An industrial market rebound has proven to be the tide that lifts all boats, even struggling Detroit, which recently recorded one of the strongest declines in industrial property availability in the country.
Detroit, with about 365 million sq. ft. of industrial space, tied with Atlanta in recording an 80 basis points drop in availability in the first quarter, according to a report by commercial real estate services firm CBRE. Lauren Scarpace, senior vice president with CBRE, attributes the improvement to the automotive industry. The increase in sales of new cars, he says, “spreads confidence through the regional economy, whether it is a large supplier, small business owner or a start-up.”
About 1.2 million sq. ft. of space was absorbed in the first quarter in the Detroit market, according to a recent report by Newmark Grubb Knight Frank (NGKF). Overall vacancy has dropped to 9.6 percent, not as low as in some of the major U.S. markets, but much lower than the near 16 percent vacancy peak seen in 2010.
Picking up speed
Fred Liesveld, executive vice president with NGKF, notes that the auto industry and accompanying suppliers have caused the gobbling up of space in Macomb, Western Wayne and Southeastern Oakland counties. Total auto sector employment has grown in Michigan, with employment in the motor vehicle and vehicle parts manufacturing sectors exceeding the total level of employment at the end of 2008.
“Look at the announcements that General Motors, Chrysler and Ford have recently made for jobs for the state,” says Liesveld, pointing out the recent GM plan to add 1,400 new jobs to two Michigan plants for the rebuild of the Chevy Volt. “There is quite a bit of new investment in Michigan.”
Also, with almost a complete lack of new development, space supply is shrinking as the industrial market picks up speed. “It’s very hard to find a good, available industrial building in the Detroit area these days,” Liesveld says. The prime markets are at about 7 percent vacant, though the city of Detroit itself is still the slowest performer, with 24.5 percent vacancy.
“I have to believe that Detroit will be the next area of opportunity for developers,” Liesveld notes.
Scarpace says Detroit can certainly use new industrial product, and speculative development is not too far off now that availability has decreased, rental rates are rebounding and lending opportunities continue to improve. He says the spread between rental rates for existing product and new construction is narrowing to the 10-20 percent range. There’s a less than 4 percent vacancy level for buildings in the sub-100,000-sq.-ft. range, in a market where the average building is around 50,000 sq. ft. to 100,000 sq. ft. However, there’s only about 1 million sq. ft. of development right now in the pipeline across the Detroit market.
Scarpace agrees the city of Detroit should be the next location for developers.
“There is tremendous local pride and national credibility in basing your operations in the city, and perhaps in this next real estate cycle we may see a modern business park created in the city limits of Detroit,” he notes.
This article was republished with permission from National Real Estate Investor.