Auto Makers' Woes Dog
Office Market in Detroit

The Motor City's commercial real-estate market -- already one of the country's weakest -- continues to slip as its auto-dependent economy sputters. Falling or below-average rents and weak demand in the Detroit region's office, warehouse and apartment sectors aren't for the faint of heart.

Prospects are a bit better in the suburbs -- and retail is a bright spot -- but overall Detroit has been passed over by the job growth that has breathed life into many other major real-estate markets nationwide since 2001. Instead, the area's economy has struggled as auto makers and their parts suppliers -- historically the region's economic engines -- have contracted.

In August, the area posted the highest unemployment rate of any major U.S. metropolitan area at 7%, according to the Bureau of Labor Statistics. The national rate was 4.6%. The region's average annual population growth rate was only 0.13% from 2000 to 2005 -- its population hit 4.49 million last year -- compared with a 1% average annual rate over the period nationally, according to Moody's Economy.com.

"It's a tough sell," says Len Tosto, director of consulting and investment with Colliers International, a real-estate services firm, who says he's seen the number of buyers of industrial and office properties dry up in recent months. "The reality of what's gone on here in Detroit has sunk in and caused a lot of individual investors to step back and say, 'No thanks.' "

Office buildings are fetching prices as low as $25 a square foot for older buildings in downtown Detroit to $115 to $150 for new buildings in the suburbs, says Mr. Tosto. The average price paid for office buildings nationally through late June this year was $211 a square foot, according to Real Capital Analytics, a real-estate research firm.

The leasing market is weak across all sectors, with the office, warehouse and apartment sectors posting well-above-average vacancy rates and below-average rents in the second quarter, according to Boston-based Property & Portfolio Research Inc. The office market has been particularly hard hit, though just how much varies among submarkets. In the second quarter, central business district office rents commanded the lowest average rents, at $17.07 per square foot, while the suburban Birmingham and Bloomfield submarket garnered the highest rents at $22.73.

Tenants are in the driver's seat, and many companies such as General Motors Corp. in recent years have trimmed costs by consolidating space. Even as GM has invested about $500 million to refurbish the Renaissance Center complex that contains its headquarters in downtown Detroit, the company has reduced the amount of office space it occupies in southeast Michigan by about one-quarter over the past 10 years, says Matthew Cullen, who oversees GM's world-wide real-estate portfolio. The company currently occupies about 23 million square feet of office space in southeast Michigan, a spokeswoman says.

One Kennedy Square, where Visteon, a major tenant, is trying to sublease its office space.

Some investors remain confident that the current downturn represents an investment opportunity. Lakewood, N.J.-based Lightstone Group recently paid about $260 million for 19 apartment complexes in the Detroit suburbs. New York-based Ashley Capital has purchased older warehouse spaces at low prices, updated them and re-leased them. Retail rents are expected to rise even as new supply continues to ramp up.

Some boosters argue that Detroit's long-embattled downtown, which hosted last season's Super Bowl, is poised for a turnaround thanks to new baseball and football stadiums, a new corporate headquarters for Compuware Corp., as well as a movie theater and new stores that have opened in the Renaissance Center.

Still, the lackluster economy dogs even the newest projects. In April, Redico LLC, a Southfield, Mich.-based developer, completed One Kennedy Square, a 240,000-square-foot office building in downtown Detroit. Visteon Corp., an auto-parts supplier, was to have occupied nearly half the building. Instead, Visteon, which is restructuring, is working to sublease the space on which it has a 10-year-lease, though a spokesman says the company might still use some of the space.

Redico has another tenant in hand for an additional 55,000 square feet but acknowledges the Detroit market is a challenging one for landlords. "This is all a game about consolidation, arbitrage between buildings and people looking to gain efficiencies," says Tysen McCarthy, a senior vice president at Redico. "You can't get complacent or someone will eat your lunch."

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