The second quarter of 2020 has been very unique, to say the least. This is the first full quarter that embraced the COVID-19 pandemic, and during the second quarter, we saw the most changes to the economy. With that being said, most people anxiously waited for the second quarter reports to come out for the industrial market. The industrial sector’s success is heavily correlated with the United States economy. So, when the economy isn’t doing well, the industrial sector usually isn’t either. Thankfully, some areas shined or bounced back more quickly than expected.
Q2 Industrial Report
At an average of 3.7%, Detroit’s industrial vacancy rate is close to a record low. With more than 35% of annual net, new delivery being absorbed, and 6.5 million square feet under construction, it’s very unlikely the industrial vacancy rate will dip below 3%. If the USMCA trade agreement lightens its restrictions between the former NAFTA partners, the market is expected to remain healthy in the future, which can give landlords the upper-hand when negotiating with potential tenants.
The price per square foot of rental properties hovered around seven dollars in the second quarter. This is the highest price per square foot in decades. This also coincides with the low vacancy rate of 3.7%, meaning the rental market is highly successful right now. However, the annual rent growth is expected to fall past zero and even reverse itself at the end of 2020 due to market conditions from COVID-19. Manufacturing has been significantly affected by the Coronavirus, which will result in a steep decline in rental growth. Hopefully, with the economy being open again, many industrial warehouses will stay occupied and their tenants will remain profitable.
The trends shown in the industrial market are consistent with the Detroit economy. Despite some tension between the United States and its allies, Detroit’s industrial market increased construction. The transportation, manufacturing, and trade sectors employ almost 500,000 people while transportation equipment accounts for over half of exports from Detroit. The increase of production in the tradable economy has increased the demand of industrial facilities that serve the transportation and logistics sectors, which we can see in the list below.
Here are the top submarkets in Detroit for the second quarter:
- Airport District
- Royal Oak
- Detroit East
- W of Van Dyke/Macomb
- Southern I-275
- Central I-96 Corridor
- Groesbeck North
- Auburn Hills
- Groesbeck Central
Under Construction Properties
Over 5.7 million square feet is under construction. Much of this in the Royal Oak, Airport District, and Detroit East submarkets. Ashley Capital controls over one-third of the Detroit industrial market as they are constructing over 2.5 million SF in the metro alone. At 900,000 square feet, the Tri- County Commerce Center will be a large addition to the Hazel Park area.
Here are the properties that are, or were, under construction in the second quarter:
- Tri-County Commerce Center
- Building 5
- Building 6
- 6101 Van Dyke St
- 14200 N Haggerty Rd
- Warren Commerce Center
As one of the strongest markets in the Midwest, Detroit is seeing great demand in the automotive industry. With the resurgence of the automotive sector, industrial prices have seen a significant increase. The weighted- average pricing in the second quarter was $60 per square foot, which is much higher than what it was five years ago at $37 per square foot.
COVID-19 has created high levels of uncertainty around Detroit’s economy. Similarly to the Great Recession, Detroit and other cities across the country have seen high unemployment rates. The lockdown to prevent the spread of COVID-19 stopped commercial and business activities. So, manufacturing saw a 28.96 percent decrease in job activity. Many activities have begun again, which has helped get the economy back on track.
In addition to the economy improving slightly, Detroit is in a great position to withstand a crisis such as COVID-19, more so than most other large cities. One-third of all Detroit workers are employed in low-risk industries, meaning they likely won’t see mass layoffs. However, the at-risk industries such as leisure and hospitality, oil and gas extraction, and retail employees could see lay-offs. But, with the low-risk industries supporting the economy, we will likely bounce back quickly.
Some submarkets have taken a larger hit than others because of the difficulties with the economy. Many submarkets, such as Detroit East and Downriver South saw a significant decrease in annualized market rent, some by over 100%. Luckily, a few submarkets did see a positive change in growth, such as the Central I-96 Corridor and Southfield.
Q2 Rent and Vacancy
For the overall rent and vacancy rates, we have seen mostly minor or negative growth this quarter. However, the year to date cost shows positive growth at 1.9 percent. Additionally, the vacancy rate is just 3.7%. This is excellent news, as it shows COVID-19 has had a minimal impact on the vacancy rate of properties. Hopefully, we can keep the average rising during the last half of the year.
This is a summarized version of a an industrial market report that was originally created by CoStar. The full report can be found here.