Do you remember those days before the COVID-19 pandemic? Detroit’s commercial real estate market — in both downtown and suburban markets — was in the midst of a sustained bull run. Flash forward from about two years to now: the Detroit CRE market is regaining that 2019-era momentum.

This is partly because the Omicron variant of COVID-19 is beginning to loosen its grip on the country. But it’s also because Detroit’s commercial real estate market didn’t crash even during the worst days of the pandemic. Yes, business activity has slowed and some sectors – like retail and hospitality – have been hit hard here.

But overall, Detroit’s CRE market has remained resilient throughout the pandemic. And now that hopes are resurfacing that the worst days of the pandemic are over, business activity in Detroit looks poised to soar again.

Midwest Real Estate News spoke with Andrew Ledger, managing director of brokerage services at Farmington Hills, Mich.-based Friedman Real Estate, about the state of Detroit’s commercial real estate market. Ledger said the forecast here is largely positive.

Let’s start with what has long been the strongest business sector: industrial. How is industrial real estate doing in the Detroit market?
Andre Leger:
This is Detroit MSA’s strongest business sector. There is a pandemic need for logistics sites. And it’s not just the Amazons of the world. The biggest retail players are now opening logistics facilities. Retailers like Target are opening locations with smaller footprints. They don’t need to carry as much inventory internally. These retailers are therefore driving the need for more logistics facilities. They need more places to store their inventory so they can get it to their points of sale faster.

When you look back at Detroit, it’s generally not a specific industry market. You very rarely see specific industrial buildings here. Our rental rates were not increasing at a rate that justified new construction costs if you didn’t have tenants in tow. We have seen this change over the past 18 months. We’re seeing more industrial specs now, and that’s something I think we’ll continue to see in 2022 and 2023.

That’s a pretty big change for Detroit’s industrial market.
Register:
Take, for example, Assembly Park in Wixom, Michigan. It was once an old automobile manufacturing plant. A promoter bought it and now installs industrial buildings there. It is almost 100 percent pre-let. Rents in our industrial market have gone from $6 to $7 per square foot now to $9, $10 and in some cases $11 or $12 per square foot. Because our industrial rents are on the rise, a specific development is justified.

Industrial vacancy rates are so low. There is not enough product. Users need more products here. I tell my brokers, if you can get land in an industrial zone, list it. If you can list industrial buildings even if they are functionally obsolete with low ceiling heights, list the buildings anyway because the zoning is already in place. Someone will come and tear down and upgrade the buildings to suit their needs.

Industrial estate land in good locations sells quickly. Industrial buildings trade quickly and at ever-increasing prices.

How is the retail sector doing? This sector has been hit much harder by the pandemic.
Register:
Everyone thought retail was going to die. We didn’t see that in Detroit. Retailers who have been able to adapt during COVID have become even stronger. Those who were weak before COVID saw their demise accelerate during the pandemic.

We didn’t see a drastic increase in retail rental rates last year, and we don’t expect to see that in Detroit in 2022. But retail’s demise as expected in 2020 is not s has not materialized as we move forward into 2022.

The office sector has obviously been hit hard by the pandemic. How is this sector performing in Detroit?
Register:
The new variant that came out around the holiday season has forced office tenants to postpone their back-to-office decisions again. Companies have yet to determine if they are bringing their workforce back and in what capacity. Are they bringing them back full-time or hybrid? And what will that do to the amount of square footage they need?

There are, however, some opportunities. Some office tenants have been very proactive. They understand that office rents have fallen for urban and suburban assets. If their leases are up, they consider moving to higher quality office space that they can rent at a lower rate. They can upgrade from a Class C building to a fully serviced Class A space at less cost than they could have gotten before the pandemic.

What worries me the most is the Class B and Class C office spaces. What’s going on with them? With rent compression, why should an office tenant move into these properties?

What about the multi-family market? It’s been a strong market across the country, even during the pandemic. Is it still doing well in the Detroit market?
Register:
First-time home buyers are often excluded from the price of single-family homes today because their prices are rising so rapidly. For this reason, many are turning to apartments when they would otherwise have considered buying a single-family home. The demand for multifamily, because of this, is not going away. Occupancy rates are so high. And because rents are rising, landlord incomes are also rising.

Before the pandemic, downtown Detroit was on a roll with plenty of CRE activity. What’s going on downtown right now?
Register:
I won’t say downtown Detroit is hurting. But it has lost some of the momentum that was happening before COVID. It’s not the fault of the owners. This is the nature of what happened with the pandemic. But the city center, if the activity has slowed down, does not suffer.

And in the suburbs? Are renters looking for multi-family properties in suburban Detroit?
Register:
At the start of the pandemic, people were trapped in their residences. Many of them felt that if they were going to be in their residences and maybe work from home longer term, they wanted as much space as possible. This extra space is easier to provide in the suburbs than it is in an urban high-rise.

It’s also important to realize that in Detroit, the suburbs are closer to downtown. You can travel to the city of Detroit from the suburbs without much hassle. You can rent in the suburbs and easily travel to museums, sporting events, restaurants and all other downtown activities. Living in the suburbs doesn’t preclude traveling to downtown Detroit.

What type of amenities are tenants looking for in modern apartments today?
Register:
They want lots of storage and they want open space. They want swimming pools. Bike storage is important. They want other types of outdoor activities.

What do you see for the remainder of 2022 in the Detroit CRE market?
Register:
It is important to be optimistic but also realistic. The fundamentals are there for increased activity. These office tenants are making decisions now. There are opportunities there. Some tenants may reduce their workforce and others may increase their workforce. Shops and restaurants are open. People want to go out. They want to socialize again.

You can never predict what might happen that is beyond your control. Maybe the stock market will crash. We might have another variant. We do not know. But as long as we continue on the right track, I’m optimistic that we’ll see positive growth in Detroit.