City Review: Detroit

Good times roll in SE Michigan, but area's prudence should lead the way before developers get carried away Besides reacquainting America with young love, circa. 1910, the blockbuster film Titanic was an enthralling reminder that "bigger and faster" are not always better. It shouldn't take an iceberg to instruct on the fine line between confidence and recklessness. Better to leave a margin for error, some room to turn aside.

Greater Detroit has a refreshing number of ambitious projects on course, including an expanded Metro Airport, downtown football and baseball stadiums, Taubman's Great Lakes Crossing megamall, mixed-use projects that "raise the bar" in communities such as Novi, Pontiac and Chesterfield Township, and new office construction in key the submarkets of Troy and Livonia.

Construction of new stadiums for Detroit's professional baseball and football teams has added to the excitement in the city's downtown area, where casinos also will pop up soon.

Regardless, this exuberant real estate marketplace will likely steer clear of choppy waters, bolstered by a fundamental prudence that should endure as outside investors come calling.

"There is no shortage of permanent financing for virtually every conceivable and a few inconceivable forms of commercial real estate. Spending it wisely lies with the construction lenders, the banks, because the biggest problem you have in a real estate cycle is the overbuilding," says mortgage banker Larry Hadley, president of Novi-based Hadley & Associates, "The banks, as custodian of construction, have done a good job of enforcing that discipline. I think the stringent lending standards this time around will keep this cycle from the extreme bust the last cycle had, especially in a marketplace like Detroit, controlled by local developers and local construction lenders.

"It's not as if we have a huge influx of out-of-town developers coming along and gilding the lily for us like more glamorous Midwestern cities like Indianapolis and Columbus did," Hadley adds.

Barometers of prosperity include continued strength in the auto industry and an exceptional single-family home market. And as long as trucks don't learn to fly, metropolitan Detroit has, in Port Huron and The Ambassador Bridge, two of the nation's major NAFTA links.

Breaking 60 Million Overall, the vacancy rate for the 60 million sq. ft. of office space in Detroit's MSA (Metropolitan Statistical Area) has fallen from nearly 20% in first quarter of 1994 to less than 11% by the fourth quarter of 1997, according to Cushman & Wakefield of Michigan's Fourth Quarter 1997 Office Summary. Cushman & Wakefield reported an overall vacancy rate of 10.7% at year-end 1997, with 1997 total leasing activity of 5,730,154 sq. ft. The average rental rate at year-end 1997 was $15.93 per sq. ft., with Class A going for $20.32 per sq. ft.

Detroit's Central Business District (23% of inventory) had an overall vacancy rate of 21.6% at the end of the first quarter of 1998, according to the Grubb & Ellis Metropolitan Detroit Office Market Report. The metro area's largest office market, Southfield, recorded a vacancy rate of 7.55%, according to the report.

Revitalization of Detroit's real estate market has touched the entire metropolitan area. General Motors' relocation to the Renaissance Center, left, has given new hope to downtown. In Pontiac, GM, Etkin Equities and the city are transforming an assembly plant into a 350-acre business park, home of GM's Truck Product Center, right.

Rental rates at year-end 1997, as reported by Cushman & Wakefield, averaged $15.93 per sq. ft. for all property types, with Class A space at $20.32 per sq. ft..

"Rates have now reached the point that the land and construction costs for new products are justified by the rents that can be attained," says John Gordy, Signature Associates-ONCOR International partner and vice president in charge of office brokerage.

"Our market has historically been a local developer's market. These local developers should never be underestimated and, in fact, they have positioned themselves well for the next building cycle," says Gordy, concurring with Hadley. "While national players have come in and entered the market, it has been difficult for them to find good development sites."

The Troy and Livonia office submarkets are leading the way with substantial speculative development already commenced or announced. Overall, as much as 10% may be added to the total of Troy office space within the next 18 months, according to Tom Lasky, principal with Colliers International.

"Tenants are lining up to lease up office space in low- to mid-$20s," adds Lasky, who represented Kirco Development's 80,000-sq. ft. Columbia III and Candlewood Office Development in Troy, front-runners in the return to construction.

