Uncertainty. That’s what the Detroit commercial real estate market faces today as the United States deals with another rise in COVID-19 cases thanks to the Delta variant.
Of course, that doesn’t make Detroit unusual. The entire country is facing the same uncertainty as it waits for this current wave of the pandemic to subside.
Andy Gutman, president of Southfield, Michigan-based Farbman Group, points to this uncertainty when he refers to the Detroit commercial real estate market as being “interesting” today.
“We are not on solid footing yet where people know what the future is going to look like,” Gutman said. “The rise in COVID cases, mostly hitting people who are not vaccinated, puts a level of uncertainty in every industry right now. We were hoping we would have been able to shake this by now and be certain of where we were headed. It’s nice to hear that we are not going back to quarantine, but the idea of everyone having to wear a mask again could slow the return of commerce.”
But even with this uncertainty, commercial real estate professionals working in the Detroit market say that the future remains bright in this city. Before COVID-19 hit, Detroit’s commercial real estate market was in the middle of a hot streak, with investors sinking dollars into the city’s downtown.
And when the pandemic does recede again? These CRE pros say that this momentum will return and only grow stronger.
Dennis Bernard, founder of Southfield, Michigan-based Bernard Financial Group, has long believed in Detroit, even before the city’s downtown began to attract an ever-increasing share of investment dollars.
And, yes, the COVID-19 pandemic did slow some of the momentum that downtown Detroit has seen. But Bernard said that he is already seeing signs of that pre-pandemic momentum returning to the heart of the city.
“Detroit has been surprisingly resilient since the start of the pandemic,” Bernard said. “Maybe we were right. Maybe Detroit after 50 years really is back. It’s hard to tell if your own self-promotion is true. But seeing how resilient the city has been during these tough times? It seems that our belief in the city was appropriate.”
Different sectors, different results
The pandemic has hit different commercial sectors in different ways. Not surprisingly, Detroit’s industrial market remains hot. The pandemic has encouraged more people to shop online. This has convinced companies to open more warehouses and distribution centers across the country.
This trend has benefited the Detroit market.
“Industrial is still a very hot product,” Gutman said. “I see no letup on that. I see more spec industrial product coming in Michigan and the Midwest. I see more industrial development in general to accommodate the growing demand. There will be no letup in the demand for new product anytime soon.”
But more surprisingly, Gutman sees positives in the Detroit-area hospitality sector, too. Hotels, of course, have been hard hit during the pandemic. Fortunately, leisure travel is starting to return. Business travel and convention business, though, continues to lag.
Gutman travels frequently for his job. He said that every flight he has taken recently has been full. That gives him hope for the hospitality sector.
“I am seeing a lot of people traveling again for business and for pleasure,” he said. “Some of that slows down, though, as you get to more of the hotspot areas, the COVID-related hotspots.”
The multifamily market has remained strong during the pandemic. But this doesn’t mean that landlords and owners don’t face challenges. The U.S. Centers for Disease Control and Prevention in early August issued a new moratorium on evictions.
This ban is more targeted than the first federal eviction ban, applying only to areas of the county with high or substantial transmission of COVID-19 and will last until Oct. 3.
This eviction ban, though, could bring financial pain to owners whose tenants are not paying their monthly rents.
“The eviction question is a very delicate one,” Gutman said. “The wrong move one way or the other could start to tumble some of those owners who are struggling. The investment in apartments, though, is still incredibly strong. Our investment sales team has a lot of buyers waiting to get into that sector. There just isn’t enough product to sell or the product that is available is going at cap rates that none of us would recommend buying at.”
Resiliency
One of the reasons for the resiliency of downtown Detroit’s commercial real estate market? Bernard said that downtown Detroit was not overbuilt, even during its recent hot streak. There hasn’t been an overabundance of new office and multifamily buildings built when compared with the demand for them.
This is true of downtown Detroit’s hotel market, too. There isn’t a surplus of hotel rooms in downtown Detroit. Far from it. As Bernard says, the demand for hotel rooms in the city far outpaces the supply.
