MICHIGAN REAL ESTATE TRENDS REPORT 2015

POSSIBLE WITH GENEROUS SPONSORSHIP BY

ACKNOWLEDGEMENTS

AUTHORS

Thomas Wackerman UM/ULI Real Estate Forum| ASTI Environmental Andrew Selinger OXFORD COMPANIES Peter McGrath COLLIERS Katherine White ASTI Environmental Wendy Dorman ASTI Environmental

GRAPHICS + DESIGN

Katherine White ASTI Environmental Wendy Dorman ASTI Environmental

CONTENTS 1 3 7 12 14 18 22 27 29 31 33 36 38 39

INTRODUCTION BACKGROUND EMPLOYMENT GROWTH & POPULATION MARKET SEGMENTS PIPELINE REPORT INDUSTRIAL RETAIL OFFICE BUSINESS PROSPECTS IN MICHIGAN TRENDS BY REAL ESTATE SECTOR TRENDS IN CAPITAL MARKETS TRENDS IN SUBMARKETS WALKABILITY MOST EXCITING OPPORTUNITIES IMPEDIMENTS

PAGE1

INTRODUCTION

T

he Michigan real estate market continues to grow, but that growth continues to be slower than expected and uneven, both by segment and geographic location. Real estate professionals continue to be cautiously optimistic about the future, but are less optimistic this year, than last. And although, for the first time since our surveys began, some segments are expected to grow over the next five years, others continue to be stuck in sorting out recovery. There are trends that will make you feel confident about our future, and trends that will make you wonder. All in all, another beautiful day for real estate investment in Michigan, if you are in the right place at the right time. The fourth quarter of 2014 was a surprise, with very strong growth in volume and number sales in the majority of the key market segments, but that has corrected with two or three quarters at lower levels. Multi-family housing leads most of the survey lists

and data reviews, with industrial sometimes appearing strong, and in other data, softening, but always cropping up as a topic of conversation. All of the other segments, although improving, are sending cautionary but hopeful messages. That, in a nutshell, is the third annual Michigan Real Estate Trends Report. Responses to this year’s survey were down significantly, hopefully because all of the real estate professionals that replied in the past were too busy doing real estate deals to complete the survey. As in last year’s, most of the respondents were private developers, followed closely by those that support real estate in the professional services. Unlike previous years, a significant number of respondents were in the industrial and office segments, where as in the past, most were residential developers (in 2013) or retail/office (in 2014). We still draw most of our participation from owners, which hopefully means that the insight is compelling.

RESPONDENTS BY SECTOR

RESPONDENTS BY JOB 13% 13%

7%

RESPONDENTS BY CATEGORY 7%

7%

7%

7%

13%

41%

46%

22%

14%

13%

13% 20% Owner Vice President President Director/Manager Associate EVP/COO Other

22%

14%

20% Private Developer Legal Nonprofit Brokerage Government Lender Crowdfunding Media Professional Service

Industrial Office Retail Residential - Rental Residential - For Sale Land Institution/Public Hospitality

14%

PAGE2

PROSPERITY REGIONS Marquette

Cities 1. Alpena 2. Ann Arbor 3. Battle Creek 4. Bay City 5. Benton Harbor 6. Detroit 7. East Lansing 8. Escanaba 9. Ferndale 10. Flint 11. Grand Rapids 12. Hamtramck 13. Holland 14. Jackson 15. Kalamazoo 16. Lansing 17. Marquette 18. Midland 19. Monroe 20. Muskegon 21. Pontiac 22. Port Huron 23. Royal Oak 24. Saginaw 25. Sterling Heights 26. Traverse City 27. Warren

Regions 1. Upper Peninsula 2. Northwest 3. Northeast 4. West 5. East Central 6. East 7. South Central 8. Southwest 9. Southeast 10. Metro Detroit

Escanaba

Traverse City

Alpena

Midland Saginaw Bay City

Flint

Pontiac

Muskegon Grand Rapids

Port Huron

East Lansing Holland

Royal Oak

Lansing

Sterling Heights Warren Hamtramck Detroit Ferndale

Benton Harbor

Kalamazoo

Battle Creek

Jackson

Ann Arbor

Monroe

PAGE3

BACKGROUND EMPLOYMENT GROWTH & POPULATION 105%

INCOME, POPULATION, AND EMPLOYMENT IN MICHIGAN [AS A PERCENTAGE OF 2005 BASE YEAR] Total Employment Total Population Median Household Income

O

100% 95% 90% 85% 80%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

n October 15th, 2015, the Governor’s Office sent out its “Reinvention News” email with a nearly inconceivable fact: “For the FIRST TIME SINCE AUGUST 2000, Michigan’s unemployment rate is below the national average!”

(approximately 0.4%). There are now 9,909,877 Michiganders in the state, ranking it as the tenth most populated (down from #9 last year). Over time Michigan’s population has been incredibly stable, typically hovering somewhere between 9 and 10 million for the past 40 years.

Perhaps not everyone will be impressed by breaking a decade and a half of mediocrity, but for many this is a signal that the state has returned, or is at least returning, to a Michigan they remember. The most recent reading measured Michigan’s unemployment rate at 5.0%: a level we last saw in June of 2001. It’s been more than 14 years since we’ve felt this good. 41%

Inflation-adjusted median household income increased by 1.3% over the previous year. Household income, which was measured at $51,411 in 2014, was devastated during the recession, falling from roughly $58,000 in 2005 to $48,000 in 2011. This fact is even more disappointing, however, when one considers that median household income was measured at $63,708 in the year 2000.

By our measures (considered here as income, population, and employment) the economic health of the state reached a recessionary bottom sometime in 2010 or 2011, and has been improving steadily since then. And though Michigan has shown continued improvement, the story remains that none of these measures have yet to make up for all of the losses sustained. Following five straight years of population loss, the state has now posted three consecutive years of net gain, though it has been modest at just above 30,000

Total employment in the state performed well over the previous year, increasing by 1.8% to 4,448,034 jobs. The state has added 310,524 jobs (or 7.5%) since the recessionary low in 2010. The story here is similar to that of statewide income: though there have been post-recession improvements, the state not only has yet to completely rebound to that near-term highpoint, but it is also more than 10% off its all-time high from the year 2000.

PAGE4

15% UNEMPLOYMENT RATES 14% SEASONALLY ADJUSTED 13% 12% 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 2005 2006 2007 2008

Illinois Michigan Ohio Indiana Wisconsin

2009

30% UNEMPLOYMENT RATES 28% KEY MICHIGAN CITIES [UNADJUSTED] 26% 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2005 2006 2007 2008 2009

2010

2011

2012

2013

2014

2015

Detroit Jackson Lansing Kalamazoo Grand Rapids Holland Ann Arbor

2010

2011

2012

2013

2014

2015

PAGE5 The Bureau of Labor Statistics preliminary seasonally adjusted unemployment rate reading for September 2015 is 5.0%, ranking the state 24th(up 20 spots from 44th last year). And while Michigan still lags behind all its Midwest peers except Illinios, it has been slowly closing the gap since 2009.

