Detroit’s sluggish industrial real estate market is showing signs of a recovery: Brokers point to a flurry of second-quarter leases and sales and growing interest in new construction as the amount of vacant Class A space declines.
The deal-making, brokers say, is driven by the rebound in automotive and manufacturing, along with low leasing rates resulting from years of foreclosures.
Increasingly, the best of the older space has been snapped up, and buyers are looking for bigger blocks to renovate — or are beginning to contemplate new construction.
“We’ve seen the bulk of (leases and sales) along the northern I-75 corridor, and we’re now seeing a lot of activity on the corridor on (the) east side, northern Macomb County, where the newer product is, in Shelby Township or Macomb Township,” said Eugene Agnone, a senior associate for industrial properties in the Southfield office of CB Richard Ellis Inc.
Absorption of metro Detroit industrial space in the first half of 2012 was 9.1 million square feet, according to a report by Signature Associates in Southfield, compared with 3.4 million for the first half of 2011.
Absorption is calculated by subtracting the amount of space vacated from the amount of space leased. Positive absorption is considered a sign of a growing market; negative absorption is a sign of a shrinking market.
The Signature Associates report found that the regional vacancy rate was 14.54 percent, down 1.73 percent from the fourth quarter of 2011.
Average lease rates were $4.47 a square foot in the second quarter, according to a CB Richard Ellis report. Though down one cent from the first quarter, it’s a 7 cent increase over the past year for the market in total, according to the report.
“Six-point-five million square feet of (leases and sales) in the suburban market with literally no new inventory. And every single submarket, minus Livingston County, dropped in vacancy rates,” said Mark Woods, COO of Southfield-based Signature Associates, of its 2012 second-quarter analysis. In Livingston County, the vacancy rate was up 1.62 percent.
Large lease transactions in the latest CBRE and Signature market reports include 158,379 square feet in the Ashley Capital-owned Romulus Business Center leased by Technicolor Videocassette of MI Inc., KUKA Systems Corp. North America leasing 147,389 square feet of warehouse/distribution space in Warren, 293,000 square feet to Detroit Manufacturing Systems in Detroit’s Gateway Industrial Park and 231,610 square feet in Romulus to Commodity Warehousing Services.
On the sales side, Menard’s Inc. purchased a 773,335-square-foot warehouse/distribution facility on Middlebelt Road in Livonia, AGS Automotive Systems Inc. bought a 360,000-square-foot manufacturing building on 181/2 Mile Road in Sterling Heights, and Brose New Boston Inc. bought a 381,708 square foot building on Bell Road in New Boston.
Larry Emmons, senior vice president in the Southfield office of Newmark Grubb Knight Frank, points to a deal he recently closed in Sterling Heights as a sign of the improving market.
The 66,132-square-foot building, on Center Street south of Metro Parkway between Mound and Van Dyke, sold for $3.35 million, he said — about $50 a square foot. The fully occupied building was leased for $4.55 per square foot, according to the Costar Group Inc. website, meaning that the cap rate for the property was below 10 percent, a pre-recession number.
Cap rate is used to estimate the rate of return on investment property, and is determined by dividing the income the property is expected to generate by the total value of the property.
To investors, a sub-10 percent cap rate, Emmons said, “usually signals that rents are stable.”
And that, he said, “draws more institutional investors into the market to sell and buy. That’s a good thing,” he said.
At this point, Agnone said, the demand for Class A industrial space is outpacing supply — while there’s plenty of industrial space in the metro area, much of it is antiquated, too small or otherwise functionally obsolete. So it’s likely new construction will begin to get planned.
“There’s supply, it’s just that supply doesn’t meet the demand as far as the type of space,” he said.
Whether industrial space is considered Class A is largely determined by the age of the building, a high ceiling clearance, a higher proportion of truck docks to square footage and wide column spacing, Agnone said.
Upgrading non-Class A space is costly, as much as $12 to $15 per square foot to raise a ceiling, he said — doable for a small area to accommodate a specific piece of equipment, but not for an entire building. Agnone said he also expects foreclosures to continue to impact the market through 2015.
The largest blocks of space are the hardest to come by. Class A industrial larger than 75,000 square feet is all but absent from the market, Woods said.
Brokers said they expect a gradual upsurge in newly constructed space for specific deals.
“We have several build-to-suits being contemplated and being quoted right now in the Auburn Hills market,” Agnone said. “Auburn Hills has been attractive, and most of Class A space has been absorbed, but Auburn Hills still has plenty of land.”
Woods said he expects to see financing available to potential purchasers of land who plan to build to suit, if said purchaser plans to occupy the completed space. While construction financing could be difficult for investment property, Woods said it would likely be possible if the owner can demonstrate lease commitments.
“Now you’re at the last wave,” Woods said. “People need the space. They’ve got the money, balance sheets are strong, and they’re not going to go into physically obsolete buildings. … Those buildings will be repurposed for something else. You’re going to build to suit.”
By: Nancy Kaffer, Crain’s Detroit