By Andy Farbman
CEO, Farbman Group
The Midwest commercial real estate market continues to heat up. Office product, in particular, is performing well. And while prices are up in markets across the country, investors are increasingly targeting the Midwest as a source of great value and quality opportunities. At a time when big coastal markets have seen prices recover up to (and in some cases above) pre-recessionary highs, the Midwest remains a place where a combination of reasonable prices and an improving market creates an appealing investment dynamic.
The presence of new players moving aggressively into the Midwest has helped to reinvigorate the regional marketplace, and the office market in the Midwest is extremely strong—even when compared to just 12 or 24 months ago.
Cities like Detroit and Columbus are experiencing occupancy numbers that are generally up across the board. While those numbers vary from one market to the next, key markets (such as Chicago) have begun to stabilize at a favorable level. Chicago office product is to some extent also buoyed by strong performance across the commercial real estate spectrum—for example, the industrial vacancy rate is at its lowest point in nearly 14 years.
Consequently, investors who capitalized on affordable pricing in the midst of the last recessionary cycle now find themselves positioned favorably in Chicago and other Midwest markets as the upswing continues.
An evolving regional marketplace
One of the primary factors fueling the continuing Midwest’s renaissance is the region’s newfound status as a popular destination for startups and high-tech firms. Entrepreneurial energy and innovation have helped breathe new life into markets like Detroit. Across the Midwest, cities are embracing this trend, and the region is gaining a reputation as a viable and vibrant home for new ideas and up-and-coming technology companies.
Artists and creative types are also coming to the Midwest in growing numbers, some who have been priced out of markets like New York City and Los Angeles. This burgeoning artistic community is especially evident in Detroit and Chicago. As the example of Groupon in Chicago demonstrates, even a single big success story can make a regional impact. The more startups and young companies that call the Midwest home, the greater the chances that any one city could hit the jackpot.
The extra mile
While the Midwest office market is stronger today than it has been in years, savvy owners and investors are still maximizing opportunities to stand out from the crowd. Just a few strategic building improvements and some thoughtful preparation can significantly boost sales and leasing leverage.
At 79 W. Monroe in Chicago, a lobby upgrade and newly refreshed common area flooring created the feel of a new lobby space without the commensurate investment. At 200 W. Monroe, a similarly targeted rehabilitation refresher included a lobby renovation, restroom upgrades, new Wi-Fi service and a brand new conference center. The right exterior renovations can also be a cost-effective way to enhance the appeal of your building. The 220,000-square-foot Southfield Centre in metropolitan Detroit recently upgraded its exterior lighting to improve nighttime visibility and create a more dramatic and visually appealing sense of place.
In Chicago, a competitive downtown environment is already prompting movement out to the suburbs. Occupancy numbers in suburban cities are currently at their highest levels in more than seven years. This is a different dynamic than in secondary markets such as Columbus, Ohio, where rates and occupancy numbers may be moving in the right direction, but downtown opportunities are still accessible. Investment firms that need lower returns—where you can buy at a lower cap rate—are understandably active in Chicago, while investors looking for greater returns have generally been more active in secondary urban markets.
In Detroit, international activity is making an impact, as global investors continue to be active—particularly in areas outside of the city’s urban core. The substantial investments in downtown Detroit made by Dan Gilbert, the billionaire founder of Quicken Loans (Gilbert currently owns about 70 properties in Detroit), have almost certainly increased pricing and generally created more activity.
Midtown Detroit has been active lately, however, as the area offers an appealing combination of affordable rates and relatively plentiful parking—conveniences that the city’s Central Business District cannot match. Midtown’s ability to provide those amenities, while still delivering the energy and atmospherics of a vibrant urban environment, have made it a popular choice for investors, particularly in the last 12 to 24 months.
While the Midwest office market continues to strengthen, there are still plenty of opportunities for opportunistic buyers with the resources and flexibility to move quickly. In fact, some of the most successful Midwest investors have done very well for themselves specifically targeting some of the most challenging properties. If you have the specialized skillset and understanding of how to stabilize and add value to those properties in an improving marketplace, the future is bright.
Going forward, savvy developers and visionary investors who can identity and leverage those “value” driven properties will likely continue to generate the greatest returns from the continuing Midwest revival.
Andy Farbman is chief executive officer of the Farbman Group, a Southfield, Mich.-based full-service real estate firm that manages more than 25 million square feet of office, retail, multifamily and industrial space throughout the Midwest.