Heading into the spring, Detroit area industrial fundamentals may prove to be more resilient than other regions nationwide. Over the past few years, other metropolitan areas nationwide, notably led by the Sunbelt and Southwest, underwent a sizable surge of logistics leasing and construction. The Detroit area, which also experienced an increase in developmental and leasing activity, appears to have occurred more sustainably as the relatively smaller amounts delivered in the Detroit area were more easily digestible. Over the past 12 months, the Detroit area has had roughly 2.5 million SF hit the market, representing an inventory increase of only 0.4%. Compared to Midwest area peers like Chicago and Columbus, which have experienced inventory increases of 1.7% and 5.1%, respectively, the amount of Detroit’s new inventory seems much more manageable. Although the current economic environment is challenging, market fundamentals in the Detroit area continue to favor property owners. While leasing volume has pulled back slightly from the all-time high reached last year during 22Q3, vacancy of 4% has barely moved in recent months and is still just above the all-time low, not leaving much room for further tightening. The pacing of rent growth has decelerated since hitting an all-time high last summer, compressing by roughly 440 basis points since this time last year. Renaissance Global Logistics, a leading supply chain and logistics solutions provider specializing in warehousing, signed the most significant lease over the past 12 months last June, with 741,990 SF at the Wixom Assembly Park. This 5 Star distribution facility was completed in March 2022 with asking rent of $6.95/SF triple net. E-commerce-related tenants serving the local population, such as Amazon, and third-party logistics providers like FedEx were increasingly expanding their regional footprint until recent quarters, when some companies like Amazon delayed or canceled projects planned or underway across Michigan. Over the past few years, increased demand for distribution and warehouse locations has benefited properties near critical logistics and manufacturing nodes spread across the Detroit metro, like the Detroit Metropolitan Wayne County International Airport, Detroit’s east side, Pontiac/Auburn Hills and the Central I-96 Corridor. Construction continues on roughly 8.2 million SF of space, and if current delivery schedules hold, there’s little risk of this new supply upsetting market fundamentals this year. At 617 million SF, Detroit has the eighth largest industrial inventory of any market in the U.S., and current projects under construction represent only 1.3% of this inventory. Meanwhile, new projects have been filling quickly, with roughly 9% of the 30.3 million SF that’s been delivered since 2017 still listed as available for lease. Continued growth might be expected in the Central I-96 Corridor and Airport Districts. These areas are adjacent to major freeways and have more space for development than mature submarkets closer to the urban core and continue to attract interest from developers, investors, and tenants such as Tag Holdings, Martin Technologies, and EV battery producer, Our Next Energy.
Most people don’t realize that Detroit’s industrial market has been operating at nearly full capacity for almost half a decade, with vacancies and availabilities running below the U.S. average throughout most of 2015–21. The compressed long-term vacancy is less a function of burgeoning demand than a reflection of Detroit’s large share of owner-occupied manufacturing plants and limited developer interest relative to markets with faster growing populations or critical locations within the national supply chain. Still, Detroit’s vacancy rate of 3.8% among logistics properties more than two years old, which encompass roughly 313 million SF of space, remains at a comfortable level for landlords. These properties are going at a market average of $7.77/SF, up roughly 6% in 23Q1 from the previous quarter. For logistics properties delivered since 2020, a total of 1.6 million SF is listed as available, down from 2.6 million listed the previous quarter. This availability has been compressing downward as leasing continues for a few larger 5 Star distribution spaces completed in recently. Over the past year, leasing reached a five-year quarterly high, indicating continued tenant demand. Momentum has been most robust at the outer fringes of Detroit’s sprawling suburbs along critical transportation routes for logistics properties in submarkets like the Airport District and Central I-96 Corridor, and a mix of manufacturing and logistics buildings along the M-53 stretching northward from downtown Detroit through the northern suburbs. The West of Van Dyke/Macomb Submarket possesses the largest industrial inventory in the Detroit area, with 65.3 million SF, representing 10.5% of the metro area’s industrial space. The fact that the largest submarket only has just over 10% of the total inventory for the market illustrates the diffuse nature of industrial properties in the Detroit area. However, the Airport District, the second largest submarket, at 56.1 million SF, accounted for the most significant amount of leasing last year, soaking up 18% of all 2021 leasing activity. This trend has altered in recent months, with the Dearborn Submarket having the most significant lease signing in 2023. This occurred in February, when an unknown tenant signed a 448,640- SF lease with a move-in date of August 2023 at 13901 Joy Road. Emblematic of demand for logistics properties, Renaissance Global Logistics committed to 742,000 SF in Wixom, along the I-96 corridor. The rapid leasing of this freshly delivered 5 Star distribution property within the Wixom Assembly Park foreshadows continued tenant requirements for newer high-quality, state-of-the-art facilities that can accommodate robotic and automated systems that are now commonplace for rapid delivery distribution and warehousing. Over the past few years, Amazon has built out several entirely new locations like the massive 1 million-SF robotics fulfillment center at the site of the former Pontiac Silverdome and leasing existing space. One such location is at the Liberty Park Commerce Center in Sterling Heights, completed in 2019. The online retailer leased 570,000 SF at $8.03/SF triple net starting rent. While Amazon started subleasing space in its extensive logistics inventory nationwide, and some nearby locations planned in the Ann Arbor area were canceled or delayed, the Detroit area is one area where Amazon has so far kept its existing space. The pace of growth has slowed noticeably, though, as the new 3.8 million-SF Amazon Fulfillment Center in Detroit is only partially open, and hiring has been delayed. This location on the former state fairgrounds was supposed to be fully operational last summer. Looking ahead, as long as the U.S. economy can avoid a significant downturn this year, vacancies will likely remain compressed through the remainder of 2023. While construction levels have increased since the pandemic, the total of unleased industrial space under construction equates to 4.8 million SF, or less than 1% of the overall market inventory. This looks like a manageable tally for tenants to absorb, given that, since 2017, only 9% of the 29.8 million SF delivered remains available.
While markets continue adjusting to persistent headwinds, Detroit’s industrial sector is still the leader in rent growth among Detroit’s four major property types. Rents have averaged 6.2% annual growth over the past five years. More recently, the pace of gains has tapered off slightly to 5% as of 23Q1 from the all-time high annual rent growth of 9% reached in 22Q2. CoStar’s Base Case forecast calls for annual rent growth to taper off through the remainder of the forecast period in 2027. However, as long as e-commerce spending continues at current levels along with customer expectations for rapid delivery, there is upside potential to the rent forecast, given that vacancies are still expected to remain near historic lows through at least 2025. The average market rent for 50,000 SF or larger space listings is $7.76/SF among logistics properties built since 2015 or currently under construction. Some of the higher advertised rents in this subset are found among properties like 41150 Van Born Road in the Airport District Submarket, with an asking rent of $15/SF modified gross. Pricing for Detroit’s extensive stock of industrial properties built in the 1970s and ’80s are advertising rents averaging $7.93/SF among properties with 50,000 SF or more available. The pricing for these older properties has risen by roughly 4% since the previous quarter.
Development activity in metro Detroit has maintained a steady clip over the past five years but has yet to undergo the dramatic acceleration experienced in other metros. Over the past few years, there’s been an uptick, with just more than 8.7 million SF under construction as of 23Q1. This represents about 1.4% of the area’s current inventory, compared to 3.7% for the U.S., and also comes in behind most other Midwest markets, including Chicago at 2.9% and Indianapolis at 6.2%. All developments underway for manufacturing users are concentrated on the north side of the metro, in the Groesbeck North; West of Van Dyke/Macomb; and Auburn Hills, Pontiac & Rochester submarkets, near the General Motors, Ford, and Stellantis assembly plants. Of the manufacturing space currently underway, roughly 68% is listed as available for leasing. Meanwhile, all 10 manufacturing facilities over 200,000 SF built in this area since 2015 are fully occupied, primarily by third-party auto parts suppliers, including Grupo Antolin, U.S. Autoforce, and Century Plastics. However, the development of logistics projects is far more dispersed throughout the greater Detroit area, which has helped keep any single submarket from being overwhelmed by unleased new supply. As of 23Q1, there’s 3.2 million SF of distribution and warehouse space underway. Recently completed projects nearby the largest centers of auto manufacturing on the north side of the metro running alongside I-75 and Route 53 have secured leases by logistics tenants supporting the auto sector. In 2021, defense contractor Oasis Advanced Engineering, which develops combat vehicles for U.S. armed forces, leased 73,000 SF here, and auto parts maker JVIS USA leased 57,000 SF. Kansas-based Flint Development recently completed one of the area’s largest speculative logistics projects, the Oakland Logistics Park. The 713,800-SF property is in Pontiac and lists triple net asking rents of $6.95/SF. There is also a significant corridor of development along the western fringes of the metro area, stretching along I-96 and I275 from Novi in the north down to Romulus to the south. This area provides some less developed areas along interstate highways to accommodate distribution, bringing goods into Detroit’s densely populated areas to the east. In June 2022, in the Central I-96 Corridor, Renaissance Global Logistics signed a lease for 741,990 SF at the Wixom Assembly Park in Wixom. Kansas City based Flint Development Ashley Capital delivered this building next to Wixom Road and I-96 in March 2022. Over the long term, the corridors along I-96 and I-275, west of the metro, are also where Detroit’s largest projects in planning are located. This region is best situated for distributors bringing goods in from Chicago and America’s West Coast ports to deliver into Detroit. The presence of the airport (and loud overhead air traffic) has kept residential development at bay, leaving open space for industrial construction. The airport district continues to attract developers’ interest, with just over 5.4 million SF of proposed or under-construction warehouse and distribution space. This area has several larger proposed projects in the market, with two planned sites accounting for 2 million SF. Friedman Real Estate of Farmington Hills intends to construct the 1 million-SF Willow Run Commerce Park in Van Buren Township by October 2024.
While investors have displayed consistent interest in Detroit’s industrial sector over the past decade, it has intensified over the past 12 months. In 22Q1, there was an all-time record high in annual sales volume of $1.4 billion. As of 23Q1, the pace of activity has decelerated slightly, but the annual sales volume of $808 million is above the 10-year average of $749 million. Sales transactions were spread throughout the metropolitan area without a clear focal point of investor interest. While investing activity has been diffused throughout the metro over the past 12 months, the area with the highest sales, the Airport District Submarket, captured about 29% of the total volume to date in 2022. The area with the second-largest volume of sales activity over the past 12 months, the Auburn Hills, Pontiac & Rochester Submarket, garnered just over 14%. Areas branching out from the Airport District Submarket along Interstate 275, heading northward from Romulus to Novi, and along Interstate 75 southward to Ohio and beyond saw attention from national and foreign investors. That included Sovereign wealth funds like GIC Real Estate of Singapore, which currently allocates roughly 34% of its total portfolio asset allocation to the U.S. In August 2022, GIC Real Estate purchased a 4 Star distribution facility in Wyandotte for $7.52 million ($75.20/SF). This 99,950-SF property was built in 1997 and was fully leased at the time of the sale. This was part of a portfolio transaction for 58 industrial and flex properties across the U.S. worth a total value of $1.67 billion. Many of the properties with the highest sales volumes were part of multi-property and portfolio sales to national and foreign investors. This included activity by REITs, including STORE Capital, Realty Income, and Industrial Logistics Properties Trust. One of the top transactions over the past 12-months occurred in March, when global institutional investment firm Stockbridge Capital of San Francisco, California, purchased a 4-Star Amazon XL Fulfillment Center at the Pinnacle Landing Commerce Park in New Boston from Hillwood Development Corporation of Dallas, Texas, for $134.8 million ($179.77/SF). This transaction was part of a two-property portfolio that included the fulfillment center here and an Amazon Sort Center in Romulus. There have only been 12 sales this year among properties built since 2015, with the two most significant in terms of total sale volume being part of a portfolio deal. One notable property built in this period that sold and wasn’t part of a portfolio sale was a 3 Star warehouse facility built in 2021 and purchased by Mark Schwager of Shelby Township, Michigan, from GRD Realty Group for $1.68 million ($100.30/SF) last April. Located in Imlay City, this facility was fully leased at the time of the sale. As sales for newer buildings not part of a portfolio is relatively uncommon, this might serve as a suitable pricing benchmark for distribution facilities in the market. In comparison, over the past 12 months, the average sale price per SF for industrial properties over 100,000 SF built before 1980 was $40/SF. The largest sale among this cohort was a sale-leaseback last June for a 2 Star manufacturing facility in Flat Rock that was built in 1922. Store Capital, a public REIT, purchased this property from Flat Rock Metal for $17 million ($55.44/SF) at a cap rate of 7.99%.
Detroit’s economy experienced a generational downturn since the coronavirus pandemic, like many other cities throughout the country and even the world. Self-isolation, lockdowns, social distancing, and state mandated business closures all contributed to Michigan suffering from the worst unemployment rate in over half a century, with 22.7% of the labor force out of work at its peak. Before the pandemic, the worst unemployment number tracked in the past 45 years was 16.2%, in 1982. Catastrophic unemployment like this has a domino effect. Because unemployed workers were out of money, they were unable to purchase items that had been keeping productivity numbers stable. The cycle continued, as those making the previously in-demand products often lost their jobs. Fortunately, federal stimulus packages, totaling over $10 billion in the form of direct stimulus checks, advanced child tax credits, rent forbearance, and additional federal unemployment insurance payments, have softened some of the damage. Michigan’s government established a staged economic reopening, called the MI Safe Start Plan, which began in spring 2021 and is being implemented through a phased approach across various regions and workplaces. Detroit’s economic recovery has gained strength and momentum this year, with improved vaccination rates and easing of restrictions. With another 152,400 jobs added in June, the year-over-year job growth rate for the Detroit area was 8.6%, outpacing the national rate of 5.8%. Many employees have been allowed to return to the workplace, with significant operational changes relating to vaccination status, social distancing, and occupancy standards. Since the pandemic began, there’s been a seismic shift in attitudes and preferences regarding where and how to work with those who can work from home expressing a 70% preference to do just that. This could have a lasting impact on how businesses operate in Michigan, with office workers making up the largest grouping of Michigan’s labor force by workplace, at 29%. With continued uncertainty surrounding new COVID-19 variant cases, the timeline horizon for workers physically returning to the office may have been lengthened. One of the largest employers in the Detroit area, General Motors, announced its cultural shift, called “work appropriately.” Under this new directive, employees are empowered to work at whatever location they can work the most efficiently and productively. The next two largest segments of the labor force are industrial at 19% and healthcare at 13%. Most major sectors within healthcare, including hospital, nursing homes, assisted living facilities, and outpatient settings, are operating but are under continued COVID-19 workplace safety rules. The industrial workforce, while back on the job, has been hamstrung by persistent side effects of the pandemic, like logistical challenges, supply-chain issues, and raw material shortages. The ISM July Manufacturing PMI was 59.5%, down slightly from June, but still an expansion of the overall economy for the 14th consecutive month. Easing of supply bottlenecks is expected as consumer spending rotates from goods to services. Two of the areas hardest hit during the pandemic, restaurants and lodging, together employing roughly 12% of the state’s workforce, continue grappling with challenges of finding workers to fill empty positions. In December 2019, approximately 416,900 leisure and hospitality positions existed in Michigan. Exactly a year later, that number was down to 217,900. While the Detroit area is still known as the auto capital of the world, Michigan has been ranked fourth nationwide for high-tech employment. Michigan has organized the state into 20 economic Smart Zones, five of which are in the metro Detroit region. The Smart Zones technology clusters promote resource collaboration between universities, governmental and community-based groups, research organizations, and industries. Economic recovery across southeastern Michigan has been concentrated in suburban areas, which have outperformed core urban areas across multiple real estate class types. Even though urban areas have suffered from recent underperformance, many positive key economic drivers remain, which should aid in the recovery. One example is Ford Motor Company’s 30- acre development centered on the Michigan Central Station, west of Downtown Detroit. Ford’s Mobility Innovation District, known as the Corktown Campus, will create a centralized location for startups, innovators, and entrepreneurs to create, experiment, and launch innovative mobility solutions on real-world streets. A total of 5,000 new jobs will be created within the Corktown Campus, with 2,500 from Ford and 2,500 from business partners. Foreign direct investment (FDI)-related job growth in Michigan has ranked No. 1 in the U.S. for the past five years. Of the 313,000 workers employed in Michigan from FDI, 64% of the jobs created are in the manufacturing sector, with the majority being in the metro Detroit area. One of the larger recent additions was Fiat Chrysler Automobiles’ new Detroit Assembly Complex, which along with the Jefferson North Assembly Plant will create approximately 4,950 new jobs.