Will Renewed Investment from Auto Companies Have an Effect on Detroit’s Industrial and Office Sectors?
Recent moves made by auto industry giants bode well for certain classes of commercial real estate in Detroit.
In 1913, Henry Ford introduced the world’s first moving automobile assembly line in Highland Park, Mich. That same year, the architects behind New York City’s iconic Grand Central Terminal unveiled their latest masterwork, Michigan Central Station. Long the crown jewel of Detroit’s skyline, Michigan Central Station has become an emblem of the city’s decline since Amtrak stopped running service to the station in 1988.
But in recent years, Michigan Central Station has found new life courtesy of, appropriately enough, the Ford Motor Company.
In June, Ford announced it had purchased the dilapidated train depot with the intention of transforming it into the cornerstone of a new campus focused on the company’s burgeoning autonomous and electric vehicle business. The auto manufacturer plans to spend nearly $740 million building a campus that will occupy some 1.2 million sq. ft by 2022, representing a landmark investment in Corktown, Detroit’s oldest neighborhood.
Ford’s proposed revitalization of Michigan Central Station is both an economically and symbolically important step for a city still recovering from filing for bankruptcy in 2013. Paired with General Motors’ decision to move Cadillac’s headquarters back to the Detroit metro area, Ford’s robust investment bodes well for the economic fortunes of The Motor City.
It bears asking, then, what, if any, impact these goings-on will have on Detroit’s commercial real estate markets, particularly those that tend to mirror the ups and downs of the city’s auto industry activity. While it’s far too soon to characterize Detroit’s commercial real estate as a blue-chip opportunity, recent history suggests that it’s only a matter of time before the city’s office and industrial markets start to react positively to the ongoing influx of auto investment.
Complicated relationship with the auto industry bailout
Industrial facilities continue to be the dominant asset class in Detroit’s commercial real estate market, and are often a bellwether for real estate in the city at large. And while the likes of Amazon, Penske and ProTrans are all in the process of building sizeable logistics centers in the Detroit area, over half of the city’s roughly 500 million sq. ft. of industrial inventory is used for manufacturing—the lion’s share of which is still auto-related.
As a rule of thumb, as Detroit’s industrial market goes, so goes its office market. For instance, according to Reonomy data, the total number of sales of industrial assets in Detroit increased by 31.6 percent in the year immediately following the 2009 auto industry bailout. Unsurprisingly, total sales of office assets followed suit, increasing by 133.3 percent (the relatively modest size of Detroit’s office market tends to produce superficially outsized numerical fluctuations). This upward trajectory held true for the average sales price in each asset class as well, with price jumps of 229.7 percent and 459.4 percent in industrial and office sectors, respectively.
After healthy increases in total sales between 2013 and 2014 (49.7 percent for industrial, 125.0 percent for office), both Detroit’s industrial and office sectors posted declined through 2016: the city saw 24.6 percent fewer industrial transactions and 44.4 percent fewer office transactions in 2016 than in 2014.
What lies ahead
Encouragingly, the auto industry’s recent doubling down on Detroit appears to have given commercial real estate investors all the confidence they need to turn the city’s industrial and office markets around. Both markets experienced slight upticks in total sales between 2016 and 2017, while the average sales prices of industrial and office assets jumped by 149.2 percent and 233.4 percent, respectively.
Figures from the latest (third quarter) market reports suggest that these prices are likely to continue climbing, especially in the city’s industrial market. With major players like Ford absorbing more than 482,000 sq. ft. of industrial space last quarter, Detroit’s industrial vacancy rate managed to hold steady at 4.3 percent despite an abundance of new space coming to market. Such a low vacancy rate will force companies to pay top dollar to snap up what’s left of Detroit’s dwindling industrial supply.
Detroit’s long-term success will ultimately hinge on whether the auto industry continues its local spending, but Ford’s and GM’s recent decisions inspire nothing if not confidence. While the city may yet encounter significant obstacles on the way to a full economic recovery, it’s fair to say that Detroit need no longer be synonymous with dire straits.
Richard Sarkis, PUBLICATION NAME.