MICHIGAN POPULATION IN 2014 BY AGE 800,000 700,000 600,000 500,000 400,000 300,000

The story of employment in Michigan’s 200,000 cities is relatively upbeat as well. As the 100,000 4 9 4 9 4 9 4 9 4 9 4 9 4 9 5 graphs in this section illustrate, the >5 5-9 10-1 15-1 20-2 25-2 30-3 35-3 40-4 45-4 50-5 55-5 60-6 65-6 70-7 75-7 80-8 85+ unemployment rate in all of Michigan’s most important cities has been generally decreasing since 2009, and is generally back to pre-recession another third is age 40-64. Though there is a large rates. In addition, with the exception of a slight young cohort, the population has been trending increase in the most recent quarter, it is generally older over the past couple years, with the median down year-over-year. It should be noted that five age rising from 39.0 in 2010, to 39.6 in 2014. Michigan MSA’s rank in the top 100 (out of 387) in For urban redevelopment, the critical 25 to 35 year the nation, based on the preliminary August unem- old demographic has only slightly increased in popployment rate. Detroit, the subject of much discus- ulation over the past five years. There is an encoursion about growth and investement, still has the aging increase in 20 to 24 year olds, but younger highest unemployment rate of major cities in the populations have continued to be on the decline, state. which, in the absence of migration from other states, will reduce the demand in this segment. The A breakdown of Michigan’s population shows a gen- empty nesters (55 to 75) have shown strong growth, erational divide between boomers and millennials. and with their disposable income, will continue to Roughly a third of the population is younger than 25 be an important segment. years old, 38.5% is 25-54 years old, while roughly

MICHIGAN POPULATION BY AGE 2010-2014 AVERAGES 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000

>5

5-9

-14 5-19 0-24 5-29 0-34 5-39 0-44 5-49 0-54 5-59 0-64 5-69 0-74 5-79 0-85 85+ 1 2 2 3 3 4 4 5 5 6 6 7 7 8

10

2010

2011

2012

2013

2014

PAGE6

REGIONAL SCORECARD BY PERCENTAGE CHANGE [2013-2014]

-1.1 % -0.7 %

-0.3 % -3.9 %

Regions 1. Upper Peninsula 2. Northwest

-1.9 % 0.2 %

3. Northeast 4. West 5. East Central 6. East

1.9 % 3.1 %

2.1 % 1.7 %

6.2 % 1.9 %

7. South Central 8. Southwest 9. Southeast 10. Metro Detroit

TOTAL POPULATION

TOTAL EMPLOYMENT

MEDIAN HOUSEHOLD INCOME

TOTAL HOUSEHOLDS

-1.3 % -5.7 %

5.3 % -2.4 %

-1.4 % -2.3 %

1.4 % -4.9 %

-2.3 % -5.7 %

7.9 % 0.2 %

14.9 % 10.7 %

3.3 % 0%

0.1 % 0.8 %

4.9 % -0.8 %

1.2 % 2.6 %

6.3 % 3.0 %

5.6 % 2.6 %

9.9 % 0.1 %

PAGE7

MARKET SEGMENTS $2,500

TOTAL SALES BY QUARTER

50 45

$2,000

40

30

$1,500

25

MILLIONS OF SF

MILLIONS OF $

35

20

$1,000

15 10

$500

5 0

A

Volume (lef t)

fter no significant growth from mid-2012 through 2013, both sales volume and total square feet sold (based on sales for all categories) increased significantly in the last quarter of 2014, before declining for two consecutive quarters in 2015. All market segments except industrial, which had experienced a peak in 2013, experienced this peak in sales volume in the fourth quarter of 2014. The correction in 2015 occurred after nineteen quarters of improvement following the low of 2010. Both indicators are more than double the lows set in 2009-2010. Office sales volume was stable through 2012 and early 2013, before a solid five quarter increase. Total

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

$0

Sales SF (right)

square feet sold has been fairly steady since early 2012, at levels that are twice those achieved before the recession. After a slow start in 2010, both total sales volume and square feet sold in the retail segment have been steadily growing through 2011 to 2013, and experienced a one quarter surge the fourth quarter of 2014. Sales volume for the industrial segment peaked in early 2014, and has slightly decreased through the next four quarters. Total square feet sold for the industrial segment peaked in the fourth quarter of 2013, significantly above pre-reception levels, but has declined over the past six quarters.

PAGE8

$400 $300 $200

Volume (lef t)

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

$0

2005

$100

$700 $600

RETAIL SALES BY QUARTER

18 16 14 12 10 8 6 4 2 0

$500 $400 $300 $200 $100 $0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

MILLIONS OF $

$500

18 16 14 12 10 8 6 4 2 0

MILLIONS OF $

$600

OFFICE SALES BY QUARTER

MILLIONS OF SF

$700

Sales SF (right)

Volume (lef t)

Multi-Family continues to be the one segment with sustained growth in both sales volume and total square feet sold. Sales volume is 7 times above the lows of 2009 to 2001, while total square feet sold is 4 times above the level of the same period. Except for a slight stable period in late-2013, growth this segment continues steady growth. Performance for both sale volume and total square feet sold in other segments are provided in the graphs in this section. The sales volume of hostility

MILLIONS OF SF

“We talk about [economic] recovery - we’re getting back but we aren’t growing. We’ve taken a lot of right steps but we need to continue to take more.”

Sales SF (right)

has increase significantly over the last three quarters. After a significant increase immediately after the recession, mixed use development has been sporadic, but recent sales volume indicates four quarters of improvement. Land sales volume has been slightly increasing for six of the past eight years, with improvement in 2014 and 2015, but nowhere near the pre-recession levels.

Volume (lef t)

Sales SF (right)

$400 $300 $200

Volume (lef t)

2015

2014

2013

2012

2011

2010

$0

2009

$100 2008

2015

2014

2013

2012

2011

2010

2009

2008

2007

$0

2006

$100

$500

2007

$200

$600

MULTI-FAMILY RESIDENTIAL SALES BY QUARTER

2006

$300

$700

2005

$400

2005

MILLIONS OF $

$500

18 16 14 12 10 8 6 4 2 0

MILLIONS OF $

$600

INDUSTRIAL SALES BY QUARTER

MILLIONS OF SF

$700

Sales SF (right)

18 16 14 12 10 8 6 4 2 0

MILLIONS OF SF

“Multi-family residential [has seen the greatest level of development activity this year]. People can’t get mortgages and aren’t yet able to buy single-family houses, so they are renting.”

