July 24, 2017, 6 a.m. | Lucro Staff | Deal Review

Detroit Commercial Real Estate's Big Comeback

Don’t count Detroit commercial real estate as down and out. In fact, the Motor City is on the verge of becoming one of the greatest comeback kids the nation has ever seen – thanks, in no small part, to the efforts of a small group of commercial real estate investors.

Detroit is still a long way from its heyday. In the 1950s, Detroit was the wealthiest city per capita in the entire world. The strength of the auto industry bolstered the local economy, and the population swelled to an estimated 1.85 million people. In the decades that followed, de-industrialization crippled Detroit’s economy. As industry fled, so did residents. The population shrunk to just over 670,000. By 2013, Detroit’s economy had weakened to the point where the city was forced to file for Chapter 9 bankruptcy protection – the largest city to file for bankruptcy in U.S. history.

Stories about crime, high vacancy rates, and a lack of municipal services would steer most investors away from Detroit commercial real estate. Yet, just as the city was hitting rock bottom, a handful of real estate investors saw the city’s troubles as an opportunity. So they started to invest—and in a big way.

Downtown Detroit Commercial Real Estate Comeback Is Driven by Three Players

Dan Gilbert is the founder and chairman of the mortgage giant Quicken Loans and majority owner of the NBA’s Cleveland Cavaliers. He’s also the founder of Rock Ventures, the umbrella entity for more than 100 companies and all of his real estate investments.

Over the past decade, Rock Ventures has purchased more than 90 buildings in Detroit’s central business district at a cost of more than $2.2 billion. Acquisitions include the Book Tower, a 38-story structure built in 1926 and the David Stott building, a 35-story Art Deco structure that opened in 1929. Both buildings were vacant at the time.

For Gilbert and Matthew Cullen, President and CEO of Rock Ventures, revitalizing Detroit is personal: both grew up in the area and know the city’s culture and heritage. In 2010, they made a bold move and decided to relocate Quicken Loans’ headquarters—and 1,700 of its employees—to downtown Detroit. In 2011, Rock Ventures purchased the historic Madison Theater Building, turning it into a collaborative tech hub that hosts a number of businesses.

Redevelopment of these sites has been strategic. Rock Ventures is focused on a very narrow geographic area, the area known as the “Woodward Corridor,” and has been steadily converting a number of outdated industrial buildings into mixed-use projects that include housing, office, and restaurant/retail space. Special attention has been paid to preserving the historic facades of these buildings, and downtown Detroit now offers the live-work-play environment that is attractive to workers searching for a funky, authentic atmosphere unique to Detroit.

This strategy worked. Entrepreneurs, artists, and startup companies—initially lured by a low cost of living—have started moving to the area. As the buzz has grown, so has the number of companies who have relocated downtown.

Twitter opened an office in the M@dison Building, owned by Rock Ventures. Detroit Venture Partners, Skidmore Studios, Detroit Labs, and Grand Circus are among the companies helping Gilbert realize his vision of a “WEBward” corridor – the transformation of the Woodward Corridor into a hub for tech companies.

As smaller companies have begun to repopulate downtown Detroit, larger corporations have followed suit. Blue Cross Blue Shield of Michigan, General Motors, Compuware, Fifth Third Bank, and Ally Bank are among the titans who have opened downtown offices since the downturn, bringing thousands of employees to downtown Detroit in the process.

“We saw it as a chance to help drive the revitalization of a major American city,” said the president of Fifth Third Bank.

The Largest Investor in Downtown Detroit Commercial Real Estate isn’t the Only Show in Town

The Ilitch family, whose companies include the Little Caesars pizza chain, the Detroit Red Wings, the Detroit Tigers, MotorCity Casino Hotel, and Olympia Development, has been working tirelessly to revitalize Detroit for decades. While Gilbert’s efforts have been prominent in media, the ongoings of the Ilitch family have been more under the radar.

