Land of Opportunity
With the outbreak of the COVID-19 pandemic last March, Gov. Gretchen Whitmer issued Executive Order 2020-21 directing all “Michigan businesses and operations to temporarily suspend in-person operations that are not necessary to sustain or protect life.” The downside of the order reverberated throughout the state’s economy, resulting in bankruptcies, a sharp runup in unemployment filings, an exodus from offices and schools, and a resulting patchwork of dozens of controversial and conflicting regulations.
Even as restaurants, hotels, movie theaters, and offices were allowed to open following Memorial Day, with tight limits on capacity, another Whitmer order prior to Thanksgiving closed bars and eateries across the state. The order was lifted on Feb. 1.
In neighboring Ohio, however, bars and restaurants remained open, albeit with capacity and safety restrictions. With predictions of a local recovery ranging from months to years, the Michigan Restaurant and Lodging Association in Lansing reported the state’s hospitality industry is “on the brink of irreconcilable damage.”
Prior to the pandemic, and to a certain extent during and after, industrial and commercial real estate developers in southeast Michigan were in clover, attracting attention from diverse corners of the economy.
“Before COVID-19, everything was going gangbusters. We had an incredibly hot industrial market,” says Paul Choukourian, executive managing director and market leader at Colliers International, a multinational commercial real estate services firm that has offices in Southfield and Birmingham. “It had probably been eight years of steady absorption and growth in office (space). Retail was doing very well. You had restaurants popping up, and 2020 was looking to be the best year ever.”
At the turn of the new year, metro Detroit’s industrial sector, particularly quality warehousing and distribution properties, remained somewhat stable. The total direct vacancy rate was 4.3 percent in the fourth quarter while the average asking lease rate was $6.56 per square foot, according to Colliers. Compare this to 3.6 percent and $6.28 in the first quarter of 2020. Specifically, warehouse and flex/R&D vacancies in the fourth quarter stood at 4.1 percent and 7.5 percent respectively. While those numbers are some of the best ever seen, they largely reflect a supply shortage at a time of growing demand for industrial space.
Hawthorne Gardening, a subsidiary of the Scotts Miracle-Gro Company based in Vancouver, Wash., and a wholesale distributor of nutrients, soil, growing media, and lighting for the hydroponic gardening and cannabis industries, doubled its space in November when it moved from Wixom to a 250,000-square-foot facility in Romulus to keep up with growing demand for its products.
“Michigan is one of the top states in the nation for hydroponic sales and use, and it’s our No. 3 state for profitability,” says Tyler Sullivan, Hawthorne’s marketing coordinator. “Detroit has 70 percent of the hydroponic retail outlets in the state. The cannabis market (recreational sales were launched in December 2019) drives our company.”
Kroger, the country’s largest grocery chain, announced last September it had selected Romulus as the location for an automated warehouse fulfillment center with digital and robotic capabilities. The 135,000-square-foot facility, which will support customers in Michigan, Ohio, and Indiana, is expected to open in 2022 and create 250 new jobs. Set in the Detroit Region Aerotropolis, a commercial development zone, the project replaces two nearby distribution facilities and is being driven by “growing demand for grocery e-commerce services,” says Robert Clark, Kroger’s senior vice president of supply chain, manufacturing, and sourcing.
Distribution and logistics enterprises located within multimodal zones like the Detroit Region Aerotropolis in southern Wayne County — offering close access to airports, freeways, railways, and shipping — are an answer to global demand for e-commerce and cargo services.
Consider that in November, the Detroit Brownfield Redevelopment Authority approved a project south of the Coleman A. Young International Airport that will support the demolition of the former Cadillac Stamping Plant site near Connor and Gratiot avenues. In its place will be a nearly 700,000-square-foot industrial/manufacturing facility targeted toward one or multiple tenants, including automotive suppliers and advanced production and log-
Other demand-generators beyond e-commerce are expected for R&D space. Last summer, Michigan sought to attract more tech facilities with a first-of-its-kind connected and autonomous vehicle corridor. The project envisions connecting downtown Detroit and Ann Arbor along Michigan Avenue and Interstate 94 with an infrastructure allowing for two dedicated lanes (going in opposite directions) for connected and autonomous transit, freight, and personal vehicles.
Put it all together, and the region’s high-profile marquee projects and others that fly relatively low under the radar add heft to Detroit’s standing as an industrial heavyweight.
