OFFICE VACANCY RATES are soaring and profits have been unsteady at the Big Three automakers, but there is plenty of optimism in the Motor City's real estate markets. City officials and Detroit's business community believe that a new $350 million headquarters building for Compuware Corp. and new stadiums for the city's baseball and football teams will bring much-needed life to downtown.
Meanwhile, the planned addition of 1,200 rooms at the city's three casinos is expected to improve convention and tourism business. And the $1.2 billion expansion of Detroit Metropolitan Airport — a big image boost — already is spawning new industrial development.
The two new stadiums and the Compuware office tower are major pieces in Detroit's downtown revitalization effort. The 16-story, 1.1 million sq. ft. headquarters for the computer and technology company is the biggest office project in downtown Detroit since the 45-story Comerica building went up in 1992. “We hope having 3,000 people down there nearly 365 days a year will allow us to make a positive impact on the community,” says Doug Kuiper, a Compuware spokesperson.
In December, the first of the estimated 3,000 workers will begin moving into the new building. Full occupancy of the company's space — including 60,000 sq. ft. of retail shops and restaurants on the ground floor — is expected by mid-2003.
Five blocks away, construction is racing along at the 60,000-seat Ford Field, which will be the new home of the Detroit Lions football team beginning this fall. The $325 million complex also will include 190,000 sq. ft. of office space.
Designed by SmithGroup, Detroit, the stadium is the last major component of the downtown entertainment district. “This new venue will create the critical mass needed downtown and be a development anchor for the city,” says SmithGroup President and CEO Carl Roehling.
Comerica Park, the new home of the Detroit Tigers baseball team, is now in its third season.
Thanks to Comerica Park and other developments and renovations in the entertainment district — including the Opera House and Harmonie Park — people have more reason to come into the city, he says.
Also recently completed in Detroit's downtown district is a $40 million overhaul of the Dime Building, one of the city's first skyscrapers. The 23-story, 365,000 sq. ft. structure, built in 1913, has been carefully restored and rebuilt to the latest technological standards. The renovation also restored the 2-story lobby and its skylight. H&R Block has signed a lease to take 105,000 sq. ft. on the top seven floors of the structure. The Detroit-based BOSC Group Inc. is the building's developer.
The Compuware project, meanwhile, will consolidate workers spread out over about nine offices in metro Detroit, at the same time creating operational efficiencies by having everyone working in one center. The company also hopes the move will boost earnings. Compuware is the owner of the building, which is being developed by Chicago-based U.S. Equities Realty LLC and Detroit-based Redico-Cummings.
Compuware, which laid off 800 workers in April from its professional services division, is in the midst of a restructuring. Although the company's quarterly profits averaged $90 million in 1999 and 2000, profits over the past seven quarters have plunged, ranging from $14 million to $45 million. In its fiscal fourth-quarter report, the company incurred a net loss of $335.9 million. Those losses were based around a restructuring charge, says Kuiper.
“We remain extremely profitable, we have no long-term debt and have a war chest of $400 million. Cash flow for the last quarter was more than $100 million,” Kuiper says. “We see the new headquarters as an investment that will help us save on costs today and make us more efficient in the future.”
Despite the high-profile Compuware headquarters project, the office sector is a soft spot in the Detroit real estate market. The sector will be flat for about nine months, predicts Matthew Fenster, executive director of Farmington Hills-based Paragon Corporate Realty Services, which helps firms lease properties.
In fact, Class-A office vacancy rates in metro Detroit hit a five-year peak in the first quarter of 2002. Including available sublease space, the vacancy rate hit 17.6% in the first quarter, compared with 9.1% at the same time last year and 13.7% at year-end 2001. Fenster contends that the office market can only improve from here.
He notes landlords and developers are becoming aggressive in their concessions to tenants. He added that the amount of office space under construction, about 574,448 sq. ft. (a figure that does not include owner-occupied office space), is at its lowest point in several years.
“People are just waiting to see what happens with the economy,” he says.
Signs of an industrial recovery are starting to surface, according to a production index calculated by the metro Detroit affiliate of the Institute for Supply Management. The index ranges from 0 to 100 and is an average measure of new orders and production activity, employment, inventories and promptness of supplier deliveries. Results above 50 show expansion in the market.
The index registered 50.4 in February — compared with 48.6 in January — marking the first month above the expansion threshold since October 2000, explains David Littman, chief economist at Detroit-based Comerica Bank.
“At the first moment the composite picks up, it is a sure-fire indicator of improvement in the commercial and industrial market,” including business expansion, improved cash flow and willingness to loan, he says.
In addition, North American automakers built 3.4% more cars in the first quarter of 2002 compared with the same period last year. Analysts note that the restocking of inventories purged by 0% incentive programs was the main reason for the increase. In April, domestic sales climbed 13% for General Motors Corp. and 2.8% for DaimlerChrysler AG compared with April 2001. However, Ford Motor Co.'s sales dropped by 7.4%.