Sales SF (right)

$140

$140 $120

$20 2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

$0 2005

$0

2015

2014

2013

2012

2011

2010

2008

2009

2014

2013

2012

2011

2010

2009

2015 2015

$10

2014

$40

2013

$15 $5

2008

$60

2012

$20

2011

$25

$80

2010

$30

$100

2009

MILLIONS OF $

$35

MULTI-FAMILY SALES AVERAGE $/SF/QUARTER

2008

INDUSTRIAL SALES AVERAGE $/SF/QUARTER

2005

2014

2013

2012

2011

$0 2010

$0

2009

$20 2008

$20 2007

$40

2006

$40

$40 MILLIONS OF $

$60

2007

$60

Sales SF (right)

$80

2006

$80

2005

MILLIONS OF $

$100

18 16 14 12 10 8 6 4 2 0

RETAIL SALES AVERAGE $/SF/QUARTER

$160

$100

$45

2007

Volume (lef t)

$120

$50

2006

$0

2007

2015

2014

2013

$100

$120

2005

MILLIONS OF $

$140

$300 $200

LAND SALES BY QUARTER

$160

$400

2006

Volume (lef t)

2012

2011

2010

2009

2008

2007

2006

$0

2005

$50

$500

2005

$100

$600 MILLIONS OF $

$150

MIXED-USE SALES BY QUARTER

$700

2015

MILLIONS OF $

$200

18 16 14 12 10 8 6 4 2 0

MILLIONS OF SF

HOSPITALITY SALES BY QUARTER

$250

MILLIONS OF SF

PAGE9

PAGE10

OFFICE SALES AVERAGE $/SF/QUARTER

$140 $120 $100 MILLIONS OF $

“There’s a favorable environment for transactions and new development. I think the State of Michigan had some pent-up demand..the demand is finally finding supply.”

$80 $60 $40

2015

2014

2013

2012

2011

2010

2009

2008

2007

HOSPITALITY SALES AVERAGE $/SF/QUARTER

$120 $100

MILLIONS OF $

$80 $60 $40

2014

2015

2014

2015

2013

2012

2011

2010

2009

2008

2007

2006

2013

2012

2011

2010

2009

2008

2007

MIXED-USE SALES AVERAGE $/SF/QUARTER

2006

$200 $180 $160 $140 $120 $100 $80 $60 $40 $20 $0

2005

$0

2005

$20

MILLIONS OF $

After a significant surge in the fourth quarter of 2014, 2015 overall sales volume appears to be returning to levels similar to 2013 and 2014. However, average sales volume per square feet sold has been steadily increasing in the retail, industrial, and multi-family segments for at least the past six quarters. In the office segment, sales volume per square foot continues a rise that started in 2011. While multi-family volume per square foot has regained pre-recession values, for the retail and industrial segments, this indicator remains stubbornly at about half of their pre-recession value. There has been some improvement since 2011 in both the office and multi-family segments, but while office is still slightly below pre-recession levels, multi-family has steadily improved above pre-recession levels.

2006

$0

2005

$20

PAGE11

“I expect profitability to continue to improve. Prices are getting to a point where it’s not like you can come in and get a steal, but rents are at a point where it makes sense to come in and buy a property. People aren’t buying purely on gut, but it makes sense in a business perspective to invest in downtown Detroit.”

TOTAL LAND SALES BY QUARTER

300 250

2000 1800 1600 1400 1200 1000 800 600 400 200 0

200 150 100 50 0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

TOTAL BUILDING SALES BY QUARTER

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

TOTAL SALES BY QUARTER

800 700

Retail

600

Industrial

500

Office

400

Land

300

Multi-Family

200

Mixed-Use

100

Hospitality 0

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

PAGE12

PIPELINE COMPLETED 6%

PIPELINE REPORT PIPELINE UNDER CONSTRUCTION

6%

4%

4%

PIPELINE PROPOSED

4% 3%

26%

6%

2%

3%

29% 36% 6%

31%

36% 20%

21%

A Multi-Family

Specialty

29%

13%

4% General Retail

Industrial

Hospitality

Health Care

Office

11%

Flex

selected pipeline of the largest construction projects across all market segments in provides an insight into the product mix in Michigan. This pipeline report presents the fifty largest projects by rentable building area (RBA) in each of three categories: completed (9,335,148 RBA), under construction (8,300,226 RBA), and proposed (18,882,033 RBA) in 2014.

6 projects). While general retail was strong in 2014 (18 % completed, 19% under construction, 21% proposed) and major projects proposed in 2013 did match those completed in 2014 at 21% (2,908,459 RBA for 11 projects), construction in this segment has fallen significantly in 2014 to 4% for projects under construction (289,000 RBA for 2 projects) and 11% for proposed construction (2,418,944 for 7 projects).

The pipeline report indicates an increase in the average size of future projects from 166,005 average RBA constructed to 377,641 average RBA proposed during 2014. This also represents an increase over 41% 2013’s pipeline projections (149,000 RBA constructed, 289,000 RBA proposed) and although it is similar to last year, it indicates a shift away from office and general retail.

Specialty projects represented 22% of completed projects in the 2013 pipeline, but only 6% in the 2014 pipeline (535,000 for 1 project), and remain steadily low at only 4% of the under construction projects (336,200 RBA for 1 project), and 6% of proposed projects (1,053,740 RBA for 2 projects) Multi-family construction projects completed exceeded those completed in 2013 (from 23% in 2014 to 26% in 2014) and greatly overshot expectations (12% proposed in 2013). Multi-family construction projects in the pipeline increased to 26% of completed pipeline projects (2,445,899 RBA for 15 projects), 36% of under construction projects (2,429,933 RBA for 19 projects), and is expected to stay strong at 29% of the proposed pipeline (6,890,568 RBU for 16 projects).

While there was an increasing trend in the number of office construction projects in 2013 (5% completed, 13% under construction, 24% proposed), this trend changes in the current pipeline, with office construction representing only 6% of completed projects (540,061 RBA for 3 projects), 9% of projects under construction (1,697,508 RBA for 9 projects) and 11% of the proposed pipeline projects (2,005,000 RBA for

PAGE13 Industrial construction completed matched expectations in the 2013 pipeline report at 31% of the completed pipeline (2,908,459 RBU for 13 projects) and are projected to remain strong at 29% of the under construction pipeline (2,429,933 RBU for 13 projects) and increase dramatically to 36% of the proposed pipeline (6,890,568 RBU for 17 projects) .

In 2013, roughly 66% of the top 150 pipeline projects were located within the Metro Detroit Region. The 2014 pipeline presents a significant shift in projects away from Metro Detroit, with the number of projects in the West, Southwest, and Southeast nearly doubling. Other Regions directly surrounding the Metro Detroit Region remained relatively stable, experiencing only a minor decrease in market share.

