Approximately one out of every seven jobs in this nation is tied to the automobile industry, so in many ways as General Motors, DaimlerChrysler and Ford go, so goes the rest of the country economically. There was a time when Detroit felt compelled to apologize for that label, but that's no longer the case because of the industry's transformation locally.
Gone are many of the traditional manufacturing jobs, which have been replaced by high-tech, R&D-type jobs. Meanwhile, the city is benefiting from a renewed investment in its urban core. NREI met with nine prominent leaders of the commercial real estate industry at the Westin Hotel in Southfield in April to discuss the various property types in Southeast Michigan and where the region may be headed in the short term. An edited transcript follows:
NREI: A lot of what drives commercial real estate is job growth. Dan Hunter, perhaps you could start by addressing job growth in Oakland County and the types of jobs the county is attracting. Also, what is the significance of Automation Alley to the region?
Dan Hunter: Actually job growth is down significantly this year. We were just talking in the office last week how amazed we are at the number of facilities under construction around the county, given the extremely tight nature of the labor market. Last year at this time we had our 14th Annual University of Michigan Labor Forecast, and we received good news that the economy continues to be robust. The bad news is that tightness in the labor market could constrict us.
Throughout the 1990s, Oakland County has been averaging about 20,000 to 22,000 new jobs a year in all sectors, primarily business services. The forecast for this year and the foreseeable future was that figure would be cut in half to about 10,000 or 11,000 jobs. The jobs are there, but bodies are needed to fill them.
In part that led to the creation of Automation Alley, which is a business consortium of a lot of the high-tech businesses in Oakland County. (The phrase refers to industrial technology corridors along I-696 and I-75.) The consortium is working together to develop Websites, CD-Roms and marketing materials in order to go out and recruit not only in our backyard, but around the world. In the year they have been working together, they have received more than one million hits on their Website.
But we find it fascinating that there is so much activity in the real estate marketplace given the 2% unemployment. A lot of the growth has been through productivity gains with the advent of the computer, the Internet, technology. Companies are thinking smarter and doing things more productively. The technology itself is creating new business opportunities.
Development has never been stronger, and we are extremely busy in our office working with some of the people around the table here, and yet the labor force has been tight. It is good news that things have not come to a halt with 2% unemployment. The State of Michigan is at about 3.5% unemployment, below the national average for the past eight years, and even our urban areas are at pretty low levels. Pontiac is at about 5% to 6%. That's how Automation Alley was created. High-tech businesses daily have job openings for Information Technology positions, automotive engineers, designers, and they are finding it more productive to work together.
NREI: What is it about Oakland County that you think attracts businesses to such a large degree? It's clearly the envy of a lot of counties throughout the country. What are its strengths?
Hunter: Many of the 61 communities in the county have done a good job of planning, maintaining and preserving the quality of life. It's ever-more-so important with R&D type companies and high-tech companies to have a sort of a mixture. Brooks Patterson [Oakland County Executive] calls it 'the city in the country,' the ability to mix the two: the suburban areas that provide the vibrancy, and the lakes, greenfields, and golf courses are not far away.
I'd also say that the tone the communities have set is pro-business. My boss, Brooks Patterson, is 200% pro-business. He will work with any business that is looking at an expansion or an opportunity. I think that goes a long way because it carries down to the local communities. Another major factor is the private sector in seeing those opportunities, to have the confidence in making investments that makes good business sense.
Jeffrey Green: Do you think the fact that housing is affordable compared with the rest of the country also is a factor?
Hunter: Yes, I do. We did some benchmarking with Automation Alley and compared Oakland County with the East and the West Coasts and some of the high-tech areas. We found that our cost of housing was extremely affordable. For someone that might be coming from Des Moines or Peoria, they might have a hiccup, however.
NREI: If you have 2% unemployment, where do you go to find labor to fill the void?
Hunter: Well, I can tell you where Automation Alley's going. The consortium has about a $140,000 advertising campaign in many of the student newspapers within the state of Michigan. Our universities do crank out a lot of IT folks, computer programmers and engineers, and the consortium is placing ads to let people know that this is an economic engine here.
And we're also placing ads outside the state at University of California at Berkeley, and some of the universities in the Research Triangle Park in North Carolina. That's just the beginning. From a marketing perspective, we're 30 years behind Research Triangle and Silicon Valley. We've made tremendous gains in the last year. The other place where we go to get people is locally. We want to retain as many of our students as possible. We want them to know that this is a vibrant and fun community, and there's no need to go to Chicago, or Orlando. The well-paying jobs are here, and compared with those areas they get a lot more for their dollar here.
