While Detroit isn’t leading the country in logistics leasing and construction, industrial market leasing in the Motor City is nothing to sneeze at. With leasing at 5-year high and the vacancy rate of 4.4% near an all-time, the market looks to remain in landlords’ favor for the near future. Although Detroit has the 8th-largest industry inventory in the US (at 611 million SF), current projects represent only 1.5% of this inventory, only 6% of the 20 million SF delivered since 2018 is still available for lease. Moreover, with year-over-year rent growth at 9.4%, shooting above it’s 5-year average, this growth spurt looks to continue accelerating for some time, particularly driven by e-commerce-related tenants and manufacturers.

Q1 Industrial Market Report

Leasing

Operating at nearly full capacity since 2015, Detroit’s industrial leasing market looks to remain in good shape in the near future, as long as the US economy continues to sustain its currently pace of growth. With a vacancy rate of 3.9% among logistics properties more than 2 years old and only 570,000 SF listed as available among properties delivered since 2020, the rate of new construction remains comfortable for landlords. Moreover, the diffuse nature of industrial properties throughout the Detroit area enables growth to span multiple submarkets. For instance, the Airport District and Central I-96 Corridor are seeing an increase in logistics properties due to their critical transportation roles, while manufacturing and logistics properties continue to spread along the M-53 from downtown to the northern suburbs.

Renting

Detroit’s industrial market remains far and away the leader in rent growth, averaging 6.2% in annual growth over the past 5 years but increasing to 9.4% over the past 12 months. Fueled largely by the e-commerce spending boom that resulted from the Covid-19 pandemic, vacancies are expected to remain near historic lows through 2023, even as new deliveries start to catch up with demand.

Construction

While construction in the Detroit metro area has remained steady, it hasn’t seen the dramatic growth that some areas have recently undergone. Currently, there is just over 9.5 million SF under construction, which is about 1.6% of total inventory—over a point below the national average of 2.9%.

Here are the top industrial submarkets in Detroit for the first quarter:

1. Airport District
2. W of Van Dyke/Macomb
3. Auburn Hills, Pontiac, & Rochester
4. Central I-96 Corridor
5. Detroit West

Under Construction Properties

Although industrial construction in Detroit hasn’t taken off the way it has in some other midwestern markets (it’s at 1.6% of total inventory compared to 2.2% in Chicago and 6.3% in Indianapolis), the steady pace of growth means that newly delivered properties are filling quickly. Most new manufacturing developments are in Groesbeck North, West of Van Dyke/Macomb, and Auburn Hills, Pontiac & Rochester submarkets, while new logistics developments are much more dispersed throughout the greater metro area. The largest future projects are planned for the I-96 and I-275 corridors west of the metro area, which is the most convenient location for distributors bringing in goods from Chicago and West Coast ports.

Here are the 7 largest properties that are, or were, under construction in the first quarter:

1. Building A, 10160 Assembly Park Dr.
2. Oakland Logistics Park, 2100 S Opdyke Rd.
3. Building 6, 42060 Ecorse Rd.
4. 1030 Featherstone St.
5. Canton Business Park, Michigan Ave.
6. 13751 Hamilton Ave
7. 12601 Southfield Fwy.

Sales

While most other major metropolitan areas experienced record-setting industrial sales in 2020, Detroit was lucky to rebound by the end of the year and finish only slightly below the 5-year average at $729 million. However, prices in Detroit have increased from last year’s low of $58/SF to average $65/SF, and the city’s cap rates, at 8.8%, are 229 basis points higher than the national average, which is helping to attract investors hunting for higher yields. Four of the five top purchases in Detroit so far this year were industrial and net lease REITS.

Economy

Responding to what has been identified as a generational downturn resulting from the Covid-19 pandemic, including a catastrophic unemployment high of 22.7%, Michigan’s Safe Start Plan took a phased approach to reopening and renewing the economy. In Detroit, increased vaccination rates and eased restrictions enabled a lot of people to go back to work, bringing the year-over-year job growth rate to 8.6%, above the national average of 5.8%.

The nature of office work has changed considerably, as 70% of office workers indicated an explicit preference for working from home when possible. Since they make up the largest sector of the workforce in Detroit, at 29%, this may result in significant changes in the office market in the future. For instance, one of the largest employers in the state, General Motors, has transitioned to what it calls a “work appropriately” plan, which allows employees to work wherever they work most efficiently and productively.

Meanwhile, the next two largest segments, industrial at 19% and healthcare at 13%, are also reeling from the impact of the pandemic. Healthcare facilities remain critical to combatting the pandemic, and although they have eased some restrictions, they continue to operate under Covid-19 workplace safety rules that have been dropped by most other sectors. Moreover, while back on the job, the industrial workforce continues to face logistical challenges, supply chain issues, and raw material shortages as a result of the pandemic.

This is a summarized version of an office market report that was originally created by CoStar. The full report can be https://www.compass-commercial.com/industrial-real-estate-reports/.