That has helped even the hotel market here during the pandemic, a sector that COVID-19 has devastated in most cities.
Bernard said that his company is financing two hotels in Detroit that have maturing mortgages. Bernard Financial is also providing financing for the construction of a new hotel in the city.
“If you had told me six months ago that we’d be providing this financing, I would have said ‘No way,’” Bernard said.
This begs the big question: Will people return to living in downtown Detroit after the restaurants and bars open and companies ask their employees to return to the office?
Bernard said some people won’t. After they moved from downtown Detroit, they sank their money into single-family homes. As Bernard says, COVID-19 was actually great for the single-family housing market.
“Some of the people who were downtown aren’t going to come back,” Bernard said. “Some moved out to the suburbs and other cities. But we will see other people come back, especially when the office starts to repopulate in September and October. People coming back to the offices will make people want to live in downtown again.”
And the eye test? Bernard says that he is already seeing more activity in downtown Detroit.
“During the height of the pandemic, it was a ghost town downtown,” Bernard said. “You saw tumbleweeds rolling down Woodward Avenue. Now that is changing. We got very lucky. Everyone was worried about what would happen to Detroit during this. But there had been a lot of caution before the pandemic when it comes to building. We weren’t overbuilt. We don’t have a lot of spec buildings. We have been able to absorb what we created.”
Retail challenges
Then there is retail. This sector has been hit particularly hard by COVID-19, too. Gutman called retail in Detroit a mixed bag.
He pointed to indoor malls. These were struggling before COVID hit and are struggling even more today, he said. But experiential retail, after a lull during the height of the pandemic, is now thriving, Gutman said.
“People want to get together and have a good experience that they can share,” he said. “But you have to be very careful when investing in retail today.”
Part of the reason for this caution? The labor shortage. It is becoming increasingly difficult for retailers in Detroit and across the country to find workers.
“You are seeing more retailers close not because they don’t have enough business but because they can’t staff their businesses,” Gutman said. “Or you are seeing businesses reduce their operating hours because they don’t have enough staffers for a full day of business.”
Gutman points to a Starbucks near his office. Every day before work, he’d grab of coffee there. That was when the coffee shop opened at 6 a.m. Now the Starbucks has changed its hours because of a lack of staffers. The coffee shop opens later in the day and closes earlier.
“And that’s Starbucks, a place that everyone goes to,” Gutman said. “Who benefits from this? The DoorDashes and Gurbhubs of the world. This is changing the dynamic of how we eat and get our food. This is a struggle that the retail industry faces. It’s not always a lack of demand. It’s often a lack of help.”
The office market in flux
As in most other cities, the office sector in Detroit came to a standstill during the pandemic. Only recently have companies begun bringing workers back into the office. And this might slow again if the Delta variant continues to send COVID cases on an upswing.
Gutman, though, said that he doubts many companies will go fully remote. And that’s good news for the future of the office sector.
“I firmly believe that you need a company culture. And you need people in the office for that to happen,” Gutman said. “The workspace that some companies need might even expand. No one wants to be on top of each other today. At the same time, if more people are allowed to work from home, other companies might not need as much space. I think this will balance out. A year from now, I think it will become a neutral decision for most. The need to give employees more space and the ability of more employees to work part of the time from home will balance each other out. I think companies will still need about the same amount of office space as they always have.”
A return to downtown?
Gutman said that Detroit has fared better than many other Midwest cities during the pandemic. The city had the good fortunate of seeing billions of dollars in private investments poured into it before the crisis, he said.
Today, people are returning to downtown Detroit, Gutman said. He cited the first Detroit Tigers game he had attended this summer. A big crowd of 31,000 fans was in attendance. That gave Gutman hope for the near future of downtown Detroit.
“The bars are busy again. The restaurants are busy again,” Gutman said. “It’s not 100 percent back. But when you walk down the street, it is active. It’s nice to see this as a Detroiter. A decade ago, downtown Detroit still had a stigma to it. For a long time we were telling people that the city was turning around. I believe it has now turned around. We still have a lot of work to do, but Detroit is an amazing city.”