Lawrence Hadley: The other, more versatile dimension of job growth and job recruitment that's been in the headlines and the airwaves lately is the idea of allowing increased immigration by highly-skilled foreigners. Senator Abraham [freshman U.S. Senator Spencer Abraham, R-Auburn Hills, Mich.] has been favoring increased immigration quotas of highly-skilled professionals. There are some who vigorously oppose that idea, and the issue has become extremely controversial.
Steve Gordon: You'll find high-tech industrial companies that are bidding business that don't know how they're going to deliver the business. Their best recruiting crop is their biggest competitors. They're playing musical jobs. It's not very healthy because it's driving the salary base up and up, but you see a lot of that right now.
I've worked with companies where I've leased five different buildings to five different companies, and I've found the same person at each company over a 10-year period. When I asked the individual about it, he said, 'They come and get me. The next highest bidder will take me somewhere else because I'm in demand.'
Business has changed dramatically in the past 18 months, five years, 10 years. There has never been a better time for the college grads that are educating themselves and going for the really good jobs right now because they are as qualified as the people who have been in business, especially because of technology. They're more computer-literate. These graduates' skills are more attractive than ever.
NREI: Steve, what excites you most about the industrial market in the Detroit area? Any trends that you see?
Gordon: The market is very active, and if you look at the marketplace in general, the market has been running at full throttle for nine years now. There's been a little hiccup in interest rates and the stock market, but for the most part we're selling so many units of cars right now. Is it still an automotive market? Absolutely. There's a tremendous amount of diversity coming into this market with e-commerce companies. We just leased a 400,000 sq. ft. building for a very automated distribution system to a company in Livonia called Webvan, an online grocer headquartered in San Francisco. The lease came through our relationship with ONCOR, but it was something I never thought was going to happen.
There are so many other new businesses coming in. We saw the days of consolidation where all the little guys were getting gobbled up by the big guys. Well, I think now with the change in the industry you see a lot of the little guys have a lot of room.
NREI: Dan, are there any industrial sectors where there's a heightened concentration of activity?
Dan Dolsen: We're seeing most of our activity now in the R&D sector. General manufacturing and construction is down slightly this year over last year. We are seeing increases in other sectors, such as health care and public sector-type construction. For us, we're primarily seeing large increases in R&D facilities, almost all international companies. We currently have projects going on with an Italian firm. We have a Canadian project going. We have a French project going. I have a Japanese project going very shortly.
The whole global kind of community that people have been talking about is really here and it's surrounded around technology and connected with mergers of groups coming together to provide services to the automotive industry. What has been really encouraging to us is that we were really prepared for a downturn this year. We were told that auto production would be down by 1 million units. It's actually going to be up by 2 million units, which is a huge increase. We're at a pace right now where we just don't see an end in terms of our own developments and with the projects that we're putting together.
Gordon: DaimlerChrysler's merger has fueled a tremendous amount of business in Southeastern Michigan. I bet you in the last two years, we've done 20 to 30 transactions, 30,000 sq. ft. and above with companies that have never been in Detroit. And there was no mention of DaimlerChrysler whatsoever when they were coming, but I guarantee that's why they're there. There's been a huge consolidation of German partnerships. The DaimlerChrysler merger has had a ton of spinoff business in Southeastern Michigan.
Dolsen: We were meeting with a German firm yesterday. The company needs a 200,000 sq. ft. manufacturing facility and it needs the building in Detroit. That's probably the bigger challenge right now, not just in Detroit but across the board ... to try and find sites, to find land that is reasonably priced and that we can have access to. The project is directly connected with Chrysler in this case. We see companies that are trying to come in. Trying to find sites, trying to find locations near manufacturing facilities. Just-in-time delivery is still the major driver for these kinds of projects.
NREI: How do you define the ultimate access?
Dolsen: For instance, in the city of Detroit it's surprising that there's not a lot of available land there. In one case, it took us more than 18 months to find a site that's in excess of 15 acres. We think we now have two to three sites that are in excess of 20 acres. The largest site that we have been able to find in Detroit is 25 acres, and the prices of these pieces of land are really incredible. They're at over $150,000 an acre, and that doesn't include the cost to clean up the property and to do the demolition work.
Doug Etkin: We have a saying in our office, which is: 'The owner of the land is the leader of the band.' And that's really the reality. You have to control land in order to control opportunity. Otherwise, you have to come to someone's conference table with a big checkbook and be willing to act quickly and spend a lot of money these days. The challenge, of course, is to make sure that you don't have too much of a land-holding portfolio in case the economy slows down for a while because holding land can be expensive. And when the market does pick up again, you are not necessarily at the price that you paid.
