While there is no denying that metro Detroit remains in a deep economic slump, the degree to which lenders, investors and even retailers have shunned the Southeast Michigan market can’t be justified, say some local commercial real estate professionals.

“Lenders have for all practical purposes redlined Southeast Michigan for sure, and even Michigan to a broader degree,” says Steve Chaben, regional manager of the Detroit and Grand Rapids offices of Marcus & Millichap Real Estate Investment Services.

“Have lenders historically shown a little less interest in doing business here than in other places? Yes. But there was always a segment that saw opportunity and reasons to do business here — and did,” emphasizes Chaben. “Those levels of interest are certainly at an all-time low.”

That’s not to say investment in the market is totally non-existent. The expansion of Wal-Mart into Detroit’s tri-county area continues. There also is a smattering of redevelopment projects. As more distressed properties come to market, new investment opportunities will likely emerge.

It doesn’t help matters that local employers are expected to trim 14,000 positions from payrolls this year, which means Detroit will likely lead the nation in job losses in 2010, according to Marcus & Millichap. Still, that’s a big improvement over the 113,000 jobs lost in 2009, a year that saw both General Motors and Chrysler file for Chapter 11 bankruptcy protection. Both companies have since emerged from bankruptcy with lower labor costs and reduced debt.

Weakening vital signs

The auto industry’s misfortunes have clearly had a negative impact on consumers and real estate fundamentals. The vacancy rate for community and neighborhood shopping centers in metro Detroit ballooned from 10.4% at the end of 2008 to 12.5% at the end of 2009, according to New York-based real estate research firm Reis. Effective rents during that period fell from an average of $15.70 per sq. ft. to $15.04 per sq. ft., a 4.2% decline.

Reis projects that the vacancy rate for community and neighborhood shopping centers will rise to 13.8% in 2010 and peak at 14.8% in 2011. Effective rents are expected to bottom out at $14.53 per sq. ft. in 2011, or about 3.4% lower than current levels.

The mall vacancy rate in metro Detroit also has spiked, rising from 7.8% in the fourth quarter of 2008 to 9.5% in the fourth quarter of 2009, according to Reis.

But contrary to popular opinion, the retail market in metro Detroit hasn’t been as devastated as other markets that experienced explosive growth over the past decade, says Dennis Bernard, president of Bernard Financial Group in Southfield, Mich., a mortgage banker servicing $3 billion in commercial real estate loans. “In Detroit, we did not have the overbuilding and explosion of retail from 2000 to 2007.”

Wal-Mart on a roll

Slightly more than 400,000 sq. ft. of retail space will be delivered to the market this year, most of it contained in one single project. Livonia Marketplace, a 325,000 sq. ft. shopping center currently under construction, will be anchored by a 180,000 sq. ft. Wal-Mart Supercenter.

The developer is Livonia Phoenix LLC, a partnership that includes Farmington Hills-based Grand/Sakwa Properties LLC, Bloomfield Township-based Lormax Stern Development Co., and Boca Raton, Fla.-based Konover South LLC. The target date for completion is fall 2010.

Wal-Mart already has a presence in Livonia. Nearly three years ago a Wal-Mart Supercenter opened at Middlebelt and Plymouth roads, about five miles from the new store under construction.

“We’re very happy to contribute to Michigan’s tax base by growing more stores in the area,” says Lindsay Huddleston, senior manager for government affairs and public relations with Wal-Mart.

Including the new store under construction, Wal-Mart now has 10 stores in metro Detroit’s tri-county area, which includes Wayne, Oakland and Macomb counties.

The average household income within a three-mile radius of Livonia Marketplace is $65,120, according to retail consultant Jeff Green. Within a five-mile radius, average household income is $66,300 and the population totals 244,374. Those demographics meet the criteria of a wide variety of retailers.

