The third quarter of 2020 has been relatively stable for the Detroit industrial market. Despite enduring the coronavirus pandemic, year-over-year net absorption was over 1.5 million SF in Q3, and the vacancy trend has remained flat. This is likely because industrial facilities that supply to essential businesses were allowed to remain open. The specific submarkets that are doing well are Auburn Hills, Pontiac, and Rochester. These are all historically the most active submarkets for the industrial sector as they average about one million SF of net positive absorption each year. Additionally, the Airport District is seeing success with its industrial sector, as new logistical facilities are needed. In fact, the largest lease signed in the third quarter was in the Airport District. This quarter showed some great news for industrial sector investors.
In the third quarter, we saw a very stable vacancy rate, as we have through the beginning of the year. It appears the industrial sector has not been impacted by the coronavirus pandemic when it comes to vacancy rates. Additionally, the availability rate of leases in the Detroit industrial market has been far under the United States average, sometimes by four percent. With more than 35% of annual net new delivery being absorbed and slightly less than seven million SF under construction, it’s unlikely local vacancies in the industrial market will fall below three percent.
The coronavirus also had little impact on the Detroit rental market in Q3. Specialized industrial and logistics hovered around seven dollars per SF in the third quarter. On the other hand, flex spaces hovered at just above $10 per SF. These rates are all consistent with what we saw in the first half of 2020. One industry in particular that is doing extraordinarily well is the cannabis business, as the Cannabis Industrial Park in Lake Orion has properties going for as high as $26 per SF. However, for all industries, annual rent growth is expected to lower significantly in the second half of 2020. This can be avoided if the correct fiscal policies are implemented before it’s too late, to avoid an economic depression.
Construction in the Industrial Market
Despite the ongoing pandemic and tension between allies, the United States has seen great success with industrial construction. Detroit in particular relies on the neighbors of the United States for their exports. About three-quarters of Detroit’s exports go to Mexico and Canada. So, the new USMCA agreement will help boost Detroit’s tradable economy as it encourages trade between the U.S. and its neighbors. We can expect industrial construction demands to continue past the already 5.8 million SF under construction in Q3.
In Q3, there were 39 industrial properties under construction. Ashley Capital is one of the most prominent developers in the area for the second half of 2020, with one-third of the properties belonging to them. They have over 2.5 million SF under construction in the Detroit area, bringing several great properties to the area. Additionally, the Crossroads Distribution Center in the Airport District is the largest project in Q3, at 1.6 million SF. Of the 5.8 million SF under construction, 32.7% of it is preleased.
Sales for the Industrial Market
Unfortunately, Q3 of 2020 was one of the worst quarters in decades for industrial sales. However, there was a large improvement from Q2. Sales were around $80 million in Q3, whereas Q2 sales were around $45 million. The top sales in 2020 were companies who already occupied the spaces, and then decided to purchase the properties. CoStar does predict the price per SF in Detroit will double by 2022.
We cannot overlook the impact of COVID-19 on the economy. It has caused deep fear for investors, which has not been an experience for people in Detroit in over a decade. Over one million jobs have been lost in the United States due to the economy shutting down and businesses having to close. However, the industrial sector was very stable other than its number of sales. This is despite the fact that commercial real estate brokers and construction contractors couldn’t work for several months. With the spike in e-commerce and manufacturing needs, many people believe the industrial sector is the top choice for investing. Hopefully, with new financial and medical policies, the Detroit economy will see success again in just a few years.
Rent & Vacancy of the Industrial Market
The price per SF in several submarkets has grown in recent months. The submarket with the most expensive price per SF is the Central I-96 Corridor at $9.22 per SF. This submarket has also seen a 4.1% rate of growth in the past 12 months. However, this area does have a 4.7% vacancy rate. The areas with the lowest vacancy rate are the St. Clair & Lapeer Counties, at just 1.2%. West Detroit has an 8.9% vacancy rate, which is the high reported in Q3.
In some areas like Detroit, it is still hard to find good industrial space. The vacancy rate for logistics is only 3.8% and specialized industrial space is only 2.3%. It is actually the flex space which has a 9% vacancy rate pushing the overall rate up to 3.6%. We expect more inventory to come onto the market shortly as companies who couldn’t survive due to covid close their doors. However, with the push to return manufacturing to the USA, Detroit should reap the benefits of this influence.
Q3 Industrial Market Results
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