city review

Economy drives Detroit Detroit's economic development is a subject that has been discussed at length by developers and government officials for some time. Now, after a few big deals have been waiting in the wings, it seems Detroit is set to enjoy a commercial real estate renaissance.

Economic development in downtown Detroit, which for so long has only been talked about, is now becoming a reality. With an agreement in principle in hand, the city announced in April that Farmington Hills, Mich.-based Compuware Corp. would relocate its world headquarters and a technical center, with as many as 6,500 employees, to Detroit's CBD. Already underway are Detroit-based General Motors Corp.'s extensive upgrade of its new Renaissance Center world headquarters; three temporary casinos; and the Detroit Tigers' new 40,000-seat Comerica Park.

Overall, metropolitan Detroit is enjoying one of its greatest construction booms in generations, including a $2 billion expansion of Wayne County's Metro Airport. With vehicle sales possibly reaching $16 million this year, a 13-year high, there are smiles all around and, certainly, no shortage of developments in the pipeline.

And activity touches all sectors, including Wayne County's 1,800-acre Pinnacle aeropark concept (in Huron Township around airport); the 700-acre Metro World Centre; the retail and industrial transformation of the 198-acre former Ladbroke race track site in Livonia; approximately 2,000 luxury apartments; a major entertainment-oriented shopping center for Novi; a planned unit development (PUD) in Northville Township; and a string of Michigan Avenue corridor industrial parks.

This really is hockeytown Last year, the long-vacant downtown Hudson's building was imploded. Now that the dust has settled, Peter Karmanos' Compuware Corp. announced it is pursuing a development agreement to move its headquarters to the city's Campus Martius development area, which includes the former Hudson's block.

Compuware's plans include a 1.2 million sq. ft. headquarters building and a 400,000 sq. ft. to 600,000 sq. ft. technical center located on the riverfront, according to Peter Fleming, group executive for economic development for Detroit and Christopher Norris, Compuware's director of corporate communications. Projected completion and occupancy is two to four years. Compuware currently has 3,000 employees in metropolitan Detroit as well as 11,000 global employees, with annual revenue of $1.6 billion.

Karmanos has made it known that Compuware intends to finance this move by pursuing contracts with downtown businesses and governmental units rather than through tax abatements. Fleming reports that should tax abatements be required, the city council and tax commission have authorized a 15-year personal property tax relief.

With GM and Compuware taking the lead, Fleming cites pent-up demand for Class-A office and retail space - as well as a buoyant economy - as factors which will continue to drive downtown Detroit's development activity.

The redevelopment of Campus Martius is another example of business and retail development planned for the city's downtown. The 9.2-acre site includes the Kern, Monroe, Kennedy Square and Crowley blocks, in addition to the Hudson block mentioned earlier. Plans call for as much as 2.5 million sq. ft. of new space, predominantly office, as well as a new park, which will be planned around Detroit's Soldiers and Sailors Monument. The project is being developed by Detroit-based Kern Woodward Associates, a partnership comprised of Southfield, Ill.-based Schostak Brothers & Co., Detroit attorney Melvin Hollowell Jr. and Detroit-based Sterling Group.

Prior to the Compuware announcement, new investments have been added to downtown and upgrades of several venerable properties have taken place. The Penobscot and First National Buildings, acquired recently by La Jolla, Calif.-based Capstone Advisors, encompass approximately 905,000 sq. ft. and 758,000 sq. ft., respectively. The Penobscot is 45% occupied and the First National building is 80% occupied according to Tim Sinclair, vice president and director of office leasing in the Detroit office of The Farbman Group, Southfield, Mich.

Not far from Campus Martius is the former First Federal Building, which has been acquired by a local partnership consisting of Detroit-based Carpenters Pension Trust Fund and Livonia, Mich.-based Operating Engineers Local 324 Pension Fund. When renovations are complete, the 23-story tower, renamed 1001 Woodward Ave., will offer more than 250,000 sq. ft. of office space and more than 30,000 sq. ft. of retail space.

