Guest post by Bill Bubniak, senior vice president, director of investment sales, Farbman Group
In recent years, Midwest real estate—particularly Michigan real estate—has in many ways gone the way of the auto industry: the market is continuing to move in the right direction. When we look closer at the improving state of investment sales in Michigan—what things look like now and how they will remain for the balance of 2014 and beyond—that story of automotive recovery serves as a cohesive theme that ties the narrative structure of the story together.
To a large extent, that story is one of rediscovery. People are looking at Michigan with new eyes, and are rediscovering opportunities. In particular, those who have had trouble finding investment opportunities in other cities and those who are getting priced out of ultra-competitive markets, like Manhattan, are beginning to make moves in Michigan. There are new entrants into the market, and interest rates are still relatively low. This increased activity, combined with the ongoing good publicity that is being generated by the auto resurgence and the overall state economic recovery, is not just generating chatter—it is creating real momentum. It is important to note that this is not just hype—there is job creation, there is growth, and there is not a great deal of new construction. In many ways, it is the perfect storm for success with respect to investment sales.
All of these elements are coming together and are working to Michigan’s advantage. In fact, while it has long been considered a secondary state when it comes to real estate, Michigan is starting to be considered a “wise buy” from a national perspective. The good news is, lenders are following suit, and lending is picking up, too. But while the overall picture looks good, understanding the trajectory of Michigan’s real estate marketplace requires a more detailed look at how specific market segments are performing:
Michigan has seen no real construction activity in the past decade, along with low population growth and a sluggish job market. Now however, with those population and employment indices picking up, and construction still slow, the result is an increasingly robust multifamily market with very aggressive cap rates. All in all, this is the strongest real estate segment in the state. At Farbman Group, we are seeing a 6 to 7 percent cap rate on stabilized deals, and up to the high single digits or perhaps a 10 percent cap on “turnaround” deals. While the lion’s share of the business is taking place in the usual hotbeds of Oakland, Wayne and Macomb Counties, select markets—like Grand Rapids, for example—are notably hot at the moment. There is very little space available in downtown Grand Rapids, and some noteworthy sales have seen competitive bidding that actually exceeds the asking price.
It should come as no real surprise that industrial tends to go as the auto industry goes. Which is why many industrial brokers have smiles on their faces these days, and one of the big reasons why we are seeing so many transactions being done. In a sea of success stories for this segment, Auburn Hills stands out as one of the state’s hotter industrial markets. Again, the lack of new construction is contributing to this competitive dynamic, and vacancies are down across Southeast Michigan in particular. There is still quite a bit of older industrial product out there (with structural or functional concerns like sub-optimal ceiling heights and code issues) that is not doing as well comparatively, but even there, we are seeing activity beginning to tick up. Michigan is starting to see a bit more build-to-suit activity, but demand is so immediate and the need is so acute that many companies are demonstrating a willingness to take those lower ceiling heights or inferior geographic locations.
Retail market in particular is seeing a lot of first-time buyers in the state. Not infrequently, that population of buyers is also exploring options in other Midwest markets like Milwaukee, Cincinnati and Toledo. Overall, retail remains largely segmented, mirroring the national trends in that respect. With the continued encroachment of online sales into brick-and-mortar, and the trend toward retailers adopting smaller and more efficient formats, big box retailers are downsizing and reformatting. Consequently, retail formats that have been less impacted by those trends are performing the best: neighborhood strip centers and smaller, grocery-anchored centers are figuratively flying off the shelves, and demand is sky high. With power centers, buyers need to be smarter and more careful. You have to buy right and know your location, understanding both the area and the demand profile.
As in much of the Midwest, office remains Michigan’s softest segment. Despite that comparatively lackluster performance, we are seeing some bright spots that did not exist a few years ago. There are pockets of opportunities, but you have to be a little more careful what you are buying. The Troy market, for example, is basically a microcosm of the larger state marketplace: a still-soft office market making a slow and incomplete recovery from the recession and the auto industry struggles. Like the rest of the state, Troy is also bucking up against some significant national trends: people working from home, cubicle sharing, etc. There is, however, still a fight for quality for class A-locations. One notable bright spot in Detroit is Dan Gilbert, who recently purchased One Woodward Avenue and the Dime Building. His confidence and investment is creating some demand and interest from others—both from inside and outside of the state.
Aside from Chicago, many of the same factors at play in Michigan are also influencing the markets to some extent across the Midwest. Investors who are running out of prime opportunities in A-states or cities are rediscovering the potential in places like Wisconsin and Ohio. Michigan has something most of those other markets do not have, however: a compelling story of a dramatic turnaround. Institutional buyers are recognizing opportunity in Michigan, and investors who used to think it was not “fashionable” to own something in Michigan have come full circle. In short, Michigan is “cool” once again. Some of this is the result of national trends as well, of course, but Michigan is making a bigger leap than other states nationally—and there is tremendous up-side here compared to many other states. When you know you can buy quality for less, it is exciting.
Looking ahead, the near-term future remains bright. The cascade of interrelated positive factors bodes well: the auto industry’s strong performance, fewer troubled properties, more lenders lending in the state, more tenants in the market, light construction activity, and a generally improving economic outlook. One cautionary note to keep an eye on in 2015 and 2016 is the issue of troubled loans. Those closely tracking troubled loans will see that there are a large number of balloon notes in the Midwest coming due. If you combine that with the uncertainty as to where interest rates might be heading, the window of opportunity to sell might be somewhat limited. The year ahead looks good, but the crystal ball gets cloudier once we move into the New Year.