Metro Detroit’s retail market is characterized by strong tenant demand and investors’ eagerness to acquire and backfill vacant properties. In the downtown area, the revitalization efforts and adaptive reuse developments that started well before the pandemic continue. In fact, this year marked Detroit’s 100th commercial demolition, accelerated by $95 million in American Rescue Plan Act funding.
Over the past five years, the City of Detroit has invested $1 billion in preserving or developing more than 4,600 affordable housing units. The hard work is paying off. Between July 2022 and July 2023, Detroit experienced population growth for the first time since 1957, according to the U.S. Census Bureau.
A major highlight this year was the reopening of the long-abandoned train station, Michigan Central Station. Ford Motor Co. redeveloped the property in the city’s Corktown neighborhood into a 30-acre technology and cultural hub. Until Aug. 31, the first floor will be open for “Summer at The Station,” where visitors can take self-guided tours and enjoy food and beverages outside. This fall, the first commercial spaces will begin opening to the public.
Meanwhile, developer Bedrock topped off construction of its Hudson’s project, the redevelopment of the former J.L. Hudson’s department store site. General Motors Co. plans to leave the Renaissance Center for the new development in 2025.
The Detroit City Football Club recently acquired the former Southwest Detroit Hospital site with plans to build a new stadium that will serve as the permanent home for the professional men’s soccer team in Detroit. The building has been abandoned for 18 years.
“The story that permeates continually in Detroit and its metro area is adaptive reuse projects across all product types,” says Evan Lyons, senior director with West Bloomfield-based brokerage firm Encore Real Estate Investment Services.
Retail absorption is steadily increasing, while the pace of new construction has slowed, Lyons points out. The well-documented increase in borrowing and construction costs in recent years has led to the slowdown in new development, which has in turn reduced the availability of quality space for lease. Brokers are working hard to find lease opportunities for retailers, which are beginning to accept higher rents.
Eric Unatin, principal with Mid-America Real Estate in Bloomfield Hills, says that a lack of inventory is the major obstacle in the marketplace. “The overall theme is that there are more retailers looking for space than there are retail spaces available,” he says.
“We’re seeing rents slowly start to kick up. Once word gets out that retailers are willing to pay more than what has been traditional market rates, that could create new construction opportunities. The deals don’t make sense unless the retailers are willing to pay rents that justify the expenses,” says Unatin.
“Demand outpacing supply isn’t totally new, but the slowdown in construction because of [higher] costs has made everything a little more difficult,” says Matt Berke, principal broker with Farmington Hills-based Keystone Commercial Real Estate. “But that’s what our job is — to dig up the right spots for clients.”
Leasing boom
The metro Detroit retail market experienced significant net absorption during the first quarter of this year totaling 597,560 square feet, according to Colliers. In contrast, the previous quarter’s net absorption was 222,400 square feet, and the first quarter of 2023 had negative net absorption of 366,100 square feet.
In the first quarter of this year, there were 292 leases executed totaling 923,124 square feet. The overall vacancy rate decreased slightly to 5.1 percent from 5.2 percent the prior quarter.
“There are a slew of new retailers trying to penetrate the market,” says Unatin. “Tenants such as Shake Shack, Cava, First Watch, Snooze and a handful of veterinarian clinics are all vying for the same spaces.”
All categories of restaurant tenants — ranging from quick service to fast food and sit down — are active in the market, according to Berke. He says there are far too many restaurant users to list, but some of the clients his firm is currently representing include Chick-fil-A, Five Guys, Qdoba and Savvy Sliders.
Automotive tenants, including convenience, oil change and car washes, are also on the actively expanding list. Examples in this category include Tommy’s Express Car Wash, Zax Auto Wash, Jax Kar Wash, Sheetz, Casey’s and Kum & Go, notes Lyons.
In addition, soft goods retailers are very active in the market, according to Unatin. Examples include T.J. Maxx and its sister companies HomeGoods, Marshalls and Sierra, as well as Burlington, Ross Dress for Less, Total Wine & More and Hobby Lobby.
A new-to-market retailer is Crate & Barrel, which recently opened a 38,000-square-foot outlet store in Canton. Additionally, PGA Tour Superstore is opening a store in Novi at the end of July.