Also, there is a lot of enthusiasm from the real estate and banking industries about what is happening in Detroit. "The stadiums, what GM is doing, Compuware in Campus Martius and, especially, the upgrading of the airport, will put a whole new light on the city," says Mark Cleary, president of Livonia, Mich.-based Plante & Moran CRESA.

Temporary casinos find housing While Compuware's relocation will take time, the three city-approved gaming operators are deep into getting temporary casinos ready, and demonstrate how Detroit is attracting multiple development formats. Since development, land acquisition and design for the new casinos will take several years, temporary casinos are being housed in existing buildings.

Detroit-based Atwater Casino Group's temporary casino located at the 188,000 sq. ft. former Wonder Bread Bakery will include 70,000 sq. ft. of gaming space, restaurants and retail. Also included in this project will be a four-story parking structure and surface parking, which will accommodate 2,500 vehicles.

The MGM Grand Detroit temporary casino will be in the former IRS building. Plans call for 75,000 sq. ft. of casino floor space and themed restaurants, including the Hollywood Brown Derby, Nayla Mediterranean Grill and MGM Grand Buffet. A third temporary attraction, Greektown Casino, will be a redo of Greektown's existing Trapper Alley facility and will feature 75,000 sq. ft. of gaming space upon its scheduled completion, each representing an investment of approximately $100 million.

New suburban office well absorbed According to New York-based Cushman & Wakefield's Michigan First Quarter 1999 Office Summary, Detroit's metro and suburban office space are two areas of real estate that have seen a turnaround in recent years. The vacancy rate for the nearly 61 million sq. ft. of office space in Detroit's Metropolitan Statistical Area (MSA) keeps falling. In the third quarter of 1996, vacancy stood at 16%; by the first quarter of this year, vacancy had fallen to 10%.

Of individual markets, Detroit's CBD (23% of properties) has an overall vacancy rate of 18.9%. Brokers and owners report excellent absorption for new office construction in suburban Detroit with only the I-275 corridor showing vacancy rates above 10%, at 11.4%, for the first quarter of this year.

While capital markets took a breather last year suburban office properties, which were by-passed in the last buying spree, have been building value. Joe Anthony, director of investment sales for Los Angeles-based CB Richard Ellis, notes that many sellers who had deals evaporate last fall will likely not miss the opportunity a second time around. Some of the properties now leasing include:

In Livonia: * Bloomfield Hills, Mich.-based Kojaian Cos. has leased 39,000 sq. ft. to Southfield, Mich.-based Market Strategies and 115,000 sq. ft. to Bingham Farms, Mich.-based Rock Financial. Both leases were for space at Kojaian Cos. Victor Corporate Park.

* Plymouth, Mich.-based DeMattia Development Cos.' 80,000 sq. ft. Victor Park West, also at Victor Corporate Park, is 50% leased, according to principal Gary Roberts, who adds that the firm is working on possible projects in north Troy and Rochester Hills.

* Bob Gargaro, director of leasing for Dallas-based Prentiss Properties, reports that newly constructed Phase III of 91,170 sq. ft. Seven Mile Crossing, as well as 245,000 sq. ft. Seven Mile Crossing I and II, are nearly occupied. Additionally, Prentiss' 241,695 sq. ft. One Northwestern Plaza in Southfield is 94.5% occupied.

In Farmington Hills: * Kojaian Cos. is working on two buildings totaling 324,000 sq. ft. at Orchards Corporate Center, which are expected to be completed by year end.

In Troy: * At the Kojaian Cos.' 186,500 sq. ft. Troy Corporate Center, vice president David Hobaian reports leases of 25,000 sq. ft. for Miller Canfield Paddock and Stone law firm and 311,429 sq. ft. for Ross Roy Communications.

* Southfield, Mich.-based Etkin Co.'s 85,000 sq. ft. Northfield Point is approximately 90% leased.

* According to Mike Moran, partner with Bingham Farms, Mich.-based Colliers International, the company has commitments of 70,000 sq. ft. for the 250,000 sq. ft. second phase of Columbia Center, which is scheduled for completion in the first or second quarter of 2000.