Other expected projects in Troy include: * 250,000 sq. ft. Columbia Center Phase II, scheduled to begin construction in summer, 1998;

* Troy Corporate Center, two buildings totalling 173,000 sq. ft. on a 22-acre site at the northeast corner of Long lake and Crooks, purchased from the Bellemead property. Construction should begin by this summer, according to Vice President David Hobaian;

* Northfield Point, at the southwest corner of Crooks Road and Corporate Drive, also on a portion of the Bellemead property, which has been site plan approved for 85,000-sq. ft. of mid-rise office, and also a 25,000-sq. ft. Northfield Marketplace retail center. Rob Wineman of Etkin Equities reports that the asking rate for office will be $23 per sq. ft. plus electric; for retail, $24 to $26 per sq. ft., triple net.

Similarly, spec office projects are flourishing in Livonia, an anchor of the accessible Interstate 275 office corridor. Announced projects include:

* The DeMattia Development Co.'s 80,000-sq. ft. Victor Park West in the Victor Corporate Park just north of Seven Mile Road and east of I-275, where construction is to begin this summer;

* The Kojaian Company's 380,000-sq. ft. Victor Corporate Center (two buildings of four stories each), also in the Victor Corporate Park, to begin construction by summer; and

* The 92,467-sq. ft. Seven Mile Crossing Phase III, already under construction. The asking rate will be $23 per sq. ft. gross plus electric, while the existing 245,000-sq. ft. of Seven Mile Crossing I and II are 95% occupied, according to Tom DeBaldo, Prentiss Properties Ltd., director of leasing and development.

In contrast, the downtown Detroit office market is watchfully waiting for new construction. General Motors has begun the relocation of its corporate headquarters to the Renaissance Center, and most observers believe overall CBD office demand will increase significantly over time. GM likely will be a thoughtful, as well as opportunistic, property owner, as evidenced by its recent purchase of the Millender Center and its valuable parking deck.

GM's commitment to the RenCen has already prompted others to look at downtown. In mid-May, California investor Capstone Advisors bought the Penobscot Building and the First National Building, both landmark office buildings located downtown. Interest is heating up downtown. One of the area's newest offices, 150 W. Jefferson, is on the block.

In addition, the Buhl building has changes hands, while the Kojaian Cos. has purchased the Yamasaki-designed One Woodward Building, the new home of the Greater Detroit Regional Chamber of Commerce. Rental rates downtown shot up 10 percent during first quarter 1998 as vacancy rates dropped.

"There's definitely a need for Class A space," says DMR Commercial Real Estate Service executive Fred Klugman, adding that a property like the First Federal building would be a "good candidate for upgrading to Class A status."

Additionally, CB Richard Ellis broker Dennis Kateff notes that, "Before, we would have been hard-pressed to come up with a comeback scenario for downtown; then, three significant announcements were made in a span of eight months: the stadiums, the GM move to the RenCen, and casinos."

The Other Downtown? Three great concentrations of business space in Metropolitan Detroit are the Prudential Town Center in Southfield, the Renaissance Center and the New Center area (five miles north of downtown), where GM will soon be vacating its nearly 1 million-sq. ft. headquarters building, and the adjacent 800,000-sq. ft. Argonaut Building.

Southfield is the Detroit area's largest office submarket with nearly 16 million sq. ft. of space. At the end of the 1st quarter of 1998, nearly 93 percent of the total space was occupied.

Awaiting developments is TrizecHahn, owners of the area's Fisher, Albert Kahn (former named New Center) and New Center One buildings - all connected by skywalks - which total about 1.4 million sq. ft.. The "golden towers" of the Fisher Building are home to WJR, one of the nation's oldest and most powerful radio stations.

While Albert Kahn and New Center One are fully occupied, the Fisher Building's occupancy is about 80% (at an asking rate of $17 gross plus electric), according to Jerry Burgess, vice president of TrizecHahn.

Overall, TrizecHahn, which owns and manages more than 70 million sq. ft. of space, added 12 million sq. ft. of new product last year, and plans to bring on about 15 million to 20 million sq. ft. more this year, according to Burgess. The latest proposal for reuse of GM's headquarters has come from Michigan Gov. John Engler, who has indicated the state will consider the property for a consolidation of state offices in metro Detroit.

