Detroit in terrible shape and it’s not getting better yet

Published 9:52 pm Sunday, August 22, 2010

Times are tough for U.S. commercial property owners, but few have it worse than landlords in Detroit.

The Motor City never quite recovered from the previous recession at the start of the decade only to get snagged in the current slump. And in the last 12 months, it’s seen joblessness nearly double and two pillars of its economic lifeblood, General Motors Co. and Chrysler, go on government life-support.

The ripple effect was a tidal wave: commercial real estate vacancies and mortgage delinquencies surged, rents plunged and major new construction virtually dried up.

“Our market’s gone through an incredible paralysis,” said Frederick Liesveld, managing director for Grubb &Ellis’ Detroit office. “This year we were fighting with incredible uncertainty as to what was going to happen with the automakers.”

GM and Chrysler emerged from Chapter 11 bankruptcy protection much leaner this summer, and the fallout eliminated thousands of additional jobs — from restaurants to retail stores. The unemployment rate has almost doubled in the past year to 17 percent in June, far above the U.S. rate of 9.4 percent.

In the Detroit metro area, one in five business addresses is vacant, according to data from the U.S. Postal Service. To attract tenants, landlords are slashing rents and offering incentives like free rent and money for renovations.

There are, of course, some encouraging signs in the market.

Earlier this month, some $1.36 billion in federal grants were awarded to companies in Michigan as part of an effort by the Obama administration to jump-start development of next-generation electric vehicles and batteries.

GM got a chunk of that and this week announced it would begin assembling battery packs for the Chevrolet Volt, the company’s upcoming rechargeable electric car, in Brownstown Township about 21 miles from Detroit.

“We start building prototypes of the battery early next year, so that we’re ready to supply batteries for the Volt when it starts going into production in November of next year,” said GM spokeswoman Susan Garavaglia.

In June, General Electric Co., leased nearly 300,000 square feet of office space owned by auto parts supplier Visteon Corp., which filed for bankruptcy protection in May. GE also plans to build another warehouse for research into wind turbine power.

The phones in Grubb &Ellis’ local office rang more in July than in the first six months of the year combined.

“People are now talking again,” Liesveld said.

But there is no doubt a recovery remains a far-off prospect.

In all, almost one quarter of the Detroit area’s office space is vacant, and that rate is projected to climb to 26 percent by year’s end. The U.S. rate, by contrast, is 16.6 percent, according to Grubb &Ellis.

The loss of auto manufacturing jobs and plant closures has pushed up industrial vacancies to 14.8 percent. That’s also ahead of the national rate of 10.7 percent. Grubb &Ellis expects it will climb to 16.5 percent by year-end.

The closure of car dealerships amid the auto industry restructuring has added tens of thousands of square feet of retail space to the market — but so far it’s not luring any takers.

“Both retailers and landlords are doing everything they can just to hang on to their business,” said Mark Woods, chief operating officer of Signature Associates, a commercial brokerage and property management firm.

More than 100 commercial properties in Detroit valued at $2.6 billion were in some stage of foreclosure, caught up in bankruptcy or had their mortgages restructured as of the end of July, according to Real Capital Analytics. That makes Detroit second only to Las Vegas with the worst commercial real estate market.

“It’s going to be a depressed situation for many years,” said Dan Fasulo, Real Capital’s managing director.