NREI: Doug, please update us on what's happening at Centerpoint Business Campus in Pontiac?
Etkin: Well, at Centerpoint we are excited about our new full-service Mariott Hotel that will open in late October. It's a 290-room hotel with very extensive meeting space, over 15,000 feet. Given the quality level we've applied to the project, it should be the second finest hotel in Oakland County, surpassed only by the Townsend Hotel in Birmingham, which of course is a world-class hotel. We're proud of that, and we found that our location is right in the midst of Automation Alley. And we find that our customer base in our existing hotels that we have there is probably one-third from overseas at any given time.
NREI: Any other projects, Doug, that you are working on that you want to talk to us about?
Etkin: In the last 18 months we've acquired three pieces of property on the west side of town. We wound up selling one parcel at Twelve Mile and Haggerty roads to a Japanese machine tool manufacturer. We recently acquired the corner of Twelve Mile and Halstead, and we acquired land on I-275 at 8-1/2 Mile and Haggerty. And we also recently placed land under contract in Novi.
So we believe that as Oakland County begins to become more difficult in which to find land, and as a new airport opens, we think that the west side of town is now going to have even more growth than it's had historically. Although clearly in the last five years on the west side of town, the I-275 corridor has been very explosive. We also think that Novi, as a community, is maturing. It is starting to make many of the right decisions to have the proper balance of quality of life and convenience of services. And we think that Novi is going to be a real star in the next decade.
NREI: Jeffrey, your firm does a lot of land analysis. Has your market research discovered any particular strengths or weaknesses of the region?
Green: Probably our most underserved element is in the hotel end of our town. In doing some work with MGM Grand Detroit Casino, and now MotorCity Casino and the soon to be opened Greektown location, those folks cannot find quality hotel rooms for the high-rollers. They don't exist. They're not happy with the Marriott downtown because it has yet to go through with its $100 million renovation. Once it does, I'd be interested to see if they can get rooms there.
What these casinos end up doing is shuttling a lot of their high-rollers to the suburbs to the Westin in Southfield, or the Ritz-Carlton and the Hyatt in Dearborn, which just underwent a pretty substantial renovation. So, I think there are some stronger openings for maybe smaller, boutique-type quality hotels in the city.
NREI: Are people coming from a great distance to play the casinos?
Green: The segment that is coming from a distance, that would be the overnight guest, is much higher than once anticipated. The MGM supposedly is making twice the amount of money that the New York New York property of MGM's portfolio in Vegas is making, which is tremendous. Again, this is a temporary facility, not a permanent facility, which leads to another interesting question: Will a permanent facility ever be built?
Etkin: We're probably Detroit's largest hotel developer. We're concerned that if the permanents are built, that the same room demand that the temporaries are talking about needing now will be self-absorbed with the rooms that they're required to build. So the question is, will the permanents be built? And if so, the permanents are each required to have 500 hotel rooms. We believe that there might be an opening in downtown Detroit for quality product. It's not much of a secret now that we have been nosing around there for about a year and half, but we're committed to making sure that if we do something in downtown Detroit, it makes economic sense.
Dennis Bernard: The difficulty is that on a national level, lenders are very concerned about speculative hotel development, especially in areas that are unproven. That's going to make it very difficult. The equity requirements are increasing every day for new hotels. Lenders want track records. It's getting even more difficult to finance existing hotels with track records. Just as our demand in Detroit is increasing, lenders in their herd mentality are moving away from hotels. We were involved in working on a hotel downtown and what stopped the lender finally was the whether the permanent casinos would finally happen. If they were going to happen, the lender was afraid that a hotel not associated with the permanent casinos would be the one left standing when the music stopped.
Green: Well, what are those issues that are at the forefront of whether the casinos become permanent or not? We all assumed they were going to be permanent four years out from the opening of the temporary casino to the permanent, but that whole logic seems to have changed. Why?
Hadley: The casinos seem to have trouble acquiring the land, doing the assemblage. They are getting held up for ridiculous prices by the existing landowners. It's difficult to do a public land assemblage for an expensive property. Everybody in this room knows the best way to do a land assemblage is quietly, secretively, until it's a done deal, and away you go. But unfortunately, they couldn't do it that way. Detroit tends to lag national markets from an overbuilding perspective for all real estate property. So what will happen here is we are still at the peak of the real estate market in Detroit. Our occupancies are very strong, our rental rates are very strong. In the rest of the country, that's starting to soften while we're still trying to underwrite to more aggressive standards locally. And the lenders are saying, 'No, no no. Let me tell you what's happening in Atlanta and in Chicago and Dallas, and that's what I'm going to underwrite here.'