"This idea is being researched," says Burgess, who adds that TrizecHahn takes the proposal seriously, "The governor has an opportunity to help Detroit in its revitalization. I would hope we would have a firm commitment within the next 90 days; we are optimistic that this is a win-win-win idea (for TrizecHahn, the city and GM)."

Meanwhile, the New Center Area Council, of which Burgess is vice chair, is proceeding with promotion of its Urban Village concept. "There's no area of the city that has a better head start and an ability to put something together than the New Center area," says Burgess, pointing to Wayne State University, the expanding Henry Ford Hospital System, TrizecHahn's ongoing investments in its properties, the strong Boston-Edison residential district and pending announcement of new townhouse development.

"We're getting a lot of interest from developers who weren't running around asking questions a year ago," Burgess says.

Spec construction is on its way, but relief in the marketplace has undoubtedly been provided by build-to-suits, as well as less conspicuous consumption of the 90s, making better-grade Class B space acceptable to many companies.

A larger build-to-suit, representing the entry of Chicago-based The Alter Group to the Detroit marketplace, is the new three-story, 162,000-sq. ft. corporate headquarters for Gale Research on an 8.3-acre site in Farmington Hills' Arboretum Office Park. Gale Research was represented locally by Cushman & Wakefield.

Scheduled for completion in fall 1998, the Gale Research's new headquarters will employ Alter Group's KappaCore model of its patented ReadiDesign program, according to Kirk Rosene, vice president and director national development. Rosene adds that the Alter Group, which has more than 3 million sq. ft. of speculative and corporate projects under development nationwide, is studying other opportunities in metro Detroit.

REITs and other entities have been grabbing up properties in Detroit at values approaching, and perhaps, exceeding what has traditionally thought to be replacement cost levels of $125 per sq. ft. to $140 per sq. ft.

The purchasing scorecard, according to the Grubb & Ellis 1998 Real Estate Forecast, includes:

* Prentiss Properties Trust's (PPT) acquisition of Southfield's 13-story One Northwestern Plaza and Livonia's Seven Mile Crossing from Duke Realty;

* Liberty Property Trust's acquisition of an office-high-tech portfolio from Kojaian and an industrial high-tech portfolio from TIAA-CREF;

* Great Lakes REIT's purchase of Southfield's Oak Hollow #40 from MetLife and Troy's Long Lake Crossing from New York Life; and

* The Archon Group's purchase of Farmington Hills Gateway Office Building from MONY.

Going forward, the performance and actions of REITs will be watched in such areas as being able to secure rental rates that will justify purchase prices and satisfy shareholder expectations, potential role in development of new projects, and the ability to manage as effectively as local entities.

"Prices are still climbing, but starting to taper off a little bit," according to Trammell Crow investment broker Eric Siegel," Detroit has historically been a 10 cap rate, but we are starting to compete with markets like Phoenix, Atlanta and Seattle."

"In many places, a lot of local players have seen how values have increased for the premier properties. Now, they tend to believe that their properties are basically worth as much as those traded to REITs," adds Joe Anthony, director of investment sales at CB Richard Ellis. He calculates that REITs were involved in about half of the approximately $470 million worth of major office building transactions in metropolitan Detroit during 1997.

It's Entertainment Each era has its commercial archetypes, its retail ways of life. Some of us can remember waiting all year to see how St. Nick would gussy-up Hudson's downtown, a tradition of spectacle brought up-to-date more recently by Troy's Somerset Collection.

Similarly, community malls like Wonderland Mall in Livonia are reinventing themselves with a strong family entertainment quotient. Going all out are the still new movie-theater-restaurant-souvenir shop, come-as-you, anytime-you-want megaplexes. Undoubtedly, modern Americans find favor with manufactured experience. Grubb & Ellis' 1998 Real Estate Forecast notes megaplexes in store for Haggerty and Seven Mile in Livonia, I-275 and Ford Road, M-59 near Mound Road, I-94 at 23 Mile Road, and Haggerty near 14 Mile Road, joining the already successful 20-screen "Sony-plex" in Southfield.

