“The industrial market activity is strong across Detroit with not just users, but investors and developers too. Detroit market rents are well above average for most of the U.S., and cap rates remain historically very low for good quality industrial product. Vacancy across the Detroit industrial market is low, making it difficult to find product regardless of the size or use. For this reason, we are seeing a lot of users looking at new construction and build-to-suit projects. Solid real estate fundamentals, improved economic conditions and resurgent U.S. manufacturing make Detroit a market ripe for both institutional investment and major corporate occupier demand in the near future.” — Patrich Jett, MCR, SIOR, LEED AP – Senior Vice President | Detroit
Michigan employs the highest number of engineers per capita anywhere in the country, making the Detroit region a top spot for both manufacturing and modern distribution which is becoming more heavily dependent on automation. Because of this, Amazon is leading market activity and will pave the way for other large non-automotive based projects and outside investors/developers, although automotive is still the driving force in the market. Ashley Capital is delivering 1 million square feet (MSF) for Amazon in Livonia, Kojaian is breaking ground on 1 MSF for Amazon in Romulus and Hillwood/Gramercy is breaking ground on 1 MSF for Amazon in Shelby Township.
While the region is more widely known for its manufacturing prowess, Detroit has a plethora of logistics advantages and employs more than 235,000 people in the field. The region supports four Class 1 railroads: CSX, Canadian National, Canadian Pacific and Norfolk Southern. Detroit is also a NAFTA gateway with more than 70% of the truck freight passing through the area originating from out of state. Finally, the Detroit Metro Airport is the eighteenth busiest passenger and twenty-seventh busiest cargo airport in North America with 202,032 metric tons of freight passing through its facilities annually.
After peaking at nearly 14% in 2010, the Detroit industrial market has experienced significant demand for its distribution and manufacturing product, significantly lowering the overall vacancy rate to 3.3%. Vacancy rates remain low in all size ranges, but are most tight in big-box product over 200,000 square feet and product under 25,000 square feet. Vacancy rates will remain low for the foreseeable future, despite an uptick in new development, most of which are build-to-suit (BTS) or pre-leased, meaning very little new product will be hitting the market soon.
Net absorption remains strong with more than 1 MSF of occupancy gains the first three quarters of 2017. Detroit looks to complete its seventh consecutive year of positive absorption at the end of 2017, an impressive feat for the market. Looking ahead, the combination of BTS product that will be available in the near future and increase in demand from automotive and non-automotive manufacturing users will keep absorption positive for distribution, manufacturing and R&D space in the region for the foreseeable future.
While Amazon is dominating new development in the Detroit region, other companies are also developing product, including InSite Real Estate, which broke ground on 600,000 square feet for Penske Logistics in Romulus (a cold storage distribution center for Kroger). Ashley Capital (Detroit’s largest industrial owner and market leader) has delivered a 575,000-square-foot DC spec project in Hazel Park of which approximately 200,000 square feet has leased, and has broken ground on another 742,000-square-foot DC spec project in Livonia. NorthPoint Development, a developer new to the Detroit market, has also announced two spec projects in Romulus and one in Lansing that will bring a substantial amount of new distribution space and competition to the market. Overall, nearly 1 MSF of product was completed in the first three quarters of 2017, with an impressive 3.7 MSF in development. This is the most product under construction in more than a decade.
At $5.62 per square foot (PSF) NNN for new DC space and top of the market rents for class A existing flex & manufacturing space, the Detroit market rents are well above average for most of the U.S. Asking rents are up in nearly all size ranges, but have experienced the largest year-over-year increases in the over 200,000 square feet size range which has increased from $4.45 PSF NNN to $4.91 PSF NNN the past 12 months. Despite a healthy asking rent, low vacancies and strong demand, institutional investment in the region remains low. Despite this, a lack of product available to purchase in core markets, combined with increased interest in secondary markets, mean investment activity could pick up, especially with Detroit providing a multitude of opportunities.
For more insights, learn about the top 10 U.S. industrial emerging markets positioned to experience the most robust increases in demand from occupiers and owners. And stay tuned for more U.S. Industrial Market Spotlights!
James Breeze is National Director of Industrial Research for Colliers International in the United States. Based in the Greater Los Angeles area, he prepares quarterly and specialized industrial research reports and interprets trends and data across the country.