PIPELINE PROJECTS BY REGION

NUMBER BY CITY OR TOWNSHIP 1 2 3 5 8 12 27

PAGE14

INDUSTRIAL NET ABSORPTION

2014 INDUSTRIAL SALES BY REGION

$600 $500

40,000

$400

$ IN MILLIONS

60,000

20,000

35 30 25 20

$300 15

-

$200

(20,000)

$100

5

(40,000)

$0

0

ationally and locally, the Industrial sector has recovered quickly from the recession. A strengthening national economy is driving the demand for space amongst industrial users. In Michigan, this has tightened the supply, and has turned market conditions in the favor of landlords. While users demand more space, investors continue to have interest in the asset class, especially in newer buildings. Industrial space is viewed as a safe investment because of41% market demand and the perceived operational cost advantages—cheaper to construct, easier to repair, less regulation issues, cheaper to re-tenant—than other asset classes. Overall, the trend in industrial is towards larger, more efficient buildings that offer excellent truck access, and more importantly, the flexibility to adapt to future needs. In quality submarkets such as Troy and Auburn Hills, quality buildings spend very little time on the market. This is creating a very tight market for good product, and could finally push the market towards a boom in new construction, which has been extreme-

ral

Cen t

We st

Ea th C st ent ral Sou thw es Sou t the ast Me tro Det roit

2015

Sou

2014

hw est No rth eas t

2013

No rt

2012

Eas t

N

2011

per

2010

Pen i

nsu

la

10

Up

(60,000)

MILLIONS OF SF

80,000

ly slow so far in this recovery. So far, the industrial market’s main customer, the automotive industry, has shown little willingness to pay for new construction. As their fortunes improve and the product that fits their needs comes off the market, more automotive companies may opt for the build-to-suit option over retrofitting already constructed buildings. For developers and general contractors, this market dynamic cannot come soon enough. 3 TRENDS TO WATCH Efficient Layouts: Today’s industrial buildings are laid out to maximize space. Like their peers in the office sector, the recession caused industrial users to take a good hard look at their space utilization. In general, a brand new building today uses less square feet to perform the same functions as a previous generation’s building, which saves the user significant amounts of money.

PAGE15

INDUSTRIAL SALES BY COUNTY

SALES IN MILLIONS $0-$2.5 $2.5-$10 $10-$30 $30-$135 $135-260

PAGE16

“With the auto industry back on track, having sold 15-16 million cars last year, suppliers are healthy. Firms from around the world continue to move pieces of their businesses here, so as the suppliers are healthy and the businesses are healthy, they need manufacturing and warehouse space.” Clear Heights and Column Spacing: While layouts are more efficient, the most obvious change in today’s industrial buildings is the taller clear heights and the column spacing. While a 24 foot clear building was the cat’s meow fifteen years ago, many companies now are looking for 32 foot clear heights, and sometimes taller. The taller clear heights allow for more stacking of goods, and more room for machinery. The wider column spacing/lack of columns allows for more freedom of movement, and the ability to quickly retool a manufacturing space—a key consideration in today’s fast pace business environment. Infill Development: After generations of greenfield development—industrial users building facilities farther and farther out of the city, more industrial users giving infill sites a second look. Infill sites offer in-place infrastructure, access to stronger employee demographics, access to redevelopment incentives, and closer access to potential delivery sites. RENTAL RATES

per square foot has increased to $14.50 by the end of the second quarter of 2014, but has since declined to $14.00. The uneven recovery is directly related to the large blocks of space that still exist in many markets, where landlords have to get extremely aggressive to attract or retain tenants. While the trend line in rental rates has declined from the previous year, expect the up-and-down trendline to continue. VACANCY The statewide industrial market vacancy rate is posted a 7.9% vacancy rate in the second quarter of 2015. This compares favorably to the 12.8% vacancy rate posted during the fourth quarter of 2010—an impressive decrease of 490 basis points. The low vacancy rate has turned the negotiation leverage in favor of landlords in many markets, as there is just very little product on the market for tenants and users to choose from.

Rent growth in Michigan since the second quarter of 2012 has been positive. Since bottoming out at $13.25 in the second quarter of 2012, the state’s rent

$6.50 $6.00

ACTUAL RENTS PER SF

12%

VACANCY RATES

10% 8%

$5.50

6% $5.00

4%

$4.50 $4.00

2% 2010

2011

2012

2013

2014

2015

0%

2010

2011

2012

2013

2014

2015

PAGE17

SALES VOLUME IN MILLIONS OF $

$300 $250

CAP RATE

14 12 10

$200

8

$150

6

$100

4

$50

2

$-

0 2010

2011

2012

2013

2014

2015

SALES PRICE PER SF

$30 $25

2010

500

$20

400

$15

300

$10

200

$5

100

$2010

2011

2012

2013

2014

2015

Sales One of the best stories in 2014 was the recovery of Michigan’s industrial sales market. This recovery has continued into 2015, especially in upper-tier, high-tech oriented submarkets. In some cases, high quality industrial buildings are trading at higher per square foot prices than office buildings—a scenario that turns industry convention on its head. The average price of industrial property throughout Michigan has increased substantially as the economy has recovered. From a low point of $8.00 per square foot in 2010, the 2015 sales market is post-

0

2011

2012

2013

2014

2015

BUILDINGS SOLD

2010

2011

2012

2013

2014

2015

ing average sales prices over $23.00 per square foot. Expect sales prices to continue to climb into 2016. New Construction Just 2,048,340 square feet of new space has been delivered in 2015. This represents a much smaller number than during previous recoveries, as industrial users and banks continue to steer clear of new construction. Time will tell if new construction begins to move forward as the economy continues to improve and good space comes off the market.

PAGE18

RETAIL 2014 RETAIL SALES BY REGION

$1,000 $900

35 30

$800

$ IN MILLIONS

$600

20

$500 15

$400 $300

10

$200

5

$100

0

Up

Volume (left)

he past twelve months have generally been a good-news story for retail real estate investment in Michigan. Whereas other property types had only to recover from the recession, retail has also had to contend with consumer trends shifting to online purchasing. And while perhaps retail leasing has not been a categorical success, retail investment sales have shown clear improvement, with increases sales volume and price per square foot. 41% LEASING Vacancy rates, which generally have increased in the post-recession years, have finally been decreasing since approximately mid-2014. The most recent measurement shows an overall vacancy rate of below 6.5%. Complementary to that metric is the

Ea th C st ent ral Sou thw est Sou the ast Me tro Det roit Sou

ral

Cen t

We st

Eas t

st hea

No rt

hw est

No rt

per

Pen i

nsu

la

$0

T

MILLIONS OF SF

25

$700

Sales SF (right) fact that over the past 12 months, net absorption has had its strongest year since the recession. The two most recent quarters each registered nearly 30,000 square feet of absorption, whereas no other quarter in the last five years had registered even 20,000. $11.50 $11.40 $11.30 $11.20 $11.10 $11.00 $10.90 $10.80 $10.70 $10.60 $10.50 $10.40

