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Retailers, Investors Find Detroit’s Improving Economy Inviting

Retail-Absorption-Detroit

Steady employment gains and new households in metro Detroit have boosted optimism in the retail sector. The local economy added 36,500 nonfarm payroll jobs in the 12-month period that ended September 30, 2017, an expansion of 1.8 percent and in line with employment growth nationally.

Job gains were led by the professional and business services sector, which filled more than 12,400 positions. This segment includes many well-paying tech jobs as companies such as Penske Logistics and Lear Corp. increase staffing.

Steven Chaben, Marcus & Millichap

Steven Chaben, Marcus & Millichap

As of August, Detroit’s seasonally adjusted unemployment rate stood at 3.2 percent, down from 5.3 percent a year earlier, according to the Bureau of Labor Statistics.

Amazon.com is rapidly expanding in the metro area. Amazon opened a fulfillment center in Livonia this fall, creating 1,000 positions, and has additional facilities planned in 2018 for Romulus and Shelby Township that will create a combined 2,600 jobs when fully staffed.

The combination of job creation and increasing wages is boosting household incomes and contributing to rising retail sales. The median household income in the third quarter stood at $59,600 per year, slightly higher than the U.S. level. The gain in spending power is benefiting existing retail operations and attracting new businesses such as Topgolf and Duluth Trading Co. to the market.

Retailers expand in suburbs

Retail completions totaled 1.3 million square feet from July 1, 2016 to June 30, 2017, up from 1.1 million square feet during the prior 12-month period. Menard’s is one company increasing its footprint in the market with new stores due to open in Belleville and Taylor, Michigan during 2018. The facility in Taylor will anchor the new 80-acre Trader’s Point development on the former Gibraltar Trade Center site.

Meanwhile, Kroger Marketplace and At Home are other retailers opening multiple locations this year in both new and existing space.

Across metro Detroit, retailers absorbed nearly 3.3 million square feet in the four quarters that ended June 30, lowering the vacancy rate 80 basis points to 6.8 percent at mid-year. Vacancy, however, remained 140 basis points above the national rate.

Multi-tenant properties contributed to the elevated vacancy rate. Vacancy in these properties stood at 11.3 percent as of June 30, after posting a drop of 110 basis points over a 12-month period. The persistently high rate is due in part to long-shuttered malls including Northland Center in Southfield and Summit Place Mall in Waterford. The planned demolition of these centers would help tighten the vacancy rate.

Robust tenant demand for retail space has helped boost rents this year. The average asking rent stood at $12.94 per square foot at the end of the second quarter, up 4.9 percent from the same period a year earlier and the highest rate since 2009.

Rent growth is widespread. Bloomfield was the only submarket that did not record a year-over-year rent gain. Here the average asking rent declined 3.5 percent to $18.17 per square foot at the end of the second quarter, still the second highest rent among submarkets.

Buyer interest revs up

Rapidly improving operations are drawing investors to Detroit’s retail assets, while the increase in competition has put upward pressure on prices. During the 12-month period that ended June 30, the price of multi-tenant buildings vaulted 15 percent to an average of $177 per square foot at cap rates typically in the 8 percent range.

The average price of single-tenant properties, meanwhile, posted a 4 percent rise to $256 per square foot at cap rates that averaged in the mid-7 percent range.

New retail development in suburban areas with strong demographics will attract investors seeking a flight to safety. In these areas, cap rates are typically in the low-6 to low-7 percent bracket for small multi-tenant assets, while single-tenant buildings can trade at first-year returns in the 5 percent range.

Transaction activity over the 12-month period that ended June 30 increased for neighborhood and community centers with more than 100,000 square feet, although trading volume remained light. These assets exchanged hands at an average price of $82 per square foot with cap rates in the 7 to 9 percent range.

Throughout the metro area, many local buyers are focusing on older strip centers with less than 25,000 square feet. During the last four quarters that ended June 30, the average price for these buildings reached $121 per square foot at cap rates typically in the 8 to 10 percent range.

— By Steven Chaben, Senior Vice President, Marcus & Millichap. This article first appeared in the November 2017 issue of Heartland Real Estate Business magazine.

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