Another benefit of the industrial expansion tackles what past growth cycles couldn’t handle — namely, remediation of the leftover factories from the Arsenal of Democracy that helped win World War II. To meet the demand for tanks, planes, trucks, munitions, and more, factories built on the outskirts of town were quickly surrounded by neighborhoods.
When the need for war supplies plummeted following the victory overseas, many industrial facilities were vacated. As the economy improved in 1950, people began moving to the suburbs to be free of empty manufacturing and production plants that could be accessed by curious children. The migration impacted an urban landscape that had marked Detroit since its founding.
Consider: Michigan Central Station helped power southwest Detroit when it opened in 1913, but in 1988, falling demand for rail service brought forward the city’s version of a haunted mansion. With the passage of time portending a future demolition, Bill Ford, executive chairman of Ford Motor Co. and a great-grandson of company founder Henry Ford (who used the train station regularly during his lifetime), set in motion a new direction. His decision also underscored why it pays to get out of the office from time to time.
After pondering the possibilities of a forlorn structure with all of its windows knocked out, Ford was inspired with a vision for a mobility-centered district anchored by the train station. In June 2018, he announced in front of the entrance doors to the monolith his plans for what will become a 30-acre campus serving as an “innovation hub for innovators, startups, entrepreneurs, and other partners from around the world to develop, test, and launch new mobility solutions on real-world streets, in real-world situations.” The $744-million project will house some 5,000 employees in the first half of 2023 — half from the automaker, with the rest made up of mobility, logistics, robotics, and autonomous teams.
Ford is also pumping $700 million into the construction of the Rouge Electric Vehicle Center in Dearborn, to build an all-electric F-150 pickup by mid-2022. The neighboring Ford Rouge Center, where the F-150 has long been produced, along with the forthcoming F-150 PowerBoost hybrid, also benefit from the capital infusion. In turn, the automaker is spending $750 million and creating 2,700 jobs at its Michigan Assembly Plant in Wayne, which currently produces the redesigned Ford Ranger pickup and has started building three new Ford Bronco models. Part of the plant space will be dedicated to autonomous vehicles. The automaker is also spending $2 billion to redo its Research and Engineering Center in Dearborn.
Not to be outdone, in January 2020 General Motors Co. announced a $2.2 billion investment to convert its Detroit-Hamtramck assembly plant, rechristened Factory Zero, into its first fully dedicated electric vehicle production facility. The plant will produce a number of all-electric trucks and SUVs on GM’s Ultium battery platform, including the GMC Hummer pickup, which begins production later this year. It will be followed by the Cruise Origin, a shared, electric, self-driving vehicle designed by GM’s Cruise subsidiary in San Francisco.
To make it all work, GM announced late last year it’s partnering with Verizon Business to install dedicated 5G fixed mobile network technology at Factory Zero to help manage systems and equipment in the plant that rely on connectivity, such as robotics and automated assembly lines. “Much of the future of the automotive industry is going to be determined, and developed, right here in metro Detroit,” says Mark Reuss, president of General Motors.
Rounding out the Big Three, Fiat Chrysler Automobiles (now part of Stellantis) announced in 2019 a total investment of $4.1 billion through 2021 in five existing Michigan plants that’s expected to create nearly 6,500 new jobs. The company is spending $1.6 billion to convert the two plants comprising the Mack Avenue Engine Complex into the Detroit Assembly Complex – Mack, which will build the next-generation Jeep Grand Cherokee and an all-new three-row, full-size Jeep SUV and plug-in hybrid models. The plant is the first auto assembly plant to be built within Detroit city limits in 30 years, and is expected to open this spring.
Next door, the company is investing $900 million in the Jefferson North assembly plant, to ready the facility to build the Dodge Durango and the current Jeep Grand Cherokee. Once the latter vehicle is redesigned, it will be produced at Jefferson North, as well.
FCA’s expenditures also extend to the suburbs at the Warren Truck, Warren Stamping, and Sterling Stamping plants. Based largely on FCA’s outlays, Detroit was selected as the No. 1 U.S. metropolitan area for foreign direct investment in 2020 by Site Selection magazine.
Apart from the automotive industry, multinational firms have been setting up shop in the region. A decade ago, Amazon was barely on the map. Today, the e-commerce giant has 13 locations in Michigan and nine in metro Detroit, including four fulfillment centers (Romulus, Brownstown Township, Livonia, and Shelby Township), along with five delivery stations (Hazel Park, Sterling Heights, Romulus, Wixom, and Pontiac) where packages are sorted and loaded onto vehicles for delivery. Amazon also has two delivery stations and one fulfillment center in Grand Rapids, and a delivery station in Lansing.