The income reports from the Big Three automakers are a mixed bag. DaimlerChrysler AG reported net income of $2.3 billion in the first quarter of this year compared with a $2 billion loss in the same period in 2001.
At General Motors, net income totaled $228 million in the first quarter of 2002, down from $237 million in the first quarter of 2001. Meanwhile, Ford reported a net loss of $800 million in first quarter of 2002 compared with a profit of $1.13 billion over the same time period last year. However, Ford's 6-cent per-share loss was better than the expected 15-cent per share loss.
The industrial vacancy rate was 8.2% in the first quarter, up from 4.4% in the first quarter of 2001. About 4 million sq. ft. of industrial-related office space is under construction, compared with about 6.5 million sq. ft. in first-quarter 2001.
“Developers are being safe with expansions, waiting to have the business before they move ahead,” says Matt Osiecki, associate broker in the Detroit office of Los Angeles-based CB Richard Ellis. “They're waiting to fill buildings first before starting new ones.”
One major project is American Axle's $32 million headquarters and production facility in the city of Detroit. The 8-story, 240,000 sq. ft. building is scheduled to be completed in June 2003, says Randy DeRuiter, senior regional vice president for St. Louis-based Clayco Construction Co., which is the construction manager in the joint venture project with Alberici Constructors, also based in St. Louis.
About 500 workers will be housed in the building, which includes a manufacturing facility converted from a former General Motors Corp. plant. The construction will consolidate about 200 workers scattered in offices throughout metro Detroit.
“The fact that they kept a major automotive supplier in the city of Detroit was very important to the city,” DeRuiter says. “American Axle was one of the most successful suppliers in the last year.”
Clayco also is building a $20 million, 362,000 sq. ft. world headquarters and production facility in Highland Park for BudCo, a printing and distribution company.
The completion in March of Northwest Airlines' World Gateway Midfield Terminal at Detroit Metropolitan Airport has spurred industrial and office construction. Scheduled projects include the 1,200-acre Pinnacle Aeropark, and a planned 800,000 sq. ft. to 1 million sq. ft. world headquarters for auto parts maker Visteon Corp. in nearby Van Buren Township.
The terminal is designed to improve arrivals and departure times for the estimated 41 million people who pass yearly through its gates. The airport, previously deemed one of the worst in the nation, added 97 gates, 11,500 new parking spaces, 70 eateries and a variety of retail offerings.
“The whole perception of this area is being completely turned around based on Midfield,” according to Roehling of SmithGroup, which was architect of the new terminal.
“It's a very subtle thing, but the reality is that people will be very happy to move through and visit the area now,” he says. “It enhances the ability for businesses to market their products at an attractive port. It is full of positives.” The 25,000-acre industrial development around the airport is bisected by interstates 94 and 275 and extends to the east from Willow Run Airport, a mostly cargo facility on the south side of the city that is about 10 miles west of Detroit Metro Airport.
To the north of Metro Airport, the Nemer Property Group Inc. and Clayco Construction are planning an 80-acre, $150 million project called Vining Park, which will include R&D facilities, office buildings, and a hotel and conference center.
Another recently announced development is the $40 million Warren Tech Center Industrial Park, which will be built on 38 acres at Interstate 696 and Mound in Macomb County, north of the city. Larson Realty Group of Bloomfield Hills, Mich., reports that it plans 250,000 sq. ft. of research facilities at the park.
Hotels: Casinos To The Rescue?
In Detroit, even the hotel industry's fortunes are tied closely to the auto industry. With Ford's losses in 2001, and layoffs and slow sales at GM and Chrysler, hotel business suffered.
“Whenever the auto companies cut back, everybody suffers,” says Victor Martin, general manager of Best Western Sterling Inn in Sterling Heights, Mich. “The auto industry still makes up the majority of business in the Detroit hotel market.”
But that didn't stop Best Western Sterling Heights from completing a 90-room, $12 million expansion in the third quarter of 2001, which included a 23,000 sq. ft. indoor waterpark. The goal of the project was to boost weekend occupancies at the hotel, which had historically lagged behind business occupancy during the week. The work paid off: the hotel succeeded in doubling its occupancy rates on the weekends and holidays, Martin says.
The city's three casinos are stirring up the most excitement in the hotel sector. The casinos plan to add 1,200 rooms — 400 rooms each — within the next four years as they expand and build permanent sites. The extra room capacity is expected to jumpstart Detroit's convention business.
The city's three gaming houses — the $220 million MGM Grand Detroit Casino, $200 million Greektown Casino and $160 million MotorCity Casino — are in negotiations with the city for extended operating agreements and permanent sites.
Under the latest plan, Greektown and MotorCity are expected to stay at their current sites, and MGM Grand will either expand at its present site or at another location. Previous plans by former Mayor Dennis Archer to build lavish, Las Vegas-style casinos on the Detroit riverfront fell through.
“The idea of having the casinos build more rooms was to attract larger conventions, and once that happens there will be peripheral development,” Martin predicts. “Everyone is waiting to see what is going to happen.”