Mark Woods, a broker for Dearborn, Mich.-based Ford Motor Land Development reports plans for three spec high-tech, office properties, each about 70,000 sq. ft. beginning in the fourth quarter of this year. Also, 230,000 sq. ft. Corporate Crossings at Fairlane, with completion slated for second quarter, 2000, is nearly 25% leased. Overall, Woods reports that Ford Motor Land has developed about 800,000 sq. ft. of space, predominantly office, over the last three years.

Southfield stands strong The Southfield submarket, Detroit's neighbor to the north, still commands the largest block of suburban office space - nearly 15 million sq. ft. Troy is second largest with nearly 11 million sq. ft. With many older properties being redeveloped, Southfield remains an important commercial crossroads.

In recent years, the Kojaian Cos. (Northwestern Corporate Center, 26711 Northwestern Building and the former FTD Building on Northwestern Highway) and the Farmington, Hills-based Berger Group (Comerica Southfield Tower and North Park Plaza), have led the way with the three "Rs," remodeling, retenanting and repositioning. The last of this wave includes the investment of greater than $40 million for acquisitions and improvements made by The Farbman Group in the 522,000 sq. ft. Bingham Office Center, which is now 94% leased.

Gregg Leshman, property manager for Redwood City, Calif.-based Tower Realty Management Corp., reports that rental rates at Southfield's Town Center - a 2 million sq. ft. office complex still owned by a Singapore government real estate entity - have risen 15% to 20% per year over the past two years.

In Southfield, Birmingham, Mich.-based Dietz Organization is also developing American Commerce Centre for Bloomfield Hills, Mich.-based Jonna Realty Ventures. The 72-acre site represents a rezoning of land to high-tech and R&D uses, a first for the city, according to president Paul Dietz. Build out is expected to take two to three years.

Cementing growth The high-tech and research corridor of prosperous Oakland County now has its own handle - Automation Alley - and its own Website. Due to the DaimlerChrysler headquarters and tech center, Auburn Hills and surrounding areas have experienced exceptional real estate strength. This metropolitan epicenter has seen expansion of automotive-related research and design firms, homes, apartments and retail, including Great Lakes Crossing, megamall a development of Taubman Centers Inc., Bloomfield Hills, Mich. The combined Auburn Hills and Rochester Hills office markets only total 1.1 million sq. ft., according to Cushman & Wakefield's office report, with a 2.5% vacancy rate for first quarter 1999.

Beachum & Roeser, Birmingham, Mich., is building Wellington Green, a 30-acre site carved out of Chrysler Technology Center land. The 260,000 sq. ft., six-building first phase will consist of 125,000 sq. ft. The building is expected to be completed in the first quarter of 2000.

Near Wellington Green, Bingham Farms, Mich.-based Burton Katzman Development is working on its Five Points Drive mixed-use project. According to principal Peter Burton, the 27-acre site will be home to a 134-unit Homestead Village extended stay hotel; a 248-unit Embassy Suites; Rio Bravo, Applebee's and Macaroni Grill restaurants; and a 57,000 sq. ft. medical office building.

Burton's firm has also completed a 128,000 sq. ft. technical facility for DaimlerChrysler in its 38-acre Executive Hills site in Auburn Hills, while three additional spec buildings ranging from 25,000 sq. ft. to 40,000 sq. ft. are planned for construction.

Certainly, the Big Three remain potent investors on their home turf. GM's total investment in its Ren Cen headquarters should reach nearly $500 million, including an extensive upgrade of the center's 73-story, 1,300-room hotel, to be managed by Washington, D.C.-based Marriott International. Ford Motor Co. is also renovating its world headquarters in Dearborn, Mich.

In Macomb County, one of the nation's most concentrated, industrial corridors, Don Morandini, director of the economic development division for Macomb County department of planning and economic development, estimates that manufacturing companies have invested $990 million there in the past two years. GM is committing $1 billion in improvements and consolidation of functions over the next five years at its Warren Tech Center campus; and DaimlerChrysler has or is completing investments of $338 million in its southern Macomb County facilities, including the Warren Stamping Plant, Warren Truck Assembly and Sterling Stamping Plant.

