Techies take over the Motor City

The Detroit real estate market is finally showing signs of growth as a new type of worker moves in. By Justin Slaughter

Abandoned homes and empty factories with plywood-covered windows have become a symbol of Detroit, Michigan, marking the “Motor City’s” long decline from the center of America’s automobile industry in the 1950s to its municipal bankruptcy in July 2013, the largest in US history.

Though the many factory windows remain shuttered and rows of derelict houses still haunt its streets, the city has seen a rebirth of real estate activity, as employers have added at least 38,600 tech jobs in the city between 2010 and 2015.

Dennis Bernard
Dennis Bernard

Dennis Bernard, founder and president at Bernard Financial Group, a regional CRE lender based in Detroit, says the city’s industrial real estate market is benefiting from an influx of tech jobs downtown, and research and development firms throughout the metro area, which are taking the place of older manufacturing jobs centered around the city’s automotive roots.

“Toyota and Lexus may not build in Detroit, but their [research and development] offices are here,” he says.

While filling an employment and occupancy vacuum that has lingered since more than 60 automobile manufacturing plants shut down over the last 35 years, tech jobs in particular have set up shop in office towers downtown, opening up new opportunity in the local real estate debt market as owners look to refinance.

Bernard says a major catalyst came in 2010 when Dan Gilbert, CEO of Quicken loans and owner of the basketball team the Cleveland Cavaliers, moved his suburban corporate headquarters and 1,700 employees to the Compuware office tower in downtown Detroit in an effort to draw more business to the area.

Tech companies have followed suit. In 2013, the global tech firm MSX International (MSXI) announced it was moving its headquarters and 300 employees to downtown’s One Detroit Center. And last September, Amazon announced plans to build a high-tech corporate office in downtown Detroit.

Since Gilbert moved Quicken, an online mortgage firm, downtown, Bernard Financial has been an active lender on properties in the neighborhood. In the last year alone, the firm originated a total of $132.5 million in loans on the First National Building office tower downtown, and has placed construction loans as large as $40 million on the The Albert and Broderick Tower residential buildings nearby, showing the need for financing that’s arisen from an influx of new workers.

Of cities with the largest pools of tech workers, Detroit had the fourth-largest growth in tech workers from 2010-2015, up 49 percent from 37,400 in 2010 to 76,000 in 2015, which is significant for a city of 689,000.

Detroit’s industrial vacancy rate (which includes tech, research and development and light-manufacturing) dropped to 3.1 percent the last quarter, down from 3.6 percent the first quarter this year and 16 percent in 2009, according to CBRE.

The city’s population peaked at 1.86 million in 1950, driven by the plentiful factory jobs provided by Detroit’s “Big Three” employers Ford, Chrysler, and General Motors.

But 61 automotive manufacturing plants closed in metro Detroit between 1979 and 2011, according to Michigan-based Center for Automotive Research, driving the population down to just over one million by 1992.

Though the city still reels from the wounds left by the massive downsizing of the “Big Three,” the recent diversification of the city’s job and tenant base has both raised hope and changed the lending landscape.

In part due to the economic decline, loan underwriting in Detroit had become stricter and tougher on underwriting compared to the rest of the country, says Bernard.

“While the rest of the country was doing 75 percent loan-to-values, lenders in Detroit were doing 65 percent,” he says. “Interest rates were usually 15-25 basis points higher than other parts of the country, and debt yields were higher.”

But with the current environment changing, lenders have eased up as Detroit becomes more attractive for buyers.

“A lot of investors who can’t find products at reasonable cap rates elsewhere are looking to secondary markets like Detroit to augment their yields,” says Anne Galbraith-Kohn, SVP at CBRE’s Detroit-area offices. “And as a result, we are seeing more lending activity here.”

Galbraith-Kohn points to the increase in speculative construction of industrial properties (including tech-related properties) in the city as another sign of lenders’ confidence that the city has made a financial turn for the better.

“The speculative construction is riskier, and because those developers react so closely to market trends, it’s a strong indication of demand in that market,” she says.

A recent CBRE report noted that speculative construction of industrial properties rose from less than 400,000 sq ft in Q1 2016 to over 1.2 million sq ft in Q2 2016.

An additional bonus is that the US government has deemed the metro area a redevelopment zone, and therefore entitles lenders active in Detroit to lucrative Community Reinvestment Act (CRA) tax credits, which could continue to draw more buyers and lenders to the city.

But Stuart Boesky, CEO of Pembrook, a private real estate firm that originates commercial real estate debt across the US, cautions that the city’s vacant land created by the fallout of the automobile industry may provide opportunities in the long-term, but not in the short-term.

Even though the demand for multifamily housing is growing there, current multifamily rents remain too low to do significant ground-up development or repurposing at worthwhile returns on investment, at least not without significant public subsidies, he says.

In July, the median monthly rent for a one-bedroom apartment in Detroit hit $795 per month, a 12 percent year-over-year increase, but that’s small compared to other cities of similar size, like Boston (median rent of $1,950 for a one-bedroom apartment) or Washington, DC, (median rent of $1,750), according to Zillow.

But that hasn’t stopped Boesky, a Detroit native, from testing the water. He recently joined talks to provide a loan on a residential conversion along the Detroit riverfront as part of a group of real estate industry professionals who want to see more investment in Detroit as a matter of civic pride. But so far, the deal has stalled