ACTUAL RENTS PER SF

2010

2011

2012

2013

2014

2015

PAGE19

RETAIL SALES BY COUNTY

SALES IN MILLIONS $0-$2.5 $2.5-$10 $10-$30 $30-$135 $135-$260

PAGE20

Average rents, which generally have climbed since the recession, fell by 5% in 2015. Although, it should be noted that in the post-recession years, average rent has measured between $10.70 and $11.40 per square foot. Sales Metro Detroit is by far the center of Michigan’s retail universe, at least by sales volume. More than $800,000,000 of retail space was sold in 2014. No other region saw sales top even $300,000,000. The west region ranked second, measuring more than $200,000,000 in sales. Though they tend to fluctuate a bit, sales in square feet, total sales, and buildings sold have all been generally improving since the recession. In the most

7.5%

VACANCY RATES

recent quarter, more than 6,000,000 square feet of retail was sold, which registered at more than $300,000,000. Over the past couple years, the number of buildings sold per quarter has averaged roughly 600, compared to a low data point of about 350 in 2010. Prices and cap rates show clear signs of improvement as well. Average price is up. Since dipping to almost $30 per square foot in 2011, sales prices have rebounded to roughly $50 per square foot recently. Similarly, cap rates have been steadily decreasing from above 10% to below 8%. Clearly demand for retail investment has improved over the last several years.

$70 $60

7.0%

AVERAGE VOLUME PER SF

$50

6.5%

$40

6.0%

$30 $20

5.5%

$10

5.0% 2010

$800 $700

2011

2012

2013

2014

2015

SALES VOLUME MILLIONS OF $

14 12

$600

2010

2011

2012

2013

2014

2015

TOTAL SF SOLD MILLIONS OF SF

10

$500

8

$400

6

$300

4

$200

2

$100 $0

$0

2010

2011

2012

2013

2014

2015

0

2010

2011

2012

2013

2014

2015

PAGE21

12

CAP RATES

800

BUILDINGS SOLD

700

10

600 8

500 400

6

300

4

200 2

100

0

0 2010

2011

2012

2013

2014

2015

2010

2011

2012

2013

NET ABSORPTION

40,000

30,000

20,000

10,000

-

(10,000)

(20,000)

2010

2011

2012

2013

2014

2015

2014

2015

PAGE22

OFFICE 2014 OFFICE SALES BY REGION

35

$ IN MILLIONS

$500

30

$400

25

$300

20

MILLIONS OF SF

$600

15

$200

10 $100 5 $0

Upper

N

Northwest Northeast

West

East Central Volume (left)

ationally and locally, the office sector has experienced an uneven recovery. In first tier markets, such as Chicago, New York, and San Francisco, trophy office prices are trading and leasing for record prices. In those cities, the recession is over—financial and technology firms are willing to pay for quality space in urban environments. In secondary markets such as Detroit, the office market is still recovering. In these markets, the office sector is facing unique pressures. Employers generally have smaller headcounts, and from there, 41% are using significantly less space per employee. Due to technology, many companies encourage people to work from home, saving real estate costs. With this in mind, the glut of space on the market ensures that tenants will continue to hold more cards in the negotiation process, especially in lower quality buildings. However, for quality buildings, even in markets like Detroit, the outlook is much brighter. For Class A

East

South

Southwest Southeast Metro Detroit 0

Sales SF (right)

tenants looking for office space in top-tier locations, there simply are not many options available. The conversation in these buildings is beginning to skew back towards the landlords, as they know that new construction (read: competition) is not on the horizon anytime soon. 3 TRENDS TO WATCH Efficient Layouts: The greatest change in office real estate is the shift towards the open-office layout. Instead of private offices and chopped up spaces, companies are opting for far fewer offices, and open, public spaces. The benefits are two-fold—increased collaboration between employees, and more efficient utilization space. For landlords, this is not necessarily good news. According to CoreNet Global, the average amount of space per office worker globally is approximately 150 feet or less, down from 225 feet in 2010.

PAGE23

OFFICE SALES BY COUNTY

SALES IN MILLIONS $0-$2.5 $2.5-$10 $10-$30 $30-$135 $135-$260 $260-$531

PAGE24

“Large companies are trending to move their headquarters downtown because, realistically, they are realizing that if they want the best and the brightest, they need to be downtown. From a young people perspective, this is the best place to be – to have a life very vibrant, diverse – and people can really have an impact here. Millennials don’t graduate college and make decisions based on how much money they are going to make, but make decisions based on where and how they can make an impact.” CAP RATES

16

VACANCY RATE

12%

14

10%

12 8%

10

6%

8 6

4%

4 2%

2

0%

0 2010 $15.00

2011

2012

2013

2014

2010

2015

ACTUAL RENTS $/SF/YR

7 6

$14.50

2011

2012

2013

2014

2015

2014

2015

TOTAL SF SOLD IN MILLIONS

5 $14.00

4

$13.50

3 2

$13.00

1

$12.50

0 2010

2011

2012

2013

2014

2015

Virtual Commuting: the technological changes of recent years make telecommuting and virtual commuting easier than ever before. The typical telecommuter is a well-educated, high wage earner. According to the Census Bureau’s annual American Community Survey, the average telecommuter holds a degree, earns about $58,000 a year, and belongs to a company with more than 100 employees. For office users, it allows a more flexible work environment, and allows companies to cast a wider net for talent. From a real estate perspective, it allows companies to save on real estate costs by simply leasing less space.

2010

2011

2012

2013

Urban and Downtown Offices: The shift of the millennial generation towards cities and urban environments is not a fad—it is a trend that will affect real estate markets for generations to come. The no-frills office of the past has given way to the high-design, high amenity office of the present. High-end cafes, day-care centers, and other amenities are now seen as a necessity to retain top-tier talent. In many respects, the downtown location is seen as an amenity as well. For companies that want to attract and retain smart, hardworking, and young employees, a downtown office is an excellent start.

PAGE25

AVERAGE SALES PRICE PER SF

$80 $70

“What’s going on with Detroit with trying to create an incubator for design-based industries is really interesting, as it’s building off of the history as an auto-based area, and is really a glimmer of hope for the long-term future of Southeast Michigan.”

$60 $50 $40 $30 $20 $10 $2010

2011

2012

2013

2014

2015

2013

2014

2015

2013

2014

2015

RENTAL RATES Rent growth in Michigan since the second quarter of 2012 has been positive. Since bottoming out at $13.25 in the second quarter of 2012, the state’s rent per square foot has increased to $14.50 by the end of the second quarter of 2014, but has since declined to $14.00. The uneven recovery is directly related to the large blocks of space that still exist in many markets, where landlords have to get extremely aggressive to attract or retain tenants. While the trend line in rental rates has declined from the previous year, expect the up-and-down trend-line to continue.

TOTAL BUILDINGS SOLD

350 300 250 200 150 100 50 0

2010

2011

2012

VACANCY The statewide industrial market vacancy rate is posted a 7.9% vacancy rate in the second quarter of 2015. The vacancy rate swings widely from different submarkets, but for the most part, has declined since the great recession. The vacancy rate can vary considerably from market-to-market. While Downtown Ann Arbor generally posts a vacancy rate below 2%, suburban markets such as Troy have seen their vacancy rate hover above 25% for quite some time now. Generally, hipper, downtown style office markets have performed better than suburban settings.