With residential development at a halt in Southeast Michigan, most retailers have no reason to expand into the outlying suburbs. Infill projects like Livonia Marketplace offer the best investment opportunities in the foreseeable future, says Jim Stokas, principal at Stokas Realty Advisors in Southfield. “Retailers build in anticipation of future growth and future population, and now that growth has become stagnant.”

Eyesore no more

Even in a tough market, success stories emerge. When Ramco-Gershenson Properties Trust and ING Clarion jointly acquired The Shops at Old Orchard in West Bloomfield in August 2007, the center was only 40% occupied.

The anchor store, a 54,000 sq. ft. Farmer Jack supermarket, had closed the previous year. But the owners were keenly aware of the center’s potential. After all, it was located in an affluent and large trade area.

The owners launched a $10.2 million redevelopment project that included re-tenanting the 95,000 sq. ft. center built in 1972. They scored a major victory in the spring of 2008 when Plum Market, a specialty grocer, signed a 37,000 sq. ft. lease at The Shops at Old Orchard. The facelift continued with a new mix of restaurants and small-shop tenants. Today the center is more than 90% occupied.

“The transformation of the Shops at Old Orchard has been a great success for our company,” said Michael Sullivan, senior vice president of asset management for Ramco-Gershensen, a publicly traded REIT based in Farmington Hills, Mich.

“We have been able to bring a number of new, dynamic retailers to the market and provide the area an updated shopping venue,” adds Sullivan. Ramco-Gershensen has ownership interests in 88 shopping centers totaling 19.8 million sq. ft.

Besides Plum Market, some of the tenants at The Shops at Old Orchard include ethnic grocer Babylon Foods, Bake Station Too, Mail Boxes Etc., Olga’s Kitchen, and Running Fit.

Buy, sell or hold?

While the volume of property sales transactions remains low, Chaben of Marcus & Millichap says that there are more deals getting done than many people realize.

A good many of the transactions have involved distressed properties, but certainly not all. “If I’m an owner of a stable asset today there is probably little reason to sell,” Chaben says, “but there are a few caveats.”

For starters, President Obama’s proposed 2011 budget calls for the long-term capital gains tax, currently at 15%, to rise to 20%. Owners may be motivated to unload properties now rather than wait.

Secondly, 1031 exchange buyers can avoid the Michigan Business Tax if they sell an investment property in Michigan and invest the proceeds in a like-kind property in another state. “For an investor not comfortable in Michigan, here is some motivation to move to a better market,” says Chaben. “You not only defer the capital gains by doing a 1031 Exchange, you avoid the Michigan Business Tax.”

Lastly, a wave of impending loan maturities could trigger more property sales. Many shopping center owners will need to refinance their properties over the next few years as their existing mortgage loans reach maturity. Because property values have fallen so steeply for a variety of reasons, many borrowers will likely be required by lenders to put more equity into the deal or risk losing the property. That leaves borrowers with a choice.

“If I sell the property, I can take that equity out and redeploy that capital somewhere else and not face the bullet coming at me when I know I can’t refinance this thing just down the road,” says Chaben.

CMBS stirrings

After a long hibernation, the commercial mortgage-backed securities (CMBS) market is showing a little bit of life in metro Detroit. Bernard Financial has an $8.6 million conduit loan on a retail property under application with a lender.

The non-recourse loan is for 10 years at 75% loan-to-value with a 30-year amortization. “This is the first CMBS retail loan that I’m aware of in Southeastern Michigan in 26 months,” says Bernard.

In this particular case, the borrower was carrying too much debt on the property and the loan became non-performing. The lender agreed to a discounted payoff and now the borrower is seeking new financing “We’re seeing a lot of discounted payoffs right now,” says Bernard.

One growing area of business for Bernard Financial is CMBS loan modifications. The company has completed at least a half dozen CMBS loan extensions and modifications on retail properties alone, says Bernard.

“The special servicers are so overworked and behind,” he notes, “they are looking for firms like ours that can assist in the process.”

Matt Valley is editor of NREI.