Bernard: In an obscene sort of way, two years ago before the casinos opened or before GM was really making an impact downtown, you would have had better success getting hotel money, debt, downtown from the lenders before the demand was even there.
NREI: But can't you prevail upon lenders with the argument that every market is different?
Bernard: Sure, of course. Doug could build as many hotels as he wants if he wants to keep writing bigger and bigger equity checks, which obviously is a transfer risk you don't want to undertake.
NREI: How much equity are lenders requiring for a new hotel?
Bernard: Lenders claim they want 35% equity. We're seeing that sliding closer to 40%, real equity, unless there is some mitigating reasons. Etkin's Centerpoint development does have some unique aspects to it because of the location and everything that Doug and his company did at that site. But in other locations, we're looking at even existing hotel financing topping out at 65% loan-to-value.
Gordon: It's feast or famine. It's a fact most of the hotel rooms are filled Tuesday, Wednesday and Thursday with the automotive professionals. If you try to put someone up in the middle of the week, you can't get a hotel room unless you do it a week in advance. It's that simple. But then Friday, Saturday and Sunday the hotels are dying.
Bernard: We'll try and tell lenders, 'Call and get a hotel room in the middle of the week.' You can't get a hotel room, but ...
Dan Bober: I think to a certain extent our market is starting to look a little bit like some of the major cities in the country. You lose sight of what a good hotel market is like. In Manhattan, if you have a great property, occupancies are always 85% and up. There are certain pockets in our market, Birmingham for example, where those same stats are available.
But lenders that have been active in hotel lending for a long time really tend to look at everyplace else in the country and they'll tell you they're not going to underwrite a dime over 75% occupancy. If there's been a spike in ADRs (average daily rates), you can't underwrite that. We're going through that on our own servicing portfolio locally. Certainly all hotel properties we've got here in town are just hitting the cover off the ball.
No lender that we've got would underwrite to those extremes because it's not consistent with what the long-term track record for properties here has been.
With another couple of years of performance like that, I think it will become the sort of thing that you can take to an investor, to a lender, and say, 'It's not the Detroit of old. This is actually like an Atlanta, like a San Francisco, like a Manhattan.' The other question is whether this is just a casino spike or if it's just because the auto industry is doing so well. That's why lenders are a little reluctant to underwrite towhat the current level of performance is here.
I think for an existing property with a track record with a good owner and manager, I don't think there is a shortage of funding for them. >From a practical perspective, the hotel industry, like the nursing home industry and a couple others, never saw interest rates below 10%. Right now you can finance all day a hotel at 8% to 9%, which from a historical perspective is a great deal for a hotel to get into. It's so far out of what has been the long-term track record for that industry. I think it's good.
Hadley: The riskiest part of the hotel business right now, and the least favored among lenders are the roadside properties. The story you'll hear is: 'Well, that's great that you want to build a Holiday Express at Exit 138, but there's probably three more corners where somebody else could come along and build another property and compete with you. You'll do well for a while because you are the new kid on the block, and you'll still smell of fresh paint, but once the Fairfield goes in over here, The Comfort Inn goes in over here and so on and so forth, you'll be sucking wind. So, we're not going to touch that property, or we're going to underwrite again to very conservative standards.'
NREI: Jeff, what is the significance of the renovation of the Mariott downtown?
Green: The Marriott downtown has almost 1,300 rooms, so it's by far the largest property here in the Detroit market. It was a property that was neglected for a long time. In the past, it's tried to position itself as a convention hotel. Once GM purchased the Renaissance Center, it interviewed a number of different hotel operators and chose Marriott. Now, $100 million is being put into that property. But my question is: Does GM have enough demand to actually fill those rooms?
Gordon: I don't think they do. I live next door to a high-level GM executive. I asked him how much of that [demand for rooms] is because of General Motors, and the executive said 25%. I thought that figure would have been higher, say 50%. I think the hotel is really being renovated for the casinos, I really do, and General Motors is a driver.
Dolsen: It's really exciting to see what's happening with loft development in Detroit right now. The story that we're hearing is that, for instance, the Farbman Group started a project that sold out in three days. That's amazing. We're hearing from developers down there that they can't sell $150,000 units. Those aren't going, but the $300,000 units are going as fast as they can put them together. And there's a lot of available product down there that has an opportunity to be developed.
