By Doug Fura, Farbman Group
With 2020 in the rearview mirror, hopes for a healthier and more prosperous 2021 seem likely to lead to economic and development surges in markets across the country. In Detroit, where the industrial market has been a clear bright spot in a pandemic-altered development landscape, industry professionals remain optimistic that development momentum won’t be slowing anytime soon. How realistic is that optimism, where does industrial stand right now and what’s in store for Detroit?
No signs of slowing down
The Detroit industrial real estate market is easily the tightest I’ve seen at any point in the last 40+ years. We are seeing speculative construction for the first time in over a decade. Even more impressive is the fact that, for the most part, that space is being leased up before the buildings are completed. While construction costs are at record highs, they are still dramatically lower than in many/most other large markets across the country.
Who and what is driving that demand? The 500-pound gorilla is Amazon, but the boom in e-commerce extends well beyond one company, no matter how influential. The market was already evolving prior to the pandemic, but COVID-19 has super-charged that trend and elevated e-commerce to an entirely different level of growth.
The e-commerce explosion means that not only has Amazon significantly increased its footprint, but retailers like Walmart and Target have invested heavily in their own distribution and fulfillment infrastructure. Brands like Home Depot, Lowe’s and HomeGoods have also been players in this space, as demand for home improvement and home office goods and services has spiked in the last 10 to 12 months.
A manufacturing rebound?
The demand from e-commerce will eventually hit a saturation point but manufacturing demand will increase as e-commerce stabilizes. The industrial real estate market in and around Detroit, like the rest of the country, is likely to remain strong for the foreseeable future.
Another positive point for the industrial sector is the likelihood that U.S. manufacturing will ramp up over the next few years. COVID-19 has highlighted the vulnerability and disruption of many overseas supply chains, which seems likely to inspire a strong push to bring more manufacturing back stateside. The lead time to open up a new manufacturing operation is significantly longer than to open up a new warehouse, so we’ll see that lag somewhat behind the warehouse surge.
Automation will also play an important role in shaping the contours of the industrial market landscape going forward: with fewer employees needed to operate manufacturing facilities, the value proposition of overseas labor markets becomes less appealing. The general trend is moving toward more square footage and fewer jobs per square foot. In general, manufacturing jobs will be higher paid and require more technical sophistication.
The bottom line is that demand for industrial square footage should remain high — and, for industrial real estate professionals and markets like Detroit, that’s a good thing.
A region-wide ‘hot spot’
A close look at where industrial space is coming online in the Detroit market reveals no clear geographic pattern, outside of limited availability in the city’s urban core. Demand is certainly in Detroit proper, but with so little land available for redevelopment, most industrial projects can be found scattered across the greater metro area. With no single hot spot, it’s more about finding quality opportunities anywhere you can get it across the market.
Amazon has leased space in Hazel Park and Sterling Heights as satellite facilities to complement its major distribution centers. Of the 4.5 million square feet Amazon leases in Pontiac, 200,000 square feet of that is a smaller, separate facility: a distribution building for last-mile delivery.
New players, opportunities
There is perhaps no better illustration of the exploding demand for e-commerce fulfillment infrastructure than the fact that Amazon’s formerly consistent next-day service frequently extends to several-day delivery windows. Delivery times have crept upwards in the face of overwhelming consumer demand.
One fascinating development to monitor going forward is how new facility layouts and designs impact the industrial development pipeline — and the ability to meet that demand. For example, Amazon’s four- to five-story facilities in the Detroit market are a potential game-changer. Multi-story industrial facilities like these were highly inefficient in the past. With upper floors now near fully automated, this type of layout becomes not just feasible, but highly efficient. While not all smaller companies can afford that Amazon-style automation, the expanding availability of 5G could begin to change that dynamic.
It’s exciting that we are seeing, for the first time in a long time, large institutional developers building on a speculative basis. Also noteworthy is the fact that there are several new large developers now active in the area — that’s a major feat for the Detroit market. Finding quality sites remains the challenge. With so much demand, working with the right partner who can help identify, secure and convert those opportunities will be a priority going forward in this competitive market.
Doug Fura serves as senior vice president with Farbman Group/NAI Farbman. This article originally appeared in the February 2021 issue of Heartland Real Estate Business magazine.