living in the suburbs is not a detriment to getting to downtown Detroit.
What type of amenities are renters looking for today from modern apartment spaces?
Ledger: They want a lot of storage and they want open space. They want pools. Bike storage is important. They want other types of outdoor activities.
What do you see for the rest of 2022 in the Detroit CRE market?
Ledger: It’s important to be an optimist but also a realist. The fundamentals are there for increased activity. These office tenants are making some decisions now. There is opportunity out there. Some tenants might downsize and others might upsize. Retailers and restaurants are open. People want to get out. They want to socialize again.
You can never predict what might happen that is out of your control. Maybe the stock market will crash. We might get another variant. We don’t know. But as long as we continue on the right path, I’m optimistic that we will see positive growth in Detroit.