NREI: Kevin, can you talk about the prospects for short- and long-term residential growth in the city.
Kevin Dillon: Bernie Glieberman's townhomes just north of the stadiums and the theater districts are generating a lot of jobs and a lot of growth down there. (Glieberman is president of Crosswoods Communities Inc. of Detroit, which has built more than 200 condos and homes in the city in recent years.) It seems some of the younger urban professionals and the kids out of college are actually considering going downtown because there's the nightlife down there. You can walk around a little bit better. You can get from the stadiums over to Greektown and some of the entertainment district that we have now, which isn't all that great. But we anticipate considerable growth within the next couple of years.
The rental rates for downtown apartment living are very comparable with the suburban lifestyle, which is sort of a tough situation. If it was a little less expensive, I think people would be apt to live there, but the city income tax doesn't help.
NREI: Retail follows residential, so the question is how do you get it to come together?
Dillon: We don't have good grocery stores in downtown. We have lots of Ma and Pa convenience stores if you will, but we don't have the grocery stores. It's going to take a while to get the retail downtown. You're going to need the demographics.
Bernard: We're now going on two years on a Farmer Jack development in the City of Detroit. It's two years plus, and the hold up has been with the city. Farmer Jack wants to put up a 70,000 sq. ft. modern store and another 40,000 to 45,000 sq. ft. of various shop space. The city has gone back and forth on land assemblage, on site planning and setback requirements. They are arguing over who can be allowed on the outparcel. The developer now is two to two-and-a-half years into it and can't get anywhere. The interest is there from the lenders. The interest is there from the retailers. It's the City of Detroit that seems to be the difficulty.
Dillon: The interest is there from a tenant profile. Most of the apartment communities that I've seen down there are full. I'm selling a property (Sunrise Apartments) right now that's 334 units, and they've had over a hundred units vacant and unrentable over the past year. They get 30 walk-in tenants a week showing interest in the project, which is phenomenal. They only spent $5,000 in advertising. That's outrageous. The tenants are there. It just needs to be cleaned up and brought to the next level and retail needs come into play.
NREI: What's the linescore on Detroit in the investment community?
Bober: By the end of April, we will have closed almost $100 million in office loans, two-thirds of that was acquired by outside investors. I think the significant point is that we are definitely not just on the national radar screen, but also the international radar screen. I don't see any of that changing. There are various pockets around the metropolitan Detroit area that have a significant draw from some part of the economy. We talked a little bit about the technology companies coming to Detroit. We see the same thing actually happening in Pontiac, which is again another kind of formerly blighted area that is a great place that attracts web-designing companies. It's got a nightlife, and some other attributes that makes it good for that sort of activity. I-275 draws its own set of people from various technological companies. All of those influences rolling forward for 2000 presumably will be on the radar screen for a lot of years to come.
NREI: One of the criticisms of Detroit has been that it's just an automotive town, but my question is whether that is such a bad thing? Should it be more diversified?
Bober: I think it's a label that we're all real defensive about, that we always have to apologize for to some investors. But quite frankly, it's been a tremendous strength because it is the world's largest market for one of the world's largest industries. And unless something completely replaces the automobile, which could happen 100 years from now, it's always going to be that way. What's benefited the area tremendously is that it has turned from essentially a national industry to something that is a global center, and that's really given us a lot of legs. That's something that is not really well understood outside of the area.
Dolsen: The manufacturing side of the automotive industry here has really moved out of the area. It's the intellectual side of the automotive industry that has become strong here. And that's a very attractive driver. You've got major universities here that can support it. You've got a capital base that is going to support it. And I think what you're going to find as technology develops in the auto industry is it will start to impact other industries as well.
1. Dennis Bernard President Bernard Financial Group Southfield, Mich.
2. Daniel Bober President Bloomfield Acceptance Co. Birmingham, Mich.
3. Kevin Dillon Senior Associate Dietz Organization Birmingham, Mich.
4. Dan Dolsen Vice President of Business Development DeMattia Group Plymouth, Mich.
5. Doug Etkin President Etkin Equities Southfield, Mich.
6. Steve Gordon President Signature & Associates-ONCOR International Southfield, Mich.
7. Jeffrey Green President and COO The Green Group Troy, Mich.
8. Lawrence Hadley President Hadley & Associates Novi, Mich.
9. Daniel Hunter Manager Oakland County Planning & Development Pontiac, Mich.