Sounding a note of caution, Hadley says that "I remain skeptical of the longevity of entertainment-oriented restaurants. It's a very real concern. The classic retail expansion is being driven by retail companies staking out turf, rather than (perhaps) actual net demand."

Overall, however, retail in suburban Detroit is "enjoying a steady growth, continually spurred by the economy and the residential expansion, which seems to be endless," says Bennett Terebelo, executive vice president with LaKritz-Weber, "There are 72% owner-occupied homes in metro Detroit; far greater than most other large USA cities."

Retail platforms like the architecturally and landscape-rich Power Strip, as represented by projects like 300,000-sq. ft. Northville Center in Northville Township, are keeping parking lots full. And when it comes to neighborhood retail, the real bread and butter is three to five-unit supermarket or drugstore-anchored mini-strip malls.

Some implications of the trend: skyrocketing prices for corner lots, especially as Walgreen enters the metro Detroit drugstore fold; more difficulty finding profitable smaller tenants as supermarkets dominate convenience categories, everything from florist, bakery, pizza shop and restaurant to video store, dry cleaning and banking; more difficulty for developers in "making the numbers work" as the anchor (read lower profit) to supporting tenant ratio increases.

One new metro Detroit entry in the big-box area will be COSTCO, which has initially chosen five sites for its volume-purchase format (accompanied by an aggressive direct mail campaign), including a recently abandoned HQ site on the Ladbroke DRC property in Livonia.

A metro newcomer represented by Terebelo will be Chernin's Shoes, which he likens to "a Nordstroms shoe department without the department store." Initial Detroit locations will include Novi Town Center and Oakland Mall.

Detroit should remain a strong regional mall town. "The supra-regional malls are still strong, with the new twist coming on with the value-oriented Mills-type project; a new shopping experience in Metro Detroit," says Terebelo, referring to The Taubman's Company's Great Lakes Crossing in Auburn Hills, scheduled to open in November, 1998.

First-time to Michigan anchors already announced for Great Lakes Crossing include JCPenney Outlet Store, GameWorks, Oshman's SuperSports-USA, Wolfgang Puck Cafe and, most recently, Bass Pro Shops' Outdoor World. The last is expected to become a major tourist attraction, according to Taubman vice president for corporate affairs Chris Tennyson.

Tennyson adds that Great Lakes Crossing, with an anticipated 15 million annual visitors, will be similar to a Mills concept, including a racetrack platform. However, Taubman will be clustering tenants in such categories as fashion or entertainment and dining, with distinctive architecture to mark the transitions.

Elsewhere, Taubman is adding a 30-screen Star Theatres Megaplex with more than 5,000 seats to anchor a new entertainment wing at its Fairlane in Dearborn, and has plans for significant physical renovation of Twelve Oaks in Novi, Tennyson adds.

In Southfield, the city is progressing with its development role in clearing away mothballed office buildings to make way for new retail projects.

Land clearance and environmental remediation is complete at Greenfield Road and Providence Drive, in the City's southeast section, and construction has begun on a 130,000-sq. ft. retail center, to be developed by the Solo Company, according to Don Gross, Southfield Director of Community Development.

Southfield has cleared a 9-acre site, just south and west of Northland Center, formerly occupied by the vacant "Specs Howard" and Southfield Office Plaza buildings. The site is under contract to Grand/Sakwa, with the goal of attracting big-box retail complimentary to the Home Depot at 8 Mile Road and Northland Drive. Grand/Sakwa has also purchased 17 acres of Evergreen Road frontage on the Town Center campus from Prudential, Gross reports.

Nearby Oakland Towne Square, Colliers International is representing Kirco's Oxford Pointe, a spec office development at Northwestern and Lasher. Plans call for a 80,000-sq. ft. building and a 30,000-sq. ft. building.