$400 $350

TOTAL SALES VOLUME IN MILLIONS OF $

$300 $250 $200 $150 $100 $50 $-

2010

2011

2012

PAGE26

NEW CONSTRUCTION

SALES

In general, new construction of office space in Michigan have build-to-suits, as the market continues to lack the fundamentals for speculative construction. As of the second quarter of 2015, just 450,913 SF of new office space has been delivered. With so much space still on the market, do not expect an explosion of new office anytime soon. Somewhat related to new construction is the renovation of old office towers. For cities like Detroit and Grand Rapids, many older office buildings are getting a second chance as apartments. In the long run, this trend is good for the entire market—giving old buildings new life, creating a more dynamic environment downtown, and taking obsolete office buildings out of the market for good.

2015 has been a bombastic year for office sales, marked by headline deals in Downtown Detroit. The deals put the market’s contrast on display. Institution grade deals, such as the sale of the 1,200,000 SF One Detroit Center for a rumored $100,000,000 price tag show how far the market has recovered, while the $13,000,000 sale of the Fisher and Kahn Buildings show just how far the market still has to go. Statewide, the average sales price has climbed past $65 per SF, up from below $20 per SF just four years before. Given the stronger economy, expect sales prices to continue to climb into 2016.

NET ABSORPTION

20000

15000

10000

5000

0

-5000 -10000 -15000 -20000

2010

2011

2012

2013

2014

2015

PAGE27

BUSINESS PROSPECTS IN MICHIGAN

P

rofessionals in the development and real estate fields continue to view business prospects in Michigan favorably. Although the survey data shows more moderately optimistic trends than in years past, the personal interviews conducted with a diverse group of the leaders in the field all gave overwhelmingly positive indication of both their business and organization’s profitability this year and the expected improvement for the next. By and large, the interviewees indicated that profitability in 2015 had been good and that significant projects already in

the pipeline should make for an even better year in 2016. According to the survey, the outlook for the commercial development, services, and home building segments are seen less favorably than last year, although not overwhelmingly, and still predict improvement. The general construction, multi-family, and financing segments are seen to have much better prospects and have surpassed all other segments, even over the three-year period in which this data has been collected.

BUSINESS PROSPECTS IN MICHIGAN BY INDUSTRY ABOUT THE SAME

MUCH WORSE Services Investment Multi-Family General Construction Financing Commercial Homebuilding Land

41%

2013 Average 2014 Average 2015 Average MUCH BETTER

PAGE28

“Some of the pre-recession growth that Michigan missed out on, because Michigan’s recession really started in 2004, so we are capturing a lot of the retail and office locations that were going to other states, especially in the Southeast and New England.”

BUSINESS PROSPECTS VS OTHER MARKETS BY SECTOR MUCH WORSE

ABOUT THE SAME

2013 Average 2014 Average 2015 Average MUCH BETTER

Residential - Rental

Residential - For Sale

Industrial

Land

Office

Retail

Hospitality Institution/Public

Multi-family residential development tops the list, not only in this survey data, but also in the interviews conducted. Professionals in a variety of occupations, from real estate developers to architects and State officials noted the trend towards multi-family development, with expectations for the trend to only gain further traction. This trend is thought to be due to both the yet-lingering inability for those hardest hit Michiganders, especially families, to purchase homes, and, at the other end of the spectrum, at the Millennial inability to buy homes, but also their, and the Baby Boomers, trend towards a desire for walkable communities.

While respondents trended more favorably towards business prospects in Michigan by industry, the responses for Michigan’s prospects as compared to other States was significantly less favorable. The segments of multi-family residential development, residential for sale development, land, office, retail, and hospitality took significant downturns. The institutional and public development segments were consistent with the 2014 average. The single segment which improved on the optimism from last year was the industrial segment, indicating that respondents thought industrial development prospects in Michigan would fare much than in other States.

PAGE29

F

or the third year in a row, the majority of the market segments are in recovery (45%), but this is down from 65% in that category in 2014 and 85% in 2013. More importantly, for the first time in three years, there are also a significant number of segments in growth (30%), and the number of segments in advanced recovery or bottomed out has reduced from 35% last year to 25% this year, indicating that the real estate market as a whole is recovering. For the past two years no segment was ranked as a growth segment, but this year a mix of housing and industrial segments are anticipated to be in growth. One of

PEAK

GROWTH

Single Family Lots Land for Development Fulll Service Motels Moderate Apartments Neighborhood Centers Farm Ground Luxury Housing Townhome/Condominium Medical Office RECOVERY

BOTTOMED OUT

CBD Office

Single Family Homebuilding

Suburban Office

Power Centers Regional Malls

ADVANCED DECLINE

EARLY DECLINE

PEAK

BUSINESS CYCLES

Limited Service Hotels Self Storage General Industrial Bulk/Distribution Space Student Housing Tax Credit Apartments

TRENDS BY REAL ESTATE SECTOR

the limitations of this year’s survey is that there were not sufficient responses in some market segments, requiring additional evaluation, and these segments are indicated on the graph in grey. In housing, all segments, except Single Family Home Building continue to be in the recovery category or have moved to growth. Student Housing is the strongest growth segment. Tax Credit Apartments are just entering growth, a ranking that has been consistent over three years. Single Family Home Building has flipped from recovery to bottomed out over the same period.

PAGE30

“Housing downtown will continue to prosper. Housing starts have been steadier. I don’t see any reason for them not to continue. The east side [of Detroit], which was dead for awhile, now is growing steadily.”

In retail, two segments, Power Centers and Regional Malls, continue a two year trend in advanced decline, although Neighborhood Centers have moved from bottomed out to recovery. In hospitality, Limited Service Hotels have moved ahead of Full Service Hotels, which remains in recovery, and is now in growth. In industrial, all segments (Self Storage, General Industrial, and Bulk/Distribution) have moved into growth after all but Self Storage were ranked in recovery the last two years, and Self Storage moved from bottomed out, to recover, to growth over the last three years.

In office, the CBD Office segment has moved from the highest ranked category in 2013, to recovery in 2014 and finally to bottomed out in 2015, the longest decline of any segment. Suburban Office is consistently ranked as bottomed out, and Medical Office has moved from bottomed out in 2013 to high recovery for the past two years . Both Single Family Lots and Farm Ground have returned to recovery after being ranked as bottomed out last year. Land for Development has continued to be stuck in the lower part of recovery for three years.

