While there are plenty of news stories touting Detroit’s comeback, it’s the actual 2019 year-end numbers backing up the claims with solid momentum in the office and lending sectors.
And the numbers are capturing the attention of national investors, not to mention lenders who were on the bench for years and years.
Office vacancy across metropolitan Detroit decreased from 24.5 percent in 2013 to 13.8 percent as of the fourth quarter of 2019, according to national leasing firm CBRE. Asking rates have climbed since 2009 and vacancy rates have dropped. These figures even include the 23 percent-vacant Southfield submarket and the 19.5 percent-vacant Auburn Hills submarket, which with their combined total square footage account for 23.4 percent of the total metropolitan Detroit office market, dragging up the total average vacancy rate.
Focusing on the central business district (CBD), the post-recession predictions of a city powering through the real estate cycle are holding true. The total direct office vacancy in JLL’s latest Detroit CBD Skyline report is 7.7 percent. That figure includes approximately 500,000 vacant square feet in the GM-owned and largely self-occupied Renaissance Center (RenCen) complex. Remove the RenCen from the equation, and the Detroit CBD skyline (i.e. the Class A and trophy assets coveted by national lenders and institutional investors) is 96-percent occupied.
Let’s say that again: 96-percent occupancy in a 15 million-square-foot class of assets. That statistic would have triggered a construction boom in most other cities across the United States — perhaps several years ago. According to the same report, this squeeze on space continues the healthy push of office rents upward at a 6.5 percent year-over-year pace. Detroit real estate investors: you’re welcome.
Those same solid fundamentals apply to the suburbs as well, even more so when you eliminate a few submarkets where certain corridors or intersections with extraneous circumstances contrast healthier sub-nodes elsewhere in the submarket.
Let’s take a look at two examples in Southfield and Auburn Hills.
The Southfield office submarket occupancy along US-24 (Telegraph Road) and in buildings surrounding the Southfield Town Center development is significantly higher than that of buildings surrounding the long-dead Northland Mall. And several of these preverbally dead office assets around Northland Mall are rumored for demolition or to be repurposed into multifamily.
A similar narrative holds in Auburn Hills. Obsolete automotive supplier parks drag down the vacancy rate while newer, proto-industrial office/flex space is nearly 100 percent.
Removing the Southfield and Auburn Hills submarkets from the equation, statistically speaking, the office vacancy rate for the metropolitan area hovers comfortably around 11 percent, compared with CBRE’s reported 13.8 percent.
It’s not just the locals watching these fundamentals; national lenders are as well.
From a capital markets standpoint, Bernard Financial Group (BFG), a Southfield-based commercial mortgage banking and servicing firm with offices in both Southfield and CBD Detroit, had its seventh year in a row of placing more than $1 billion in commercial real estate debt across metro Detroit. BFG’s commercial mortgage servicing portfolio also topped $4.25 billion in size for the first time.
In 2019 alone, BFG closed loans with 24 different lenders, of which five had either never closed or had not closed a loan in metro Detroit in the last 20 years.
The strong fundamentals across asset classes (not just office) are a draw for national life insurance companies, CMBS, agencies, institutional debt funds and bank lenders.
In 2019, the demand for southeastern Michigan debt paper remained high. Lenders closed deals that spanned from a $150 million office renovation and repurpose bridge loan provided by a global institutional investment platform, to a $65 million nonrecourse CMBS loan with full-term interest-only on distribution centers, to an ultra-cheap $3.5 million non-anchored retail strip center loan with a national life insurance company.
It’s important to point the spotlight on the increased activity of life insurance companies lending on commercial real estate in both the greater metropolitan area and the Detroit city proper. For much of 2019 (and helped by the general fall in United States Treasury bond rates) life companies were quoting long-term, fixed-rate loans at respective portfolio-wide floors.
And as a bonus, the dark days of lenders adding a premium to their pricing “just because an asset is in Detroit” are long gone.
Detroit’s continued upward trajectory has certainly caught the eye of national and super-regional lenders and investors. With solid suburban office statistics and absorption as well as uber-tight CBD office supply, the math checks out around office fundamentals being in line across the greater metro area. This, coupled with historically low long-term commercial real estate financing interest rates, sets up well for Detroit in 2020.
That has a ring to it…Detroit 2020: clear and sharp vision for the foreseeable future.
— By Joshua Bernard, Principal, Bernard Financial Group. This article originally appeared in the February 2020 issue of Heartland Real Estate Business magazine.