Taking Off Closer to Wayne County's Metro Airport, the new Vining Road and I-94 interchange, a special $17-million public-private arrangement, should be completed this summer. Nearby, north of I-94 between Merriman and Wayne roads (just west of Metro Airport), The Farbman Group is developing the 700-acre Metro World Centre property, where the Tanger group has had an option on a 140-acre portion of the property, considered for a multi-use project valued at as much as $60 million. Farbman Group also currently is master planning the remainder of the site.

Metro Airport itself continues to set one all-time passenger record after another (43 of the past 45 months), according to Wayne County, handling more than 31.5 million passengers in 1997. A $1.6 billion expansion of Metro Airport calls for a new $786, 74-gate midfield terminal; a fourth parallel runway; a new South Access Road (to be linked to I-275); a new 12,000-space parking deck; plus extensive renovations of Metro's three existing terminals.

Nearly complete are $60 million in interim improvements, including a six-gate extension of concourse "C;" a new international check-in building, new moving walkways, an expanded federal inspection services area and an expanded baggage handling area.

Pontiac's Centerpoint Matures In North Metro Detroit, at Pontiac's Centerpoint Business Campus, General Motors Corporation, Etkin Equities and the city of Pontiac have been able to transform a to-be-abandoned assembly plant into the anchor of a 350-acre mixed-use business park.

Completed projects include renovation of the 4.5 million-sq. ft. assembly plant to a 1.1 million-sq. ft. Truck Product Center and Group Headquarters; construction of a 400,000-sq. ft. Development Center; a 71,000-sq. ft. The Centerpoint Corporate Center; a day care center; service station and 20,000-sq. ft. Marketplace at Centerpoint retail center.

Opened this March was a 110-room Courtyard by Marriott, with a 114-room Residence Inn by Marriott scheduled to be fully open in May.

Etkin Equities also completed this January a 40,800-sq. ft. office and calling center for edcor Data Systems, and expects to complete in June a 29,500-sq. ft. office-laboratory facility for Herberts Automotive Systems America, Inc., the first of three planned phases.

"These are specific tenants that came to our location that could have gone anywhere and are not related to General Motor's specific needs," says Curtis Burstein, vice president finance/development for Etkin Equities.

Macomb County is home to one of the most concentrated, industrial corridors in the nation; three of the top five (and five of the top 10) townships in Michigan in issuing of residential permits for 1996; a jobless rate well below 5 %; and per-person income growth of 21.1% from 1990-94, the greatest of any major suburban US county, according to a study done by the University of Michigan Institute of Labor and Industrial Relations. The rewards of a hard day's work include Lake St. Clair, a national bastion of personal boat ownership.

Neighboring Oakland County placed second in the UM study, with personal income growth of 19.3% from 1990-1994.

A key factor in Macomb's recent economic growth has been traditional north-south patterns of employment and development giving way to east-west ones. The stimuli include activities in Oakland County's Pontiac and Auburn Hills, including the Chrysler Technology Center, as well as road building projects like the expanded M-59 and I-696, says Donald Morandini, Director, Economic Development Division for the Macomb Dubbed the Arsenal of Democracy for helping tip World War II to the Allies favor, the city of Warren recently concluded its nearly $6 million purchase of the Warren Tank Plant, a General Dynamics facility formerly under U.S. Army jurisdiction. The city recently closed on its sale of 30 acres of the property to DCT (Detroit Center Tool), where it will build a 400,000-sq. ft. to 600,000-sq. ft. facility to build vehicle manufacturing assembly lines, according to Ed Servitto, Warren's chief assistant city attorney.

"The real accomplishment is the transfer from base closure, which is typically a six-year process, that we accomplished in 156 days, due to the hard work and dedication of those involved," says Servitto, adding that the federal government is responsible for cleaning any future projects to industrial standards. Additional uses on the site may include light industrial, research and development, and recreation.

Industrial Strength Detroit As of first quarter 1998, Cushman & Wakefield reported that 22.9 million sq. ft. of industrial space was available in metropolitan Detroit out of an estimated inventory of 500 million sq. ft., for an estimated overall vacancy rate of 4.6%. Weighted average asking rates were $4.31 per sq. ft. for warehouse/distribution, $3.82 for manufacturing and $8.16 for high tech; with weighted average asking sales prices of $26.86 for warehouse/distribution, $24.52 for manufacturing and $54.95 for high tech.