Not Enough People Living Downtown
Although the Compuware and stadium projects are changing the face of downtown, more housing is needed in the central city before downtown can truly come back to life. One project that is part of the effort to rejuvenate the central city is The Farbman Group's Lofts @ Woodward Center project, a historic renovation of an old Winkleman's department store. The $12 million project will feature 80 units and 20,000 sq. ft. of retail.
“We'll have 60 units delivered by the end of summer,” says Farbman Executive Vice President Andy Farbman, who is in charge of the company'sdivision, NAI Farbman.
Farbman also manages a complex in Macomb County's Shelby Township that has just come on line. Stoney Park Place features 161 units surrounded by high-end homes.
The $18 million project offers 2- and 3-story garden-style townhouses in a township that Farbman refers to as a growing area for apartments.
“We've started pre-leasing and demand has been strong,” Farbman says.
Retail: Action In Oakland
For Troy, Mich.-based Robert B. Aikens & Associates LLC, fall 2002 will mark the opening of a long-standing dream — the $90 million Village of Rochester Hills. The 375,000 sq. ft. project is one of the first retail developments in Michigan to use the urban streetscape concept with stores facing each other on a main street.
The lifestyle center will be anchored by a 120,000 sq. ft. Parisian department store, as well as a 55,000 sq. ft. Food Emporium by Farmer Jack. Other tenants include Eddie Bauer, Victoria's Secret, Banana Republic, The Gap, Talbots and others. The move is part of a trend by retailers to look for venues other than the big malls for growth.
The project, located on 33 acres in bustling Oakland County north of the city, is primarily targeted toward the 500,000 residents who live within a 10-minute drive of the center. The average household income within a three-mile radius of the center is $119,563. The population of Oakland County is 1.94 million, up 16% from 2000. By 2010, it's expected to grow another 16%, or 72,950 residents. Oakland County's retail sales in 2000 were $22.2 billion, greater than 14 states and the District of Columbia.
At the north end of the I-75 corridor in Novi — also in Oakland County, work is all but finished on Fountain Walk, a 737,164 sq. ft. development by PLC-Novi West LLC, a division of PLC Commercial Inc., based in Newport Beach, Calif.
The $123 million project, which features open-air courtyards and fountains, is open and features stores such as The Great Indoors, Galyan's and Cost Plus World Market. Fountain Walk also will include a bowling alley and skate boarding and mountain bike facilities. The mall is expected to be fully leased by the fall.
Contributing Editor Richard Blanchard lives in Detroit and is an assistant business editor for The Detroit.
DETROIT-BY THE NUMBERS
Metro area: 5,456,428
Source: U.S. Census Bureau
UNEMPLOYMENT: 6.1% (metro)
Ford Motor Co., 72,640 employees
General Motors Corp., 51,321 employees
DaimlerChrysler AG, 38,619 employees
Source: Detroit Regional Chamber
VACANCY RATES (Metro Area):
15.4%, 1Q 2002
11.1%, 1Q 2001
Rent per sq. ft.: $26.92 1Q 2002;
$26.51 1Q 2001
Source: Grubb & Ellis Co.
4.8% vacancy, 1Q 2002
3.4% vacancy, 1Q 2001
Rent per unit: $709 1Q 2002;
$695 1Q 2001
Source: Marcus & Millichap Research Services
7.7% vacancy, 1Q 2002
6.5% vacancy, 1Q 2001
Rent per sq. ft: $15.41 1Q 2002;
$15.32 1Q 2001
Source: Marcus & Millichap Research Services
8.2% vacancy, 1Q 2002
4.4% vacancy, 1Q 2001
Rent per sq. ft.: $37.43 1Q 2002;
$35.90 1Q 2001
Source: Grubb & Ellis Co.
54.6% occupancy, 1Q 2002
59.6% occupancy, 1Q 2001
Source: Smith Travel Research
MAJOR PROJECTS UNDER CONSTRUCTION:
Compuware World Headquarters, a 16-story, 1.1 million sq. ft. office building
Developer: Chicago-based U.S. Equities Realty LLC and Detroit-based Redico-Cummings
Owner: Compuware Corp., Detroit
Cost: $350 million
Ford Field, 60,000-seat football stadium with 190,000 sq. ft. of office space
Developer: Detroit Lions Inc.
Owner: Detroit Wayne County Stadium Authority
Cost: $325 million
Estimated completion: Fall 2002
American Axle World Headquarters, a 240,000 sq. ft., 8-story office/industrial building
Location: City of Detroit
Developer: American Axle
Owner: American Axle
Cost: $32 million
Estimated completion: June 2003
Village of Rochester Hills, a 375,000 sq. ft. shopping center
Location: Rochester Hills
Developer: Robert B. Aikens & Associates LLC, Troy, Mich.
Owner: Robert B. Aikens & Associates LLC
Cost: $90 million
Estimated completion: Fall 2002
Fountain Walk, a 737,00 sq. ft, open-air mall
Developer: PLC Novi West LLC, Newport Beach, Calif.
Owner: PLC Commercial, Newport Beach, Calif.
Cost: $123 million
Estimated completion: September 2002