That’s partly because the Ilitch family, with the late Mike Ilitch at the helm (he passed away earlier this year), has been in Detroit for decades. “Somebody had to lay the foundation and create the platform for us to build on,” says Bishop Charles H. Ellis, III. “And that was Mike Ilitch.”

Ilitch’s involvement began when Mike purchased the Detroit Red Wings in 1982 for $8 million. He promised to keep the team in Detroit, and he kept his word. The city had no resources to support the stadium, so Ilitch paid for it all himself – turning the stadium into one of the top facilities in the NHL.

A few years later, the family purchased the massive Fox Theater and its surrounding buildings. Illitch rehabilitated the theater and in 1988, turned it into the Little Caesar’s headquarters. A new 8-story headquarters is now being built next to the Fox, which will allow the company to double its footprint in downtown Detroit.

The family’s other real estate investments include “District Detroit,” a 385-acre, $1.2 billion public-private development project that includes a new arena for the Red Wings and a mixed-use development that will include more than 1,100 housing units, offices, retail, and parks. The sports-entertainment district spans 50 blocks near Woodward Avenue and will stitch together five neighborhoods otherwise divided by the Fisher Freeway.

Meanwhile, Roger Penske, owner of the Penske Corporation, has been spearheading redevelopment efforts from a different angle altogether.

Penske’s involvement in Detroit’s revitalization began after getting a call from Bill Ford Jr., asking him whether he’d be the chairman of the 2006 Super Bowl XL Committee. Ford wanted Penske to help bring the championship game to Detroit, a tough sell for a largely empty downtown.

Penske accepted the challenge.

“I didn’t realize it was going to open up a new chapter of my life from the standpoint of understanding the city of Detroit and helping build it back into a great city,” recalls Penske.

Having Penske at the helm helped to drive change throughout downtown Detroit commercial real estate. When he made phone calls, people answered. When he needed something done, people responded. “Roger looked [people] eyeball to eyeball and said, ‘We’re going to get this done,’” recalls Cullen. “He’s that kind of guy. He puts out a vision and rallies people around it and gets them to do things.”

Those things included erecting fake facades on abandoned buildings, opening pop-up bars and restaurants where none existed, and hiring shuttles to transfer people to and from suburban hotels. By the time the Super Bowl rolled around, Woodward Avenue had undergone a complete (even if temporary) transformation. But it was enough to spark the interest of other real estate developers, who started to invest in offices and apartment buildings throughout the area.

Since the 2006 Super Bowl feat, Penske has also started the Clean Downtown program to help tidy streets. He solicited business leaders to help purchase 100 new police cars and 23 EMS vehicles for the local department at a cost of $8 million. He’s spearheading a plan to return an IndyCar race to Belle Isle on the Detroit River (and has contributed in excess of $13 million refurbishing the land). He championed the effort to create the QLine, the first streetcar system in Detroit in decades.

“His money was important, but what was far more important was the power of his personality,” said Detroit Mayor Mike Duggan. Penske’s incredible ability to bring people together around a cause can be felt in almost every major event hosted in the city today.

Detroit Commercial Real Estate is Still Considered Undervalued, but it’s Fighting Back

Today, the vacancy rate in Detroit commercial real estate properties has fallen to just 7.5 percent. The average asking rent for the properties is $22.55 per square foot, according to a recent analysis. Class A properties fetch even more, approximately $23.23 per foot. Another 2.1 million square feet of office space is under development in the greater downtown area.

Across all asset classes, there is an estimated $5.4 billion in real estate development and redevelopment projects, underway or proposed, in and around downtown Detroit. That figure includes 6,091 multifamily residential units, 1,196 new hotel rooms, and the 2.1 million SF of office space mentioned above.

These investments span more than 70 projects, which is indicative of the interest in Detroit’s commercial real estate market. Gilbert, Ilitch and Penske may have been the catalyst for downtown’s revitalization, but it’s clear others have joined the fray.

“There has been so much interest in the Detroit markets in a broad range, from retail to residential and office,” says John Latessa, president of CBRE’s Midwest Division, and “the story is still unfolding.”

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