The company’s Pontiac delivery station, located on the grounds of the former Pontiac Silverdome, has been in operation since last September. A fulfillment center where some employees will work alongside robots to pick, pack, and ship small items is under construction next door and is expected to open later this year. Both facilities together comprise 3.2 million square feet of space.
More growth arrived with a 6-2 vote in October, when the Detroit City Council approved the $16-million sale of the former Michigan State Fairgrounds at 8 Mile Road and Woodward Avenue to real estate developers and investors Hillwood Investment Properties and Sterling Group, which intend to build an Amazon fulfillment center and replace a DDOT transit center. Officials say the entire project is expected to create 1,200 jobs.
Even longtime office and retail players are jumping into the industrial market. Bedrock, the real estate group led by Dan Gilbert, founder and chairman of Rocket Cos., is moving forward on the redevelopment of the former Sakthi Industrial Campus along West Fort Street. The nearly 37-acre project includes approximately 529,000 square feet of industrial and manufacturing space, 89,000 square feet of office and flex space, and more than 10 acres of land suitable for development. The property is strategically located four miles west of downtown Detroit, adjacent and to the north of the Norfolk Southern Rail Line, and near the future Gordie Howe International Bridge U.S. Port of Entry (2024 planned opening).
Meanwhile, in the heart of Detroit’s central business district, Bedrock is building a skyscraper on the site of the former Hudson’s department store at Woodward and Gratiot. The project, which broke ground in December 2017 and was to be the tallest building in Michigan until plans for an observation deck were scrapped last year, will comprise some 1.5 million square feet of space. Plans call for 400,000 square feet of offices, 225,000 square feet of residential space, 127,000 square feet allotted to event and meeting areas, and 285,000 square feet for a yet-to-be named hotel. Some 74,000 square feet of space is planned for retail and restaurant spaces, a food court, and outdoor gathering areas. Completion is slated for 2023.
“In the past year we’ve made significant steps in the continued construction of the Hudson’s site,” says Joe Guziewicz, Bedrock’s vice president of construction. “In July, two cranes were delivered that allowed us to finalize work (underground) and prepare for vertical construction of both the tower and base. In December, we began a street-level concrete pour — a milestone that provided the first view of construction from the sidewalk. As we move into 2021, you’ll begin to see additional above-ground construction of the cores and steel structures for both the block and tower buildings.”
Moving north to Oakland County, demolition at the 110-acre site of the Palace of Auburn Hills, the former home of the Detroit Pistons, was recently completed, setting the stage for an injection of up to 1.6 million square feet of prime commercial space into the market over the next several years. The Pistons organization sold the property in 2019 to a joint venture involving team owner Tom Gores and Schostak Brothers and Co. in Livonia. Terms of the sale were not disclosed.
“The plan for that development is really corporate headquarters, office, R&D, light industrial, or any combination of those things,” says Jeffrey Schostak, president of Schostak Development. “It’s true that pure office deals are slower right now, but this market is still extremely tight. If you’re just a regular office user you can find space anywhere, but if you’re a flex user with a need for office, R&D, light manufacturing, and some assembly component, you really don’t have a plethora of existing buildings out there. COVID-19 clearly threw a wrench in our plans for 2020 for that development, but from what we’re hearing from the folks we’re talking to, there is activity out there.”
Schostak says he’s been speaking almost exclusively with large foreign firms that either have an existing presence in the Detroit area or are looking to relocate an R&D center here to support the auto industry. “We’ll hopefully be announcing a deal or two on the property in 2021,” Schostak says. “Ideally the first deal is one large user that would go likely on the southern half of the site, then we’d build north toward Harmon Road.”
One sign of confidence in the region’s industrial prospects is the number of projects being built with no tenant-in-waiting. “Almost everything we do is on spec,” says Susan Harvey, senior vice president of Ashley Capital, a commercial real estate investment company with offices in Detroit, New York, Atlanta, and Chicago. “Out of our 21-million-square-foot Michigan portfolio, 95 percent (was built) on spec.”
The transformation of the old Hazel Park Raceway into the 2-million-square-foot Tri-County Commerce Center is one of Ashley Capital’s spec projects. “The third building in the complex will be ready for occupancy in March 2021 and that will complete the site,” Harvey says. “We’re negotiating leases in that building for about 550,000 square feet, and they’re almost out for signature.” In addition, two Ashley Capital properties totaling 930,000 square feet of space recently opened in Van Buren Township.
Harvey says Ashley Capital’s spec buildings are generally classified as bulk warehousing and distribution, but can also be adapted to light manufacturing. They’re typically designed to be “30 feet to 36 feet clear” — the height to which products can be stored on racking. This feature is a welcome change to the designs of the 1970s, when many Detroit-area warehouses were built, as it allows a more efficient footprint. “We also like to offer wide column spacing, and as many dock doors and outside trailer staging areas as the building design will allow,” Harvey says.
Ashley Capital’s local portfolio is 75 percent automotive-related, but a recent medical deal — and ever-aging baby boomers — could herald the dawn of a new industry sector in health care. Indeed, a research report by real estate service and investment firm CBRE forecasts that if President Joe Biden’s platform calling for $5.4 trillion in additional spending over 10 years is enacted, expanded health insurance coverage likely will drive demand for medical space closer to the consumer and spur the conversion of some retail space.
In addition, concerns over medical supplies from China, due to shortages that developed during the outbreak of COVID-19, are driving more spending in domestic production sources.
“Detroit was overlooked for a very long time as a place to do any good real estate development, but we’re seeing a lot more competition now,” Harvey says. “A lot of the speculative development that’s on the board is from out-of-state developers who have come in. They’re competing with us very successfully.”
Dallas-based Hillwood Development Co., which was founded by Ross Perot Jr., the son of the late H. Ross Perot, is partnering with Colliers International to develop the 4-million-square-foot Pinnacle Landing Commerce Park in Huron Township, located near Detroit Metro Airport.
While southeast Michigan’s industrial real estate market has enjoyed relative prosperity, the office and retail sectors are lagging. During the fourth quarter of 2020, according to CBRE, the metro Detroit office market posted 271,641 square feet of net negative absorption — only the second negative quarterly result since the fourth quarter of 2009. Net absorption is the difference between the commercial spaces vacated by tenants and the spaces taken up by them.
Commercial real estate firm Signature Associates, which is based in Southfield, reports that metro Detroit’s average direct vacancy rate for all office classes in the fourth quarter of 2020 was 18.99 percent. The same rate was 15.2 percent in the first quarter of 2019. Direct vacancy rates ranged from 10.7 percent in Ann Arbor to 26.54 percent in the Southfield-Bingham Farms area.
“Companies are choosing to delay major decisions on office expansions or relocations,” says John Boyd, executive vice president and principal at Signature. “It’s certainly typical for companies to execute a short-term extension if their lease is coming up and (they’re considering) potentially downsizing their existing space. If the vaccines are effective in the first six months of 2021, you’ll see a redeployment of people going back to offices, but it’s going to be more of a flexible work environment.”
A recent trend of “shared offices” has attracted WeWork, Regus, and Sevenco to the region, along with bolstering homegrown players like Bamboo, and Byte & Mortar. Regus has two locations in town, including at the Renaissance Center, where it has 80 private offices, eight coworking desks, and three meeting rooms. Sevenco, based in Irvine, Calif., opened a 21,000-square-foot location in Troy in late 2019 with a large enterprise suite, 80 private offices, and co-working spaces in the common areas. In addition to two downtown locations, WeWork has opened a shared space in the historic Cadillac Sales Center in Midtown, which was redeveloped by The Platform.
“We’re seeing companies that maybe just got out of a multi-floor lease in a large tower and they’re looking to downsize or they don’t want to get locked into a 10-year lease,” says Andrew Nadhir, Sevenco’s director of operations. “Our leases are typically signed for six months to a year, and occupancy ranged from 80 percent to 95 percent pre-COVID-19.” Sevenco’s tenants have included The Bank of England, ad agency BBDO Worldwide, and real estate firm The Woodbeck Team.
In a November post at AutomationAlley.com, Ron Goldstone, executive vice president at NAI Farbman, said the region’s retail sector took a “gut punch.” “Detroit retail is suffering under a similar set of circumstances as the rest of the nation, especially in urban centers,” he wrote. “With less foot traffic downtown and fewer people shopping in person, we’re seeing something on the order of a 60 percent to 70 percent reduction in volume.
“Well-located, well-conceived, and well-designed neighborhood retail is generally handling the slowdown better than other retail segments. The best regional malls, like the Somerset Collection in Troy, will power through. Some second-tier properties will survive, but there will be some attrition. Virtually no C-level malls will survive. Creative reuse will be essential, and owners and investors will need to find new uses like office, medical, industrial, and storage to transition or redevelop those properties. As a result, the post-COVID-19 retail landscape will likely feature fewer regional enclosed malls, and smaller and more creative retail and mixed-use environments.”
In the face of the hurdles posed by COVID-19, there are surprising bright spots. Against the bankruptcies and job losses, the U.S. Census Bureau reported in January 2021 that U.S. business applications for the fourth quarter of 2020, adjusted for seasonal variation, peaked at 1,115,984 — although this was a drop of 28.5 percent from the previous quarter. Michigan logged 32,590 business applications, seasonally adjusted, in the fourth quarter of last year, a 38.3 percent jump from year-ago results. For now it’s a waiting game, but some Michigan real estate executives feel positive about the recovery.
“Detroit has the best shot ever of becoming the lead city in the Midwest for places to do business,” says Andy Gutman, president of NAI Farbman, a full-service commercial real estate firm in Southfield. “We have highly educated people, an unrivalled workforce, available land that’s often properly zoned and connected to utilities, and schools dedicated to engineering and other high levels of education. It creates a workforce that makes us strong and competitive not only in the Midwest, but in the U.S. and across the world.”
Taming the Pandemic
Prospects for a recovery of the hospitality industry in metro Detroit and the nation could extend into 2024.
Due to covid-19, Two of the hardest-hit sectors of the commercial real estate sector were lodging and restaurants; indoor dining was prohibited by state order from Nov. 18 to Feb. 1. Some eateries like Highlands, atop the Renaissance Center, and Olin, next to the Shinola Hotel, had splashy openings in the past year but for long stretches had to limit their service to carry-out orders or deliveries.
Overall, more than 5,600 establishments — representing 33 percent of the Great Lakes State’s restaurant operators — say it’s unlikely they will still be in business in six months, according to the Michigan Restaurant and Lodging Association in Lansing.
“Nobody wants to spread or perish from the virus but, at the same time, it does seem as though there (was) an imbalanced penalty put on the food and beverage industry,” says Kees Janeway, managing partner at Iconic Real Estate in Detroit, who sits on the board of the Detroit Restaurant and Lodging Association. “You have people like (Andiamo Restaurant owner) Joe Vicari taking great precautions in his restaurants to provide social distancing, requiring masks, and doing temperature screenings to safeguard patrons. Then you can just walk into (a mall) and be around lots of people. For a lot of (restaurateurs), it feels like they’ve been told their livelihood cannot exist.”
Weekly hotel occupancy for the week ending Jan. 2, 2021, in the United States stood at 40.6 percent, down 17.2 percent from year-ago levels, according to STR, a global hospitality benchmarking firm based in Hendersonville, Tenn. The average daily rate was down 21.51 percent, to $108, and revenue per available room fell 35 percent, to $43.85.
Occupancy at metro Detroit-area hotels mirrored the national trend. For the week ending Jan. 2, 2021, occupancy in Macomb, Oakland, Washtenaw, and Wayne counties stood at 49.5 percent, 34.9 percent, 24.5 percent, and 33.2 percent, respectively, according to STR.
“The properties that were hurt the most are the large, full-service convention-type hotels and the transient business travel hotels,” says Kevin Jappaya, president of KJ Commercial Real Estate Advisors in Farmington Hills and co-owner of seven Michigan hotels. “The extended stay properties like Home2Suites by Hilton, Staybridge Suites by IHG, the TownePlace Suites, or Residence Inn fared much better in this environment because they have little kitchenettes so business travelers don’t have to worry about eating out.”
The light at the end of the long dark tunnel is still dim for hoteliers. “Even with the encouraging vaccine news, this pandemic and the subsequent economic impact will continue to limit hotel-demand generators into the second half of 2021,” says Amanda Hite, president of STR. “Business demand won’t return at a substantial level until caseloads are better contained. … The forecast for 2021 remains functionally unchanged, and full recovery in revenue per available room is unlikely until 2024.”
Posted By: dbusiness on April 27, 2021. For more information, please click here to read the source article.
To receive the In The Know from Signature Associates, please click here to be added to our mailing list.
« Back to Insights