Resilient. Evolved. Those are two ways to describe the retail sector. First the Internet was supposed to kill off brick-and-mortar retail. Then the pandemic was supposed to finish the job.
But what really happened? Retailers evolved. They focused on omnichannel strategies, relying on both online and in-store sales to generate business. And during the pandemic, they offered enhanced delivery options and curbside pick-up to stay afloat.
Today, the most successful of retailers are relying on many of the strategies they launched during the pandemic to thrive, even as they face staffing challenges and the continued threat of high inflation.
Retailers in the Detroit market are no different. Many are in expansion mode. Others are offering new products and services. And still others are entering this Michigan market for the first time.
We spoke to Tony Schmitt, principal in Mid-America Real Estate’s Bloomfield Hills, Michigan, office about the strength, and resilience, of the local retail sector. Here is some of what he had to say.
Can you give us a quick update on the strength of the retail sector in Detroit and its surrounding communities?
Tony Schmitt: Our activity is very strong. We had one of our most active years in retail in 2022 and continue to see the same activity so far in 2023. I am being cautiously optimistic. In the real estate world, we see a lot of ups and downs. We all experience that. But right now, we still see a lot of demand for retail space.
One of the interesting things about Detroit is that our market has never been overbuilt. Our vacancy rates for retail are low. We are waiting for the bankruptcies of some of the national players to happen to help create space for our clients who are looking to actively expand.
What about some of the strategies, such as enhanced delivery options and curbside pick-up, that retailers enacted during the height of the pandemic? Have those helped retailers today?
Schmitt: It’s really been a retail revolution. People used to talk about the retail apocalypse. But that didn’t happen. I’ve had to fight so many battles in terms of perception. The biggest is the negative impression so many people still have about Detroit. My goal is to educate people on the strength of the Detroit market and of Michigan in general. My other goal is to educate people about how resilient the retail sector has always been: Time and time again, it continues to evolve and adapt to meet the needs of consumers. Stores will close, but others will replace them.
We saw so much innovation with COVID. Restaurants focused on app-based ordering, with customers driving up and picking up food. Drive-throughs suddenly became the key thing for so many restaurants. Contactless ordering was very important during COVID. In-store pick-up became popular. Parking lot pick-ups became common. Retailers made the entire shopping experience easier. COVID accelerated these changes. It made them happen five to 10 years faster than we otherwise would have seen these changes happen.
Can you talk about the difference between urban and suburban retail in your market? Are retailers still coming into the center of Detroit, or are they focusing on the suburban areas?
Schmitt: Detroit is very much a suburban community. We have a market with 4.5 million people, and only 700,000 of them live in the city of Detroit. Our retail experience in the urban center is different than what you’ll typically see in other urban markets with bigger downtowns. Our urban core consists of office and food. We have more food destinations in downtown Detroit than we have retail destinations. There are chef-driven restaurants opening in downtown Detroit, but not as many soft-goods retailers.
In the suburbs, we have seen a growing influx of drive-through restaurants with app-based pick-up services. Places like Starbucks and Sweetgreen are all expanding in our suburbs. Some locations are shutting down their dining rooms and relying on drive-throughs. They can’t find enough workers to staff their dining rooms. That is one of the biggest issues facing retailers, specifically restaurants. Their sales are up, but they can’t find enough workers. Staffing issues have become very difficult.
I have one client who runs several sandwich shops. He is 20% below where he was pre-pandemic when it comes to staffing. He can’t get the people he needs to work in his restaurants.
What about the mini downtowns in Detroit’s suburban areas? Are they attracting a steady stream of new retailers?
Schmitt: The places like Starbucks are targeting our suburban downtowns. The retail centers in those locations are 100% leased. Their rents continue to go up. Those markets, our mini downtowns, continue to do quite well.
Can you talk a bit about the negative perception that many seem to have about Detroit? Is that changing?
Schmitt: For the most part? No. It’s not. Every time I get on a call with someone who is new to our market, they have worries about doing business in Detroit. It’s a perception that we have to live with. It’s been around since the ‘60s. The good thing, though, is that after all the stories documenting the city’s bankruptcy, we’ve had a run of positive press. People are focusing on the amazing amount of money that has been invested downtown. That’s a great story to tell. Dan Gilbert alone has invested about $4 billion in downtown Detroit. There is still a lot of work to be done. But there is momentum in downtown Detroit. I have retail clients now who want to stay downtown. That is a change.
People identify with Detroit. Everyone wants to see Detroit come back.
Is there much new construction taking place in the retail sector today?
Schmitt: It’s challenging to build new today. The construction costs are so high. The land costs were already high, and now constructions costs have risen even higher because of the pandemic and inflation. Then there are the supply chain issues. Some of our developers can’t get electric panels. HVAC equipment went on 9- to 12-month orders. It’s become hard to build anything new of any mass. Most of the development in the last couple of years has been smaller strip centers. A free-standing Starbucks can get built or a three- to four-tenant 5,000- to 10,000-square-foot strip center. That most of the building in retail that is happening today.
If you want to develop larger retail today, you need to have residential with it. The mixed-use projects are coming. One project just opened in Troy that we are finishing leasing out. We added food, a taco place and sushi restaurant, to a residential development with townhomes and condos. That development has done really well.
Have interest rates and inflation impacted retail demand in the Detroit market?
Schmitt: In our world? Not really. Our activity is driven by the strength of the retailers and their sales. People are still going out. Restaurants are still busy. People are still spending money. When retailers continue to see their numbers grow, they want to invest and grow. If there is a significant recession, then we’ll see a pullback in consumer spending. In terms of getting leases done and the demand for retail space, we haven’t seen much of a slowdown yet. I am cautiously optimistic today.