"Although there is an awful lot of big box warehouse space coming on the market simultaneously," notes Larry Emmons, vice president with Colliers International's industrial division, "and despite some isolated problem properties, the market continues to be strong and things will good be for at least another two years."

Chrysler's World Headquarters and Technology Center in Auburn Hills has benefited adjacent counties, local government officials say.

Industrial growth continues strong in Wixom, northwest of Detroit, and the Michigan Avenue-South I-275 region. "There is still an undersupply of new construction," says Jon Savoy, principal with Signature Associates-ONCOR International. As an example of market strength, Savoy notes 58-acre Wixom West Technology Park, where "the roads went in during August, 96 and now all 58 acres are sold out." Savoy adds that both Wixom and Lyon Township will be extending their utilities this fall.

And with sites in traditional light industrial strongholds like Plymouth and Livonia near capacity, activity is picking up speed in western Wayne County's Michigan Avenue (US-12) corridor. One hundred acre-plus developments include the Frankel Associate's Haggerty II Corporate Park, the Schonsheck entity's VanGuard Industrial Park, Ashley Capital's Canton Business Park, and DeMattia Development's Michigan Industrial Park.

At Haggerty II Corporate Park, a research and light industrial park north of Michigan Avenue in Canton Township, the local Lazy-Boy franchiser has purchased 10 acres and begun construction of a 100,000-square-foot-plus headquarters and distribution center. Frankel Associates also plans to construct of spec buildings of 35,600 sq. ft., 50,000 sq. ft. and 63,800 sq. ft., to be completed in 1998, reports Colliers International principal Gary Glotzhober.

A little further west, Ian Schonsheck will be developing VanGuard Industrial Park: Phase I consists of 63 acres in Van Buren Township, with access off Belleville Road; Phase II will consist of 70 acres in neighbor Canton Township, with access off Michigan Avenue. Schonsheck is also the developer of 140-acre Century Industrial Park in Wixom, where five spec buildings ranging from 33,000 sq. ft. to 60,000 sq. ft. are under construction.

At DeMattia Development's 144-acre Michigan Avenue Industrial Park, on the south side of Michigan between Beck and Denton roads, Olympic Laser Processing has occupied a new facility on a 28-acre site, according to DeMattia real estate analyst Kelly Mathews.

At Ashley Capital's 230-acre Canton Business Park, at Beck Road and Michigan Avenue, construction has begun on a 450,000-sq. ft. warehouse and distribution facility. The asking rate will be $4.75 triple net. The site is master planned for up to 2.5 million sq. ft. of Ashley-built projects, in addition to build-to-suits.

Overall, Ashley Capital continues to develop its substantial portfolio of more than 5 million sq. ft. in metropolitan Detroit. For example, Dan Labes, director of Cushman & Wakefield's Industrial Division reports that WorkPlace Integrators has occupied 285,000-sq. ft., at an asking rate of $4.50 per sq. ft. triple net, at Crossroads Distribution Center at I-275 and Ecorse Road. Three other leases, totalling 380,000 sq. ft., have also been signed.

In Highland Park, where developer Stuart Frankel is transforming the former Chrysler Corp. headquarters campus into Oakland Park, a suburban-style industrial park, Labes reports that a 141,000-sq. ft. spec warehouse facility has been completely leased. The first announced build-to-suit for Oakland Park will be a 400,000-sq. ft. facility for Budco.

Elsewhere, in Livonia, Labes expects about two-thirds of the 198-acre Ladbroke DRC property, recently sold to developers, to be used for an industrial park. Where thoroughbreds will no longer run, "land-starved" Livonia will be adding significant space at an outstanding, Middlebelt Road and Interstate 696 location. The balance of the property is expected to be developed as retail, which might enhance, not simply compete with, retail improvements taking place along Middlebelt.

Mason Capitani, principal of L. Mason Capitani/GVA, cautions that "we have been spoiled with a lot of unused land, but we are now overstretched with regard to utilities."

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