PAGE31

TRENDS IN CAPITAL MARKETS “Interest rates in general are likely to go up, because they’ve been low for a long time and because the feds are wary of cutting up too quickly, so I think it will stay low for a period of time, I don’t know if that’s years or months. I think, as lenders get more comfortable hopefully interest rates it’ll stay pretty stable. I do expect them to go up, but I hope it’s a steady increase.”

s

imilar to the past two years, this year predicts that the availability of Equity Capital will increase somewhat from most sources. That prediction is less optimistic than last year for all sources, but is similar to 2013. For the first time in three years the exception is that government equity is expected to decrease somewhat. The largest increase in equity is expected to be from institutional investors, compared to last year when it was assumed to come from individuals, and the year before from private companies, but improvement continues to be sluggish. There is not much difference between the next three categories: hedge funds, private investors and individuals, all of which are expected to improve somewhat. Debt Capital available from all sources except government is expected to increase slightly. This is the third year where the survey predicates only a modest increase in debt availability. This prediction by category is similar to 2013, but unlike last year, which predicted a more even availability of debt, there is some spread between the sources this year, with securitized lenders predicated to have the largest positive change.

EQUITY CAPITAL Goverment Syndicators Hedge funds Private Institutional All sources Public + REITs Individuals LARGE DECLINE

NO CHANGE

LARGE INCREASE

DEBT CAPITAL Government Mezzanine Lenders Securitized Lenders Non-Bank Financial Commercial Banks Insurance LARGE DECLINE

NO CHANGE

LARGE INCREASE

PAGE32

“Local and state governments don’t favor [incentives] the way they used to. At the State level, there’s a group that doesn’t think they are effective. They think the builders are going to build anyway and this is just extra for them. At the local level, it’s less about that, but it’s that many local governments don’t have the resources they used to have so they don’t have the funds to grant developers. So at the state level, I think it’s a policy choice, at the local level it’s driven by their actual finances.”

CHANGE IN INTEREST + INFLATION 2015 Long term interest rates

Short term interest rates

Inflation FALL SUBSTANTIALLY

The survey has been predicting a modest increase in interest rates in the next year, and a larger but still modest increase over the next five years in each of the last three reports. Again this year the survey predicates a small increase in long and short term rates both in the one year and five year periods, as well as a modest increase in inflation. The respondents consistently predict a larger increase in the long term over the short term. The responses to all of these questions have been very consistent over the last three years, possibly indicating anticipation that the remarkably low and remarkably stable period of interest rates and inflation must break soon, and the hope that when it does it will be mercifully modest. The predictions for changes to underwriting standards in the short term are similar to last year, but slightly more stringent in both categories. For each of the past three years this prediction has slowly increased from a slight loosening in 2013 to slightly more stringent.

REMAIN STABLE

RISE SUBSTANTIALLY

CHANGE IN INTEREST + INFLATION OVER THE NEXT 5 YEARS Long term interest rates Short term interest rates Inflation FALL REMAIN SUBSTANTIALLY STABLE

RISE SUBSTANTIALLY

UNDERWRITING STANDARDS OVER THE NEXT 18 MONTHS Development

Acquisition MUCH LESS STRINGENT

ABOUT THE SAME

MUCH MORE STRINGENT

PAGE33

TRENDS IN SUBMARKETS OUTLOOK BY REGION Metro Detroit

1

2

3

4

5

West Northwest Southwest South Central East Central Southeast East Northeast Upper Peninsula ABYSMAL

AVERAGE

T

he respondents were less optimistic about Michigan’s outlook in 2015, with an average of just 2.55 by region and 2.89 by city, as compared to last year’s average of 3.32 by region and 3.22 by city. This indicates that respondents believed Michigan’s outlook, as a whole, is below-average or less than fair. Regionally, Metro Detroit has the best outlook [4.5], with the West just behind [4], which is a departure

EXCELLENT

from last year’s report, when the outlook for the West Region was just slightly (0.06 points) ahead of the Metro Detroit Region. The Northwest, Southwest, South Central, and East Central ranked slightly below the average at 2.5. Both the Northwest and Southeast regions, which ranked in the top four regions by outlook last year, fell significantly in the 2015 survey. The Northeast region and the Upper Peninsula again ranked lowest, gaining only 1.5 points on the 5-point scale over last year.

PAGE34

“People want to live, work and play in one place. Urban areas are going to continue to increase in value. It’s a big picture trend, more like a 10 to 20 year trend, not a 2 to 3 year trend.”

The “Outlook by City” portion of the survey received slightly more positive results than the “Outlook b y Region” section. Although the average, at 2.89 by city, is still nearly 10% lower than last year’s outlook,. Traverse City jumped ahead of Ann Arbor and Grand Rapids to become the number one city for optimism about redevelopment in 2015, even though the Northwest region, where Traverse City is located, ranked quite low on the regional outlook data.. Ferndale, East, Lansing, Ann Arbor, Detroit, Grand Rapids, Royal Oak, and Hamtramck were judged to all be close behind Traverse City, with relatively high outlooks for redevelopment. Of the six Metro Detroit cities ranked individually, four scored a ranking of 4.0 or higher, which corresponds with the Metro Detroit’s ranking as the best region for redevelopment in Michigan, and with Detroit (spoiler alert) as the most existing redevelopment opportunity for both millennials and retirees. While West Michigan fared well in the regional outlook survey, the individual cities all fell from last year’s rankings. Grand Rapids fell nearly half a point

and from the second best city for redevelopment in Michigan to the sixth. Holland, last year determined to be an above-average city for redevelopment, this year scored only a 2.5. Muskegon, Kalamazoo, and Battle Creek all fell, with Muskegon receiving one of the lowest scores, squarely in the “abysmal” section. Also seen as cities with an abysmal outlook for redevelopment, Jackson, Flint, and Saginaw all scored just a 1.5. These two graphs, “Outlook by Region,” and “Outlook by City” illustrate that we view regional and city real estate opportunities differently. While they should theoretically have very similar results, as each of the regions are represented by individual cities, regional redevelopment is a difficult concept and may represent the respondent differentiating between rural and urban opportunities. . Overall, Michigan’s outlook is less optimistic than it was considered in both the 2013 and 2014 surveys, although the data contained in this report shows that the redevelopment climate in Michigan is actually improving;. This may represent a dissatisfaction with the speed of that improvement.

There’s strength of entrepreneurial culture and diversity of economic interests in West Michigan. We hear that all the time, “your companies are different”, and that’s the culture. It’s hard to measure that but it’s feedback that we get all the time… it’s not like you can create that, it’s there, it happens, we practice it and it’s something that we are doing that obviously is converted into capturing more contracts and more demands for services and products.”

PAGE35

“The physical and geographic diversity of [Oakland] County is the greatest strength – that you can be within minutes of an urban downtown and then be out on a trail or in an incredible park or nature area. The diversity of development patterns is attractive.” OUTLOOK BY CITY Traverse City Ferndale East Lansing Ann Arbor Detroit Grand Rapids Royal Oak Hamtramck Kalamazoo Marquette Bay City Escanaba Holland Pontiac Battle Creek Lansing Port Huron Sterling Heights Alpena Warren Monroe Midland Benton Harbor Muskegon Jackson Flint Saginaw ABYSMAL

AVERAGE

EXCELLENT

PAGE36

WALKABILITY “Residential units are trending to be much smaller because the city is your living room. People are willing to pay more for less space if they can be in a great location. The city IS your amenity. As the city gets more built out and more developments happen, I think that is going to push that trend along even quicker.”

M

Michigan is rightfully known as the automotive capital of the world, as Michigan is the birthplace of the automobile and the home of the “Big Three.” Michigan’s cities have nicknames like the “Motor City” and “Buick City,” and vintage car shows are ubiquitous in the summer months. Michigan’s cities – their infrastructure and design – reflect this heritage, for better or for worse. Owing also in part to the Urban Renewal initiative that some of Michigan’s largest cities embraced in the early 1950s, highways were constructed which effectively strangled neighborhoods and commercial corridors alike, prioritizing the vehicle over the pedestrian. Fast forward to 2015 where walkability is prime. Walkable communities are much-preferred, and it’s being proven time and time again through development patterns. For the automotive capital of the world, this emphasis on pedestrian-friendly communities and development is a challenge to rethink the urban landscape. A review of the 2015 walk score [from www.walkscore.com] for the cities included in this survey indicate that just one Michigan city, Traverse City, ranks at or above the top five walkable major cities in the country: New York [88], San Francisco [84], Boston [80], Philadelphia [77], and Miami [76]. Traverse City, in Northwest Michigan, scored an

82. Following closely are Benton Harbor [75], Hamtrack [74], and Alpena [71]. When comparing the walkscores of the selected cities with the survey responses for “Outlook by City” included in this report, a positive correlation exists between the more highly-scored walkable cities and the more highly-ranked cities in regard to redevelopment outlook. Traverse City, which was the most walkable city in this survey, was also seen as the city with the best redevelopment outlook in Michigan. An anomaly, however, exists with Benton Harbor’s data. Benton Harbor was the second most walkable city in this survey, but was judged to have significantly below-average redevelopment outlook for the next year, possibly a gap between perception and reality. Fourteen of the twenty-seven cities, or 52%, in the survey rank as somewhat walkable or higher. The remainder of the cities ranked mostly as car-dependent. Battle Creek [32], Sterling Heights [31], and Midland [30] ranked at the bottom, as car-dependent. As mentioned in previous reports, this report was, in part, a response to the previous national walkscore rankings that listed Detroit in last position each year from at least 2004 to 2013, often listing it as abysmal. So it is important to note that Detroit, with a walkscore of 52, is one of the more walkable cities used in this survey and is five points higher than the national

PAGE37

“Talent is always going to be one of our strongest strengths. We turn out the highest and best quality talent with our major universities. Businesses still want to locate here and grow here. People finally “get it” when it comes to locating their business and developing “place” - and we have a lot of great places in Michigan. They are going to continue to grow and get stronger. Overall, I think people are finally making that connection between talent and place.” WALK SCORES BY CITY Traverse City

82

Benton Harbor

75

Hamtramck

74

Alpena

71

Escanaba

64

Ferndale

57

Detroit

52 50

East Lansing

49

Bay City

49

Ann Arbor

49

Grand Rapids

48

Jackson

47

Marquette

TOP 5 WALKSCORE MAJOR CITIES

Royal Oak

45 44

Holland

43

Port Huron

42

Pontiac

41

Muskegon

41

Kalamazoo

41

Warren

41

Saginaw

40

Flint

40

Lansing

40

Battle Creek

32

Sterling Heights

31

Midland

30

100

Walker’s Paradise Very Walkable

U.S. Average

Monroe

50

Somewhat Walkable Mostly Car-Dependent

0

Car-Dependent

PAGE38

MOST EXCITING OPPORTUNITIES MOST EXCITING CITIES FOR 25-35 YEAR OLDS

MOST EXCITING CITIES FOR EMPTY NESTERS

9%

9% 9% Detroit

37%

Ann Arbor

Detroit

9% Ann Arbor

18%

Grand Rapids Saugatuck Traverse City

91%

18%

F

or the third year in a row, Detroit was listed as the most exciting development opportunity for 20 to 35 year olds over the next five years. Each year the percentage of respondents selecting Detroit has grown (from 50%, to 54%, to 91%). But unlike other years, only Ann Arbor was mentioned as an alternative. In previous surveys Grand Rapids has been a perennial favorite, switching places with Ann Arbor for second and third place each year. This may be partially explained by the change this year, where the survey also asked about the most exciting development opportunities for empty nesters and retirees. Detroit again topped that list, but that list also included more options. Ann Arbor and Grand Rapids were listed, as well as Traverse City and

27%

Saugatuck. It is interesting to note that survey respondents who chose Detroit for millennials, generally chose a different, smaller, city for empty nesters and retirees. Taken together, and looking at the three year trend, these survey results indicate a strong confidence in sub-markets across the state. This is supported by the geographic distribution of projects as illustrated in the heat maps located elsewhere in this report. Although “eds and meds” continue to dominate development opportunities, each of the major and smaller markets provide different profiles that appeal to different market segments, making Michigan stronger by providing diversity in real estate options.

PAGE39

IMPEDIMENTS “The biggest impediment [to development] is the expected return on investment. Especially in the Detroit area, there is still a high perceived risk of investment, so there are high expectations for return. When an investor believes something can be really risky, they have a high expectation for return. There’s an imbalance between perception and reality, as it relates to ROI.”

F

or the first time since this report has been created, the lack of alternative modes of transportation was not cited as the number one impediment to real estate development in Michigan. Perhaps, this is due to the anticipation over the substantial construction on Detroit’s new M-1 public light-rail, or the associated dialog relating to Michigan’s need for alternative transportation. Detroit and Grand Rapids continue to offer more by way of public transportation, but a greater emphasis has been placed on regional transportation planning, as evidenced by the newly-released Woodward Avenue Action Association’s complete streets plan, entitled “2020 Vision and Beyond.” Although is that too often that ambitious master plans are shelved, never again to see the light of day, the focus and energy behind this push to improve transportation and reinvent the urban landscape of Detroit, appears to have staying power.. It will be important in the coming years to ensure that this momentum is not lost. Last year’s second and third place impediments have

moved into the numbers one and two spots; building and zoning regulations and the difficulty in finding qualified workforce. The concern about the difficulty in finding qualified workforce likely reflects the substantial increase in development that has the most qualified workers focusing on large-scale developments, leaving small to mid-size developments searching for talent. Although not reflected in the survey portion of the report, those professionals interviewed consistently stated that a lack of incentives was a major concern in the coming year. As many of the oft-utilized incentives, such as the Commercial Rehabilitation Act and the Michigan Community Revitalization Program, are threatened with either expiration or cuts in funding, those interviewed were very concerned with the dwindling sources of gap financing and the substantial effect the lack of incentives will have on development in Michigan. As the recent cuts in the MEDC workforce may indicate, even if incentive programs are not substantially cut, implementing them will be more difficult, which may amount to the same prob-