It's true that Detroit has seen many foreclosures in recent months. But for a city that's suffered economically for years, it's debatable whether this amounts to a worsening climate or is simply more of the same. In February, the unemployment rate in Detroit's metropolitan area was 7.7 percent, the highest of any U.S. metro area with a population of one million or more.
These problems, tied in part to the woes of the automotive industry, are perhaps the silver lining to Detroit's situation. “We've already had all our people laid off,” says Chris Brochert, a partner with the city's Lormax Stern Development Co. “So we were ahead of the curve, so to speak.”
Furthermore, because Detroit has lagged much of the nation, developers did not aggressively build new retail during the most recent up cycle. Most areas feature a regional mall for every 250,000 people, according to Brochert. By that count, Detroit is four malls short of that ratio given its population.
But this relative absence of competition has minimized the effects of the weak economy. “It's not as disastrous as if it were spread out more and if there were more going on,” Brochert says.
Detroit has not entirely lacked retail growth in recent years. New retail has risen primarily in its suburbs. For instance, in October Bloomfield Hills, Mich.-based Taubman Centers Inc. opened Partridge Creek, its fourth property in the metro Detroit area. The 640,000-square-foot center features a Nordstrom and an MJR Cinema. Taubman also expanded its Twelve Oaks Mall last fall. Further, it is now adding a new restaurant wing to Fairlane Town Center in Dearborn.
“We build for the long term — we believe in Michigan,” says a spokesperson for Taubman. “There will always be ebbs and flows in the economy — you really have to look at it with a long-term vision.”
Several brokers say that most development is slowing, however, due in part to the scarcity of financing. Conduit lenders are reluctant to put up funds, and other financiers have imposed more stringent borrowing conditions. Potential backers want to see more equity and higher occupancy rates — 50 percent to 80 percent, according to Barry Landau, a principal with Lee and Associates in Detroit.
Brochert sees an upside to the more challenging development scenario: “It's weeding out the riffraff,” he says, referring to irresponsible developers who cut unsustainable deals. “We're getting rid of all the guys that don't know what they're doing.”
To an extent, the market in Detroit has come to favor tenants, with rents lowering and landlords more willing to entertain renegotiations and offer concessions. Brochert forecasts that if national retailer Linens ‘n Things goes bankrupt, which is a distinct possibility, Detroit and other parts of the country might even see some expansion, with national retailers swooping in to snap up the highly desirable real estate.
Brochert and his fellow brokers say they're returning to the basics and they remain busy with leasing. Redevelopment offers especially strong opportunities, according to Landau. “Personally, I think there's a lot of business out there,” Landau says. “We're pretty much at the bottom of the barrel as far as I'm concerned, and there's nothing but upside.”
“The country is catching up with us in a negative way,” says Jim Bieri, president of Detroit's Bieri Co. “Hopefully, that means we'll get out of it first, right?”
DETROIT
Population: 871,121
Foreclosure rate (for Detroit-Livonia-Dearborn metro area): 4.918%
Median household income: $28,364
Median value of owner-occupied homes: $91,700