On January 31, 2024, I attended REJournal's 9th Annual Detroit CRE Summit at Community House in Birmingham. The event featured three panels:
Apartment Market Update & 2024 Forecast
Industrial, Office, Retail and Investment Sales 2024 Market Update
Transformational Projects in Downtown Detroit and the Suburbs
The panels included brokers, developers, property owners, mortgage bankers, asset managers and others on the front lines in commercial real estate. Here's what I heard.
Panel 1: Multifamily
The moderator was Leslie Etterbeek with LR Management. The panelists included Charlie Krisfalusi with Walker & Dunlap, John Woods with BELFOR Real Estate, Kevin Jahnke with Income Property Organization, Kristen Diamond with Hayman Company and Peter Burgoyne with City Club Apartments.
Loan to value ratios are around 65% (though the LTV can be higher if a property has units reserved for low income residents)
Owners need find ways to generate additional income to soften blow as they refinance from say a 3.5% interest rate to 5.5% interest rate. The Kales Building in Detroit still has original shell space that is being built out with 52 new units to combat the higher interest rate after refinancing.
Insurance costs have skyrocketed. A deal nearly fell through after insurance quotes were coming back at $850 per unit (underwriting was at $600 per unit which was thought to be very conservative)
Ann Arbor has a big multifamily housing shortage of market units (not student housing)
Multifamily absorption in Detroit has slowed down significantly
Panel 2: Industrial, Office, Retail, Investment Sales
The moderator was Andy Gutman with NAI Farbman. The panelists were Brad Rosenberg with Mid-America Real Estate, Brendan P. George, with CBRE, Dave Dismondy with District Capital, David Giltner with Newmark and Steven Chaben with Marcus & Millichap.
Industrial
Industrial market has continued improving decade over decade
Vacancy rates across Southeast Michigan are under 3.3%
Demand may slow this year and it’s possible there is some overbuilding
Activity in 2024 will look like 2023, but not 2022 or 2021 levels
Office
Availability rate for office assets across Metro-Detroit is 35%
Office space in Birmingham, Royal Oak, Ann Arbor and Ferndale outperforming the market with sustained demand/occupancy levels
Oakland Town Square (Southfield) and Columbia Center (Troy) are high quality assets significantly outperforming other suburban office properties nearby
A TI allowance of $20/SF a few years ago costs $60/SF today – tenants have started contributing to their buildout allowance
There is recourse on all new office loans
Increasing interest in subletting as tenants can sign on for shorter terms (typically 12 to 24 months) without committing to a long term lease
Retail
Performing well, there is a lot of interest from out of state retailers looking at Michigan
The recent bankruptcies of Bed Bath and Beyond and Rite Aid creates opportunity for new retailers to enter the market
Auction Sales
Not every property is a good fit for auction
The price paid at auction for a property is not always reflective of market and the price includes some sort of discount
The buyer has a short window for due diligence after the auction closes (usually 30 days, sometimes 60 days), hence the discount
Investment Sales
The investment market is looking for yield and positive leverage
As market improves in 2024 (assuming multiple rate drops), the Midwest should be one of the first places to achieve positive leverage as value swings here were not as great as they were on the coasts
Panel 3: Transformational Projects in Downtown Detroit and the Suburbs
The moderator was Peter McGrath with Savills. The panelists were Adam Lutz with Lutz Financial Services, Beth Kmetz with Michigan Central, Jared Friedman with Friedman Real Estate, Lily Diego with Gensler Detroit, Rian English with Olympia Development and Naumann Idrees with Bedrock.
The discussions during this panel were largely related to the new developments in Downtown Detroit including the Transformational Brownfield Plan (TBP) proposed by Olympia Development, new and ongoing developments by Bedrock including the Hudson's Site and recently completed Book Tower, as well as Ford Motor Company's rehab of Michigan Central.
Also discussed were some of the ways companies are adding "lifestyle amenities" to their buildings to entice employees back to the office. Many of these amenities are incorporated into new construction. Take the Mercedes-Benz Financial Services HQ building, for instance. The entire first floor of this building is nearly entirely devoted to lifestyle amenities including large cafeteria, break out spaces, fitness center, game room, etc.
Closing Thoughts
The panelists were very optimistic that 2024 would be somewhat of a rebound year in terms of transaction volume and overall activity in the real estate market. Many of the panelists expected three to five rate drops by the Fed which would contribute to this activity. When asked what would happen if rates don't drop, the panelists expressed continued optimism, believing the disconnect between buyers and sellers would continue to shrink and that investors would accept the current interest rate environment as the new normal.
Shortly after this event, it was announced the Fed would be unlikely to drop rates as the labor market remained strong and inflation ticked upward.