A Shocking Sight In Downtown Detroit: People - Forbes

A Shocking Sight In Downtown Detroit: People - Forbes

A Shocking Sight In Downtown Detroit: People

Merchant's Row, Detroit downtown (Photo credit: Wikipedia)

Editor’s Note: This post kicks off a new special section called “Reinventing America,” which we launched Tuesday. As part of this effort, more than a dozen Forbes contributors and staff writers will focus attention on the challenges facing towns, cities and traditional industries across the nation–and highlight the growing number of success stories we’re seeing, too. Over the coming months we’ll have stories, rankings of who’s doing it right (and wrong), and, we hope, great conversations with readers, so please join in. It kicks off with this dispatch from our Detroit Bureau Chief, Joann Muller:

The city of Detroit is on the brink of insolvency. So why is it that I’ve never been more optimistic about its future?

But all you have to do is visit Woodward Avenue, the spine of Detroit’s central business and cultural district, to see that something quite encouraging is happening. Woodward used to be Detroit’s Fifth Avenue or Broadway, a thriving retail and entertainment district anchored by the old Hudson’s Department store and the famous Fox Theatre. By the time I moved to Detroit in the late 1980s, all that was gone, and Woodward was a Ghost Town, just one more of those scary, abandoned places you didn’t go in the Motor City.A year ago, I wrote a Forbes cover story, Detroit: City of Hope, which included a conversation with many of the city’s movers and shakers about the challenges of trying to reinvent the Motor City. The headlines since then certainly have been discouraging, at least on the government side. Mayor Dave Bing has been a disappointment and he and the do-nothing City Council can’t seem to agree on anything. Meanwhile, the city’s top lawyer is dithering in court to void an agreement with the state of Michigan for a financial oversight board. The political gamesmanship is probably just delaying the inevitable, which is either the governor’s appointment of a slash-and-burn emergency financial manager to run Detroit or a municipal bankruptcy filing, or both.

But not long ago, I found myself driving up Woodward on a Tuesday afternoon, and I was shocked — shocked — to see dozens of pedestrians strolling along the street. They were soaking up the sunshine at outdoor cafes, or taking a break from work at one of the downtown office buildings to stretch their legs or run errands. In any other city, this would be unremarkable. But in Detroit, it was an amazing sight. Seriously.

Friends who work downtown marvel at the number of people they see riding bikes or walking dogs in the neighborhood. They joke that joggers are running for exercise, not out of fear.

People are moving back to the city’s core. Yes, Detroit lost about 25 percent of its population in the past decade, but young professionals are moving in, lured, in part, by cash incentives offered by some of the city’s largest employers, who have added an estimated 10,000 jobs downtown in the past 18 months.

A year ago, five companies — Quicken Loans, Blue Cross/Blue Shield of Michigan, Compuware, DTE Energy and Strategic Staffing Solutions — pledged more than $4 million to help employees offset the cost of buying, renting or renovating a home in the downtown area. The program was modeled after a similar one a couple of miles to the north, in the area known as Midtown, home to big employers like Wayne State University, the Detroit Medical Center and Henry Ford Hospital. Both programs are part of an effort by these so-called “anchor institutions” to attract 15,000 talented young people downtown by 2015. So far, nearly 500 people have taken advantage of the two programs, with many more applications under way.

The problem now is there aren’t enough apartments for all the people who want to live downtown. But that’s attracting more developers who are remodeling old buildings and creating loft apartments as fast as they can.

Restaurants and nightclubs are multiplying, too. I was at a friend’s bar over the weekend and was delighted as he rattled off all the development activity going on in his neighborhood, where the only other business currently is a strip club.

As I listened to him talk about the new steakhouse opening soon on the corner, and the buildings being rehabbed down the block, I was struck by the fact that entrepreneurs and large employers, too, aren’t waiting for Detroit to solve its fiscal crisis. They sense that Detroit’s on the cusp of a rebound and they want to get in on the ground floor, while it’s still cheap. Even Twitter is opening an office downtown.

andy Baruah, president of the Greater Detroit Chamber of Commerce, confirmed it. “The way business is looking at it, the political struggle in Detroit is not new. It’s been an issue for as long as anyone can remember,” he said. So the threat of a fiscal collapse isn’t deterring their investments.

“There is an article of faith going on here,” he said. “We know it’s not going to be pretty. But the fundamentals, the basic assets in Detroit, are strong enough that it’s worth it, especially when prices are so low. At the end of the day we know there will be a city. It will find a way.”

Tenants Continue To Rule the Market - CoStar Group Confirmation of Slowed Job