Dynamic Forces Come Together to Re-Energize Detroit's Retail Market

Despite the recent announcement that Detroit has become the largest U.S. city to file for bankruptcy, a closer look at the broader trends within

the Detroit retail market reveals a development landscape that is generally moving in a positive direction. While the bankruptcy filing will affect certain aspects of Detroit’s immediate recovery, the overall theme is one of renewal and revitalization.

Motown Momentum

Across the Detroit marketplace, retailers are reviewing their existing inventory as leases mature, with a general focus on infill or relocations. There seems to be a widespread understanding that Southeast Michigan has historically been a solid retail market, and that the region’s economic turnaround is opening up new opportunities.

The list of positive developments across metro Detroit continues to grow. As Wayne State University continues to transition from a commuter campus to a more traditional collegiate campus, the surrounding area is seeing extensive development. Quality retail space on Woodward Avenue has been experiencing increased demand, and the notable successes of fast-casual restaurant brands along the Woodward corridor has fueled that momentum.

The much-heralded arrival of Whole Foods in Midtown Detroit is an important development from both a practical and symbolic standpoint, and the ongoing investments in housing and infrastructure by Henry Ford Hospital, the Detroit Medical Center and Wayne State University have given area retailers a reason for additional optimism.

While there have been a handful of “early adopters,” it will still be some time before we see substantial retail movement downtown. The M1 Rail streetcar project — which recently received final clearance to move forward and is expected to be completed by the end of 2015 — promises to play an important role in the retail revitalization of downtown Detroit. The $137 million project will establish a 3.3-mile loop along Woodward Avenue.

In the meantime, residential demand is building across the region, and the office sector is doing particularly well. Downtown rents have risen to — and in some cases gone beyond — suburban levels. Downtown Detroit has recently emerged as one of the hottest office markets in the state. The construction of a significant number of new downtown parking facilities speaks to that trend.

The 800-pound gorilla in the room is the city’s municipal bankruptcy and the assignment of an emergency financial manager. While there are no easy answers, and the resolution of that situation has created a lot of uncertainty, it seems unlikely at this point that it will completely halt the region’s overall economic momentum. It’s more likely that a restructure will allow the city to move forward.

The Fast and the Casual

While upscale, chef-driven restaurants continue to enter the market, one of the most significant retail trends in Detroit and its surrounding suburbs is the rapid expansion and continued success of another restaurant category: fast casual. This sector continues to expand and tenants display a willingness to pay high rents for the most visible and convenient locations. To that end, some developers are focusing significant attention on “shadow centers” outside of big-box retail.

These 8,000- to 12,000-square-foot strips and freestanding block sites have become a popular and increasingly competitive space to accommodate not only fast casual dining options like Qdoba Mexican Grill, Chipotle Mexican Grill, and Five Guys Burgers and Fries, but also to a lesser extent, cell phone stores, banks and other service business looking for highly visible, yet convenience-driven sites.

The relatively high-profile spaces enjoy an appealing combination of access, visibility and plentiful parking, with the backdrop of a huge block of retail gross leasable area in the adjacent center. Noteworthy “shadow center” developments in the Detroit suburbs of Chesterfield, Northville, Bingham Farms and Novi speak to the prevalence of this trend.

What is driving the timing of this fast-casual push into these particular spaces? It seems likely that a combination of a relative lack of large-scale new development, a few new retail entrants in the Detroit market and continued economic improvement have upped the competitive ante for appealing new spaces.

The general success of the fast-casual format has made this popular retail concept open to food establishments spending more on the A locations. They have a formula that works, and so they are willing to pay a premium for space that fits within the formula because they know they will do well there.

The Haves and Have-nots

The other retail trend worth noting is the increasing stratification of the development landscape. While many Class C retail centers around town are still very much in crisis, the Class A and B properties are seeing vacancies being filled rapidly. It seems as if market rents have hit bottom and are starting to creep up, and a steadily improving economy has left retailers competing more for premium spaces. Some brands are already taking locations they may not have considered just a year or two ago.

Across the region, Class A centers such as Twelve Oaks in Novi, a western Detroit suburb, stayed full even at the lowest points of the economic downturn, but rents sagged noticeably. Today, however, those rates have risen to where they were before the downturn, and in some cases are even higher.

The development pipeline is just now beginning to get moving again, and for the handful of new projects that are coming on line now, interest has been extremely high. Currently, there simply are not enough available spaces to satisfy some of the national brand names looking to enter the city of Detroit for the first time, including Petco and Five Below.

— Alex Bieri, leasing representative, Stokas Bieri Real Estate, an X Team International partner