In Detroit, the Retail Market Continues Upward Trajectory on Several Fronts
Detroit’s economy is reinventing itself and slowly gaining its footing after the Great Recession and the city’s bankruptcy. Low interest rates supported record auto sales in 2016 and another strong showing last year, adding some stability to the metro area’s bellwether industry.
A rejuvenated downtown and new, growing industries are invigorating the retail market. The story of retail in Detroit closely follows the overall narrative of the market — out with the old and in with the new.
Because of this, well-known national retailers such as John Varvatos and Lululemon have made their way into downtown, while international retailer Zara established a presence in Troy, reiterating the market’s strengthened retail sector.
Job growth is closely aligned with retail sales, and payrolls in the Motor City have been expanding, on and off, since mid-2009. At times, the snail’s pace of growth has proven frustrating for a market that bore an above-
average burden due to population declines and the auto industry’s collapse.
The outlook is positive, however, and total nonfarm payroll employment in metro Detroit eclipsed the 2 million mark last year for the first time since 2006. Manufacturing and professional and business services have provided the foundation for the local economy, each adding nearly 100,000 jobs since the trough in mid-2009.
Effects of e-commerce
This year, employers are projected to create 12,000 jobs in metro Detroit. In a good news/bad news situation for retailers, Amazon will account for more than 1,000 of those positions as the e-commerce giant completes a 1 million-square-foot fulfillment center in Shelby Township. The company received a $4.5 million grant to develop the former Visteon site on Mound Road. Upon completion, Amazon will employ approximately 3,500 residents within three warehouses and a sortation center.
Elsewhere, the largest investment by an auto supplier in 20 years is taking shape as Flex-N-Gate is building a plant at the I-94 Industrial Park. The 350,000-square foot manufacturing facility will create 750 jobs.
The expanding economy and increased optimism have resulted in a resurgence in retail sales in recent years. In 2017, retail sales in the metro area climbed 3 percent, and expectations for 2018 have climbed to 3.8 percent as more residents become employed. Unique to Detroit, housing remains relatively affordable for most residents.
According to the National Association of Realtors, the median
single-family home price in the fourth quarter of 2017 was $171,200 in metro Detroit, below the previous peak of $187,000. While homes are less expensive, household income is more than 10 percent above metro Detroit’s pre-recession peak at $59,300. A combination of low costs and higher earnings bodes well for the retail market through the current expansionary period.
Retail supply, meanwhile, is undergoing a significant amount of reinvention during this cycle. Single-tenant properties account for nearly all of the new inventory, which suggests a disciplined approach to development.
That trend continues this year as two Menard’s locations account for half of the scheduled deliveries, one of which will be a part of The Village at Bloomfield, a mixed-use development in Oakland County expected to open in late 2018 or early 2019. The other Menard’s storefront will replace the former Gibraltar Trade Center in Taylor, which consolidated operations at the company’s Mount Clemens location.
A second home improvement center recently opened in Van Buren Township on Belleville Road. The 2017 completion of the Little Caesars Arena in downtown Detroit also sparked a wave of retail construction with delivery dates extending into 2020. The arena will serve as a focal point for commercial development in the coming years.
Future of malls
Repurposing old retail space is also a significant story in the local retail market as old malls are torn down and redevelopment brings new life to underutilized land. The demolition of Northland Center in Southfield, which began last fall, will be completed this year. Only the former Macy’s store remains. Waterford Township ordered the demolition of the condemned Summit Place Mall. An unnamed developer has proposed a sports and entertainment complex for the site.
A combination of disciplined supply growth and new demand resulted in a 6.8 percent vacancy rate at the end of last year, down 40 basis points from year-end 2016. Following the recession, retailers gravitated toward locations with high household incomes, which has resulted in near full occupancy in the Troy and Bloomfield submarkets, where vacancy was 2.4 percent and 4 percent, respectively, at the end of last year.
As the economy strengthens, retailers are broadening their geographic targets. In the Downriver submarket, for example, vacancy has declined by more than 150 basis points during each of the past three years and stood at 6.9 percent at the end of 2017.
Among retail segments, malls and neighborhood or community centers face the biggest hurdle to improving vacancy rates. The rate for these properties is a hair under 10 percent, more than double the rate at power centers.
Broad-based improvement is anticipated in the coming months, which should lower the overall vacancy rate to 6.2 percent by year’s end. The projected decline in the vacancy rate this year represents an improvement of 60 basis points and builds on last year’s 40-basis point decline.
Average rents are also growing rapidly, including gains of 5.8 and 5.2 percent in 2016 and 2017, respectively. This year, rent growth is forecast at 3.4 percent, which will lift overall retail rent to $14.10 per square foot triple net for the average asking rent. Unless the market experiences growth above expectations, recapturing pre-recession rents will not occur until 2019.
Although some key economic and retail fundamentals fall short of previous high watermarks, the overall retail market remains on an upward trajectory. Buyers, tenants and developers are finding opportunities in Detroit that were scarce just a few years ago.
— By Ashish Vakhariya, First Vice President, Investments, National Retail Group, Marcus & Millichap. This article originally appeared in the May 2018 issue of Heartland Real Estate Business magazine.