Retailers continue to adjust to the inflationary pressures on consumers, who are starting to pull back and seek value-driven purchases. In May, national retail sales rose 0.1 percent, according to the U.S. Commerce Department. News outlets reported that the figure was weaker than expected. On a year-over-year basis, sales increased 2.3 percent.
“We’ve been dealing with inflationary pressures since 2020 and they aren’t going away,” says Lyons. “This directly affects the rent a tenant is willing to pay, increases the required tenant improvement dollar contribution by landlords, and forces tenants to take a harder look at their existing store performance. That said, where some businesses struggle, there is a long list of those growing and expanding even in the wake of higher costs.”
Investors eye vacancies
The leasing boom in the market combined with the high cost of new construction is propping up sales of existing vacant buildings, says Lyons.
“New construction starts are at the lowest level in the past 10 years, so it encourages existing vacancy consumption,” he says. “Two years ago, if you had asked me if droves of sales of vacant assets were in my forecast, I would have told you that it’s highly unlikely. But I invest my time with the assets my clients want to pursue.”
Lyons says about half of his transactions year-to-date through mid-June have been backfill redevelopment plays. Properties formerly occupied by Rite Aid are some of the most prominent examples.
The pharmacy chain is undergoing a bankruptcy restructuring, and the latest round of store closures in June called for 27 locations in Michigan and Ohio. Since its bankruptcy filing in October, Rite Aid has announced more than 300 store closures nationwide.
As of mid-June, Lyons had five former Rite Aid properties under contract for purchase with five different buyers. Each of the buildings was backfilled with a different type of user, three of which Lyons procured that included a national medical tenant, national hardware tenant and an owner-user. His firm has nearly 20 Rite Aid property listings available for sale or lease primarily in Michigan and Ohio.
Additionally, Walgreens recently announced that it plans to close several underperforming stores after failing to meet earnings expectations in its fiscal third quarter.
Overall, the investment sales market has been constrained because of the high cost of capital, says Unatin. But he points out that several notable retail centers in the area that have recently gone to market are sparking buyer interest.
In the first quarter, metro Detroit’s retail investment sales activity was $70 million, down from $95 million the prior quarter, according to Colliers. The average cap rate was 8.9 percent and the sales price per square foot averaged $152.
“There are still institutional investors that do have access to capital and are willing to transact,” says Unatin.
For example, a recent high-level transaction for Unatin and his colleague Brad Rosenberg was the sale of Hunter’s Square shopping center in Farmington Hills. Prior to the sale, the duo secured leases with Nordstrom Rack, Total Wine & More and Meijer to anchor a partial redevelopment of the property totaling 288,000 square feet. There are still several spaces available for lease at the center.
Kimco Realty sold the asset to Symmetry Property Management & Realty Inc., which has received city council approval to move forward with its redevelopment plans. Kimco sold 10 properties, including Hunter’s Square, as part of a $248 million disposition of former RPT assets.
Berke says there is currently more demand from investors for multi-tenant retail properties than single-tenant net-lease assets. He also notes that the buyer pool includes a mix of locally based and out-of-state investors.
According to Lyons, investor appetite this year has shifted toward unanchored and neighborhood strip centers. “The reason is we are amid one of the greatest retail leasing booms in 30 years. Simultaneously, because of retail bankruptcies, investor confidence in a building with a single lease is at a lower point.”
Additionally, Lyons says that retail strip centers have suites that cast the widest net of new business openings, typically around 1,000 to 2,500 square feet.
“This gives investors and lenders the confidence and ability to keep the asset occupied,” explains Lyons. “These centers also offer an investor a higher return than single-tenant properties, helping offset interest rates.”
A typical single-tenant asset with a 10-year lease is trading at a cap rate between 7 and 8 percent, according to Lyons, whereas multi-tenant stabilized deals are trading between 8 and 9.25 percent.
While there is investment momentum in the marketplace now, Lyons anticipates a potential slowdown in transaction volume later in the year due to the U.S. presidential election.
“Elections tend to push a portion of tenants, investors and lenders into a three-month wait-and-see policy,” he says. “That said, those developers and tenants that have committed to new store openings, market expansion and cash outlay will continue to seek opportunities and spend money.”
— Kristin Harlow
This article originally appeared in the July 2024 issue of Heartland Real Estate Business magazine.