Detroit’s sustained employment growth, along with focused redevelopment and revitalization efforts, have brightened the metro area’s economic outlook and propelled the retail market this year.
Six consecutive years of job gains have attracted new residents to the region and stemmed population outflow. Strong hiring trends have boosted household incomes, and retail sales are ascending as a result.
The local economy is expected to create 38,000 new jobs in 2016, representing a 1.9 percent annual expansion. The local unemployment rate stood at 4.9 percent in August, the lowest rate since 2001 and just 10 basis points higher than the national level.
Simon Jonna, Marcus & Millichap
The professional and business services sector led employment gains over the 12-month period that ended June 30 with nearly 12,000 additional workers hired.
Ripple effect of jobs growth
The abundance of job opportunities is also contributing to higher household incomes. Over the 12-month period that ended Sept. 30, roughly 7,500 households were created and the median household income climbed 3.1 percent. These improvements supported a 1.3 percent hike in retail spending over the same period.
Encouraged by the positive economic trends in Detroit, retailers are expanding many existing storefronts, while companies such as Nike and restaurants such as Cheesecake Factory, among other notables, are establishing a presence in the market.
Investors and developers are following retailers and residents back into Detroit too. Throughout downtown, older office buildings are being brought back to life in the form of mixed-use, ground-level retail space and upper-level residential components.
Builders are on track to complete 1 million square feet of retail property in 2016. The largest project due this year is the 250,000-square-foot Shops at Stony Creek anchored by Kroger in Shelby Township. Much of the new inventory this year is pre-leased, which has lessened the impact on the vacancy.
Construction activity is expected to gain traction in the near term as the Outlets of Michigan in Romulus, Chesterfield Towne Center in Chesterfield Township and a Menards in Taylor break ground this year. In addition, another 5 million square feet of retail space is in the planning process.
Improving vital signs
The increased demand for space has dropped vacancy to the lowest level in 10 years, which has been further enhanced by the closure of long-vacant spaces for redevelopment.
The fact that there were few additions to inventory during the second quarter resulted in vacancy receding 50 basis points to 8.6 percent.
In the last four quarters ending with the third quarter of 2016, the greatest improvement in vacancy occurred in the Southfield submarket. Specifically, the vacancy rate fell 290 basis points to 33.2 percent during that period due to the purchase and planned redevelopment of Northland Center.
The Troy submarket, which is anchored by the Somerset Mall Collection along Big Beaver Road, maintains the tightest vacancy in the metro at 3.4 percent as of the second quarter.
Marketwide, the high levels of retail space delivered this year will not outpace demand. Year-over-year vacancy in 2016 is expected to drop 40 basis points to 4.7 percent, which will impact rental rates.
With the amount of available space across metro Detroit diminishing, rents are creeping higher. The limited availability of retail space in desirable areas, including downtown Detroit, drove asking rents up an average of 1.9 percent to $12.28 per square foot over the past year ending in the second quarter.
Strong tenant demand will contribute to asking rents advancing 3 percent to $12.35 per square foot in 2016, which remains 12 percent below the 10-year peak. As rents continue to rise, we can anticipate investment sales activity to pick up and property values to improve.
With regard to single-tenant asset sales, buyers this year have focused on standalone properties priced under $5 million across the tri-county region, which includes the Macomb and Royal Oak submarkets.
Cap rates have held relatively steady during the first half of the year, with fast-food properties trading at around 5 percent and local restaurants changing hands in the mid-6 to mid-7 percent range.
Looking ahead, investors will begin targeting single-tenant assets along major thoroughfares, and properties along the QLINE will pique investor interest ahead of the rail system’s opening in late 2016 or early 2017.
Strengthening operations, lower entry costs and the potential for higher yields have drawn investors to multi-tenant properties in Detroit with assets in select Oakland and Macomb submarkets, in addition to others, garnering the greatest attention.
Over the last four quarters ending in the second quarter, the average price per square foot for multi-tenant properties rose 15 percent on a year-over-year basis to $159 per square foot, while strip centers rose 20 percent over the same period to $127 per square foot.
Construction magnets
As we close out the year, new retail construction in outlying areas such as Ann Arbor, Farmington Hills, Novi, Rochester — as well as Bloomfield, Chesterfield and Shelby townships — will provide buyers with additional acquisition opportunities. Retail assets in redeveloping neighborhoods will also generate investor interest.
While there is still room for improvement in Detroit’s retail property market, sustained employment growth and concentrated redevelopment efforts have brightened the economic picture across Southeast Michigan and will propel retail property performance through the remainder of the year and into 2017.
— By Simon Jonna, First Vice President, Investments, Marcus & Millichap. This article first appeared in the November 2016 issue of Heartland Real Estate Business magazine.