Signature Associates

A bright future? It’s on the horizon for Detroit’s industrial sector

Posted By: REJournals on October 4, 2024.  For more information, please click here to read the source article.

How resilient has the Detroit-area industrial market been? Its fundamentals are strong enough to allow it to weather the challenges that come with high interest rates and construction costs.

And one professional working this market said that this resilience bodes well for the future of the industrial sector in Detroit and its surrounding areas.

John Boyd, executive vice president and principal with Signature Associates in Southfield, Michigan, said that the industrial market in the Detroit area remains active, even with higher interest rates.

This doesn’t mean, though, that investment sales and new construction are happening at the same pace as the Detroit market saw in 2020 through much of 2022. Boyd says that transactions and construction have slowed here as they have across the country thanks largely to higher interest rates. The impact of the coming presidential election has also slowed industrial transactions, as it does every four years, Boyd said.

But even with this slowdown, the fundamentals of the Detroit-area industrial market remain strong, Boyd said. Leases are still being completed in this sector. And tenants continue to seek out distribution and manufacturing space.

“Just look at the for-sale market,” Boyd said. “We are seeing a smaller number of transactions. But the prices of industrial properties that have sold are significantly higher than they were during the last several years. These increases are mostly mirroring the increase in construction costs.”

The biggest factor impacting the local industrial sector, Boyd said, is high construction costs.

These higher costs have contributed to the slowdown in new industrial construction throughout the Detroit market, Boyd said. When tenants move out of an existing building, they are finding fewer industrial buildings available to them. These tenants must often instead look at existing industrial space, even if it isn’t a perfect fit for their needs.

“The demand for existing industrial space is strong in our market,” Boyd said.

As in other markets, Boyd said that it’s more difficult for tenants to find space in smaller industrial properties, especially those offering from 10,000 to 15,000 square feet. This is especially true in Detroit’s suburban markets, Boyd said.

“That goes for buildings from the inner ring to the outer ring suburbs of our market,” Boyd said. “It’s not easy to find smaller industrial properties in an inner-ring area like Redford Township or Oak Park up to the far exurbs of Rochester Hills or Orion Township.”

When does Boyd think new industrial construction might pick up in the Detroit-area market? Not for a while.

Boyd said that new construction starts should pick up again once spring arrives in 2025. By then the weather will be warmer in Michigan and the presidential election will be settled. The Federal Reserve Board might also have enacted more rate cuts, all factors that could boost construction activity.

The most significant industrial construction project taking place in the Detroit-area market today is GM’s 700,000-square-foot facility in Auburn Hills. This facility will supply materials to an existing plant dedicated to building Chevrolet Silverado elective vehicles.

Spec development, though, has dwindled in the local industrial sector. This isn’t a surprise. The same thing is happening across the Midwest and the country.

Investment sales have slowed, too, thanks largely to higher interest rates. Boyd said that users are willing to pay more for industrial space than are investors.

Despite the temporary slowdown in new construction and investment sales, Boyd says that the Detroit-area industrial sector still boasts solid fundamentals. Boyd said that Southeast Michigan remains an attractive market, too. For one thing, it boasts one of the largest concentrations of engineering talent in the country. It also has many strong healthcare jobs.

“And that’s not even mentioning the billions of dollars that have been invested recently in downtown Detroit,” Boyd said. “There’s a strong technology base in this region that makes the area very attractive for end users.”