It’s no secret that the greater Detroit area suffered a double hit in the last 4 years, first from the well-publicized decline in auto sales and then from the 2008 crash and lengthy downturn.Despite the economic gyrations, however, there is a considerable upside and leasing momentum to talk about.
Several new-to-the-market retailers, restaurants and fitness chains are landing in the region, including ULTA, which has done 10 deals in the last 7 months in mostly high-income areas. Discount grocer ALDI has opened 20 stores in the past 18 months, most often purchasing land to build 12,000-square-foot stores in high-density, middle-income areas. Other new retailers to the market are Five Below, Christmas Three Shops, buybuyBABY, Yankee Candle, clothier Citi Trends and a new concept by local furniture giant Art Van called Pure Sleep.
Five Guys Burgers and Fries, Fat Burger and Chipotle have also moved into the market, as have Fitness 19, Planet Fitness and their much larger competitor LA Fitness. LA Fitness is opting for 50,000-square-foot locations, both stand-alone and retrofit, primarily in professionally oriented, mid-to-upper income areas. The chain has opened eight locations in the market, and in the past 2 years, it has built clubs in such high-traffic suburbs as Royal Oak, Bloomfield, Southfield and Livonia.
Eleven of the 25 former Circuit City big-box sites have been leased, with Best Buy and Big Lots taking several of those vacant spaces. Only half of the original 12 vacated Linens ‘n Things boxes remain, with Best Buy, Big Lots and appliance/electronics seller ABC Warehouse cherry-picking some of their best locations. In fact, some of the major leases closing recently were Best Buy’s takeover of the former Circuit City in Novi, Big Lots’ lease of former Circuit City stores in Dearborn and Madison Heights, and Old Navy’s lease of the former OfficeMax in Novi. At least one new big-box tenant and several smaller retailers are considering these spaces as their debut in the market. Additional movement in the area includes The Salvation Army, which has signed on to lease large resale-store locations in Oxford, Clarkston and Shelby Township. Christmas Tree Shops took part of the former Value City in Taylor and part of a former Mervyn’s in Shelby Township.
Overall demand for spacestillremains moderate depending on the quality of the real estate, competition, traffic counts, population density and income, and whether there’s retail synergy at a site. Strip centers that aren’t on hard corners or are otherwise poorly located will continue to suffer weaker demand than centers with major tenants such as grocery, discount, home furnishings or apparelretailers. Cost Plus World Market is in the process of departing the region. The retailer made the mistake of not fully penetrating the market at the outset and, as a result, suffered from inadequate brand exposure. A few of their stores remain open within the state, butthese areoutside the Detroit market.
Shopping center owners with little or no debt, along with well-capitalized retail REITs, are the most active in shopping center redevelopment and expansion activity and are able to provide finish-out capital for new tenants. However, the credit crunch, a succession of commercial and residential real estate loan defaults and greater equity demands from lenders have new development plans at a near standstill. The exception — The Landmark Shoppes at Detroit's Gateway Park project at Woodward and 8 Mile Road — is still slated for a spring 2012 opening. A 94,000-square-foot,urban-style Meijer will anchor the 360,000-square-foot project, which is the first major retail center built in Detroit in more than 20 years. Several other junior anchors, including Marshalls, are heading to the site as are a number of in-line tenants in various stages of negotiation. With the success of the Shoppes, future development of major inner-city retail centers in Detroit seems inevitable. Construction is also underway on the 551,000-square-foot Adams Marketplace at M-59 and Adams Road and the redevelopment of 307,000-square-foot Livonia Mall at Middlebelt and 7 Mile Roads.
Rental rates in the market for unimproved retail space—those locations in “as is” condition— range from $3 to $5 per square foot for big-box sites (more than 50,000 square feet) and from $6 to $8 per square foot for medium or junior boxes (less than 30,000 square feet). Inline space that sits farther from the street ranges from $12 to $18 per square foot,while end-cap and freestanding space goes for between $19 and $25 per square foot.
In contrast to other parts of Southeastern Michigan, a few cities have held their own. Ann Arbor has remained consistent over the last five years with minimal vacancy rates and stable rents. And the newly enhanced central business districts, or “sub downtowns,” of Birmingham, Royal Oak, Rochester and Northville have all transitioned to specialty restaurant/entertainment developments that are attracting younger patrons. The city of Ferndale is also a new up-and-comer in this category.
With ongoing auto industry improvements, southeastern Michigan should be showing considerable progress in retails sales, occupancy and higher rents by 2012.
— Jim Stokas is an X Team International partner and principal of Stokas Realty Advisors in Detroit.