Occupancy Up In Suburban Detroit Office And Industrial Assets, But Talent In Short Supply
Investors who bought up Detroit suburban office properties at devalued pricing coming out of the recession are now reaping the rewards, according to speakers at Bisnow’s Detroit State of the Market event last week.
Investors bought several million square feet of suburban office properties at $20/SF when occupancy was 15%, 20% and 25%, invested capital to reposition assets for modern users, and now occupancy is at 70%, 80% and 90%, said Jared Friedman, manager of acquisitions and opportunities at Friedman Integrated Real Estate, a real estate brokerage and advisory firm based in Michigan.
“Office space in Detroit's suburbs is a best-kept secret,” Friedman said. “I think we’ll see continued growth in and around the suburban office sector and don’t see it slowing anytime soon.
"There's not a ton of distressed properties [that] are left to buy. But this is a good thing because it’s cleaned up the market, resulting in a good supply-demand balance. This year alone we had 500K SF of net absorption — 400K SF was in the suburbs.”
Friedman said overall vacancy in the suburbs is about 15%, when five years ago it was in the 20s.
“If we could create more land, we could build more industrial facilities,” General Development Co. Asset/Business Development Director Stacy Fields said.
She said industrial vacancy in Rochester Hills is just 5%.
“In the past, companies moving into Detroit skipped downtown and went into the suburbs — Auburn Hills, Ann Arbor, Troy, Chester Hills and the I-75 corridor markets,” she said.
In 2008, General Development purchased 211 acres now known as Oakland Technology Park in Auburn Hills and has built facilities for eight auto-related R&D and manufacturing companies, including Faurecia, one of the largest auto parts manufacturers in the world.
Fields said a major challenge for Detroit in attracting companies is the lack of a regional mass transit system to connect suburban communities like Auburn Hills to downtown. She said companies like those at Oakland Technology are in the suburbs because they need large production spaces. But the location makes it difficult to attract young talent, as educated millennials desire an urban lifestyle and tend to live in downtown.
Fields said 97,000 jobs are posted in the Detroit region, but without mass transit many will go unfilled. She said lack of public transit may limit future suburban development from the central business district only as far north as Interstate 75.
As land costs rise in core markets, developers and commercial real estate users tend to go to the suburbs, said David Ferszt, president of Farmington Hills, Michigan-based multifamily property management firm Village Green Management. He cited Chicago and New York as examples of cities with exceptional mass transit systems.
Farbman Group President and Chief Financial Officer Andy Gutman said the lack of mass transit connecting downtown to the suburbs is the biggest complaint of office and industrial clients, who contend they could put unemployed people in the center city to work if there was public transit to transport them to job sites.
“Other cities are connecting downtowns and suburban markets with mass transit, but we’re not doing that, and it’s not even under discussion," Gutman said. “On a regional level, this will hurt Detroit, because people here don’t live the commuter lifestyle of Chicago, San Francisco and Los Angeles. They tend to live close to where they work because that’s the way they were brought up.”
To prevent urban sprawl, Ferszt said the focus should be on creating walkable environments in suburban communities, as well as in downtown, to attract millennials. He said another reason companies chose to locate in the suburbs is the lack of parking in downtown.
He said developers are having difficulty luring big retailers like Target to downtown projects, because of the parking problem.
“Downtown doesn’t have large pieces of land required for big-box retailers, and it’s hard to assemble a large enough parcel to accommodate them,” Ferszt said.
Gutman said developers have done a good job of creating space in mixed-use projects for smaller retailers, which has resulted in lots of new restaurants in downtown, when just a few years ago there was only a handful of them.
"But it will be interesting to see if large corporate retailers enter the downtown market, and how they manage it," he said.