New high-tech role for Novi Another area of Detroit, Novi, a strong residential and retail center, has been changing to keep up with the growth in other areas of the city. Novi municipal officials, in an effort to balance development and to meet rising taxpayer expectations for services, have rezoned nearly 1,000 acres of property to Office-Service-Technology (OST) status in order to enhance and diversify the Novi economy.

As of the first quarter of this year, Cushman & Wakefield reports approximately 28 million sq. ft. of available industrial space, divided among warehouse, distribution, manufacturing, and high-tech out of an estimated inventory of 500 million sq. ft. in the metropolitan Detroit area. The estimated overall vacancy rate of this industrial space is 5.6%. Availability of space for individual product types includes 2.7 million sq. ft. of high-tech GLA; 16.3 million sq. ft of manufacturing; and 9 million sq. ft. of warehouse and distribution GLA.

Additionally, Colliers International 1999 Industrial Market Report, notes the following about the area's industrial market:

* Mean asking rents for suburban warehouse and manufacturing space increased nearly 7% to $5.57 per sq. ft., triple-net;

* At the same time, high-tech and research space rents climbed nearly 9% in the suburbs, to a mean asking rate of $7.94 per sq. ft., triple-net, at year-end; asking rates broke the $10 ceiling in Auburn Hills and Novi;

* Brokers report high demand for and limited supply of smaller warehouses - between 10,000 sq. ft. and 25,000 sq. ft. - in all submarkets.

In recent years with industrial sites scarce in Livonia and Plymouth Township, significant development has taken place along the Western Wayne County's Michigan Avenue corridor. Major developments planned or in progress include Troy, Mich.-based Frankel Associate's Haggerty II Corporate Park; the Wixom, Mich.-based Schonsheck's VanGuard Industrial Park; New York-based Ashley Capital's Canton Business Park; and the DeMattia Group's Michigan Industrial Park. Kojaian Cos. and Philadelphia-based Liberty Property Trust have also reported some interest there.

DeMattia Group has built about 500,000 sq. ft. in its 140-acre Michigan Avenue Industrial Park, including build-to-suits for Olympic Laser, Howard Delivery, Contractors Steel Center and Express Tools. Roberts reports that the park could handle another 800,000 sq. ft. of construction.

At either end of this corridor, both Willow Run and Metro Detroit airports have benefited from this intensified real estate market. Construction continues on Metro Airport's $2 billion-plus expansion, including a 74-gate new midfield terminal, a fourth parallel runway, a new South Access Road (to be linked to I-275), and a new 5,000-space parking deck. Last year, Metro Airport handled more than 30 million passengers, showing an international traveler volume growth of more than 15%.

Since 1992, reports Dan Labes, senior vice president for industrial brokerage with Grubb & Ellis, Ashley Capital has constructed or remodeled approximately 7 million sq. ft. of facilities, has more than 1 million sq. ft. now under contract, and has another 4 million sq. ft. proposed.

Jon Savoy, senior vice president and director industrial services for Grubb & Ellis reports continued strength in the Wixom, Lyon Township and Brighton markets. Savoy estimates as much as 500,000 sq. ft. has been added to the industrial inventory in the Wixom area over the past several years, with 800,000 sq. ft. of space under construction or planned for Lyon Township. Savoy also reports Wixon, Mich.-based Quadrant is developing a 76-acre park in Brighton Township. Additionally, DeMattia has just completed ground preparation for the second phase of its Trans-West Industrial Center in Howell Township, northwest of Detroit.

Critical mass in retail Along with other real estate types, retail is making its mark in Detroit. Not too long ago, "demalling" was the order of the day. For example, Southfield's Tel-Twelve Mall was rejuvenated in a community's effort to accommodate big box-users and to appeal to a wider trading area.

With more consumers Internet shopping and catalog buying, bricks and mortar retail is fighting back with new platforms and entertainment-oriented shopping and dining. Theaters with private screening rooms (carved out of megaplexes and one-upping the relatively new stadium or love-couch seating), food service and even private bathrooms are some of the ways retailers are trying to attract customers.

Among new platforms for metro Detroit are Taubman Centers Inc.'s recently opened 1.4 million sq. ft. Great Lakes Crossing in Auburn Hills, and the proposed West Village in Novi, a joint venture of Taubman and Ramco-Gershenson. Bennett Terebelo, executive vice president with Southfield, Mich.-based LaKritz-Weber, says one-third of the 600,000 sq. ft. West Village will be entertainment-oriented retail.

Thus, while acknowledging challenges to malls, including "everyone being shocked by the amount of merchandise sold on the Internet this past Christmas," Terebelo still feels that metro Detroit could accommodate one or two more regional malls in the future.

Will lodging play a casino card? At year-end 1998, Ann Arbor-based Hospitality Advisers' survey of more than 27,500 rooms in Wayne, Oakland, Macomb and Washtenaw counties, reported southeast Michigan hotels had an occupancy rate of 69%, compared to year-end 1997 occupancy of 68%. The strongest submarkets, with year-end 1998 occupancies at 70% or greater, included Auburn Hills, Dearborn, the I-275 Corridor/Farmington and Troy/Birmingham.

"Regionally, there is still growth in rates, but occupancies are flat with more product on line," notes Mike Blahosky, hospitality and investment sales broker with Grubb & Ellis. He added that with the economy so robust commercial travel remains the backbone of lodging in Michigan.

Also, the model-line approach shows no sign of letting up, with each major hotel company creating product for a diverse and distinct price - and amenity points. "If you include Allen Park, nearly 500 new rooms will come online this year in the airport area," adds Blahosky, citing new Red Roof, Hilton Gardens and Motel Six properties, as well as renovations of Doubletree, Four Points (formerly Shoneys), and Baymont Inns and Suites (formerly Budgetel) as examples.

"With no hotel components attached to the temporary casinos, they should be very good for the hospitality business in metro Detroit," he says.

While downtown Detroit has approximately 2,500 hotel rooms - a number dwarfed by downtown Chicago's 75,000 - the future picture could change dramatically because of the hotel components of the three proposed permanent casinos, the Campus Martius area and conversions of the temporary casinos.

Etkin Equities is about to break ground on the third hotel at its 350-acre, mixed-use Centerpoint Business Campus, which is anchored by General Motors' Truck Product Center and Group Headquarters. Already open are a 110-room Courtyard by Marriott and a 114-room Residence Inn by Marriott.

Multifamily takes shape Multifamily housing is another area that is also doing well in this new real estate climate. The 1998 Detroit Apartment Market Survey, produced by Terzo & Bologna, Livonia, Mich., reports that, over the past five years, multifamily housing permits have averaged about 4,100 in the four-county area of Wayne, Oakland, Macomb and Washtenaw counties. Additionally, vacancies by submarket showed Detroit, Macomb, Oakland and Western Wayne with the lowest vacancy rates, all under 4%.

Overall, Makarov estimates that Detroit's multifamily housing has grown at a rate of about 3% per year over the last three to four years. Rental rate increases, Makarov notes, continue to be hindered by the strength of metro Detroit's homeowners' market, both resale and new construction.

Based on area activity, in-fill market locations for luxury apartments are in high demand. According to Bonnie Burskey, director of asset management for Silverman Cos., Farmington Hills, Mich., her firm has completed approximately 800 units within the last two years, and is planning or has in progress another 1,100 units for the metropolitan Detroit and Ann Arbor areas.

The company has begun construction on the Lake Village of Rochester Hills and is finalizing market research and product design for 320 apartment homes planned at Lake Village of Northville.

For the Village Green Cos., construction should begin soon on a new product line, Regents Park of Troy, where, according to Village Green CEO Jonathan Holtzman, renters will be able to customize apartments. This development will bring new, high-end apartments into metro Detroit area and adds a level of personalization previously not known to this property type.

The future of real estate in Detroit looks bright with the economy strong and with many building projects forecasted for the downtown and surrounding areas. Economic fortitude has come to roost, with Compuware and GM leading the way. Riding on the enthusiasm for these companies is the demand for office space, retail and entertainment projects, which are helping to put Detroit on the road to prosperity.

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