While Detroit’s surge in logistics leasing and construction hasn’t reached the heights of the Inland Empire or Dallas, market conditions continue to favor landlords. With a vacancy rate of 4.6% and leasing just below the all-time high, which was set a year ago, the industrial market continues to grow steadily. At 617 million SF, Detroit has the 8th largest industrial inventory in the US, and even though new construction is picking up, current projects represent only 1.6% of the total inventory, so it doesn’t look like the pendulum will be swinging in favor of tenants any time soon. At 9.1% year over year, rent growth has continued to surpass its 5-year average, and continued growth is expected around the Central I-96 Corridor, particularly near Novi and Wixom.
Q3 Industrial Report
Due to Detroit’s large share of owner-occupied manufacturing plants and limited developer interest relative to more appealing markets, the industrial market’s vacancies and availabilities have run below the US average for most of 2015-2021. The current vacancy rate among logistics properties that are more than 2 years old is 4%, while 2.4 million SF is listed as available among properties delivered since 2020. Growth is most robust among Detroit’s suburban outskirts, near critical transportation routes. Driven by the needs of logistics providers like FedEx and Amazon, new deliveries with high-quality, state-of-the-art facilities that can accommodate robotic and automated systems are the most sought-after.
Among Detroit’s 4 major property types, industrial properties lead rent growth, averaging 6.6% annual growth in asking rents over the past 5 years, but this rate has slowed to 9.6% after reaching an all-time high of 10.3% in Q2 of 2022. Moreover, new deliveries aren’t expected to catch up with demand until at least halfway through 2023, so vacancies will most likely remain at historic lows through 2023. For logistics properties that are 50k SF or larger and have been built since 2015, the average advertised triple net asking rent is $7.29/SF, while properties of similar size that were built in the 1970s or 1980s are advertising triple net rents averaging $7.75/SF, an increase of approximately $1/SF since last year.
As of the end of Q3 2022, approximately 9.8 million SF are under construction in the Detroit metro area, representing only 1.6% of total inventory, compared to the 3.9% average for the US. Of this space, 8.7 million SF is distribution and warehouse space (up from 5.3 in Q2 2022), and of the manufacturing space currently underway, only 39% remains available for leasing (up from 27% in Q2 2022).
Here are the top five submarkets in Detroit for the third quarter:
- Airport District
- Detroit East
- W of Van Dyke/Macomb
- Detroit West
- Southern I-275
Under Construction Properties
A lot of development activity is underway along the western edge of the metro area, particularly along I-96 and I-275 from Novi in the north down to Romulus in the south. This area is well situated to distribute goods from Chicago and the West Coast into Detroit. Moreover, proximity to the airport has kept residential development at bay, so there’s more available space for industrial construction. Two planned sites in the area will account for 2 million SF.
Here are the 7 largest properties that are, or were, under construction in the third quarter:
- Romulus Trade Center, 1 Vining Rd.
- Building 6, 42060 Ecorse Rd.
- Eastland Commerce Center, 18000 Vernier Rd.
- 2, 18000 Vernier Rd.
- Canton Business Park, 48620-48626 Michigan Ave.
- D, 14674 23 Mile Rd.
- 13751 Hamilton Ave.
Annual sales volume reached an all-time record high of $1.3 billion in Q1 2022, and it has slowed only slightly to $1 billion in Q2 2022, remaining well above the 10-year average of $717 million. While transactions were dispersed across the Detroit metro area, 26% of total volume was situated in the Airport District, and areas branching out from the Airport District were also quite popular with investors. Moreover, the average sale price for industrial properties of at least 100,000 SF that were built before 1980 was $41/SF, while only 14 sales within the last 12 months have included properties built since 2015, most of which sold as part of portfolio deals.
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 work has changed considerably. 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 two largest segments after office work, industrial at 19% and healthcare at 13%, are still 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. These are expected to improve as supply bottlenecks are cleared when consumer spending shifts from goods to services.
Finally, Michigan has ranked #1 in the US in foreign direct investment-related job growth for the past 5 years, and a significant amount of that growth is in the manufacturing sector in the Detroit metro area. This is expected to expand in coming months with new facilities adding a total of approximately 10,000 new jobs.
This is a summarized version of an office market report that was originally created by CoStar. The full report can be found here https://www.compass-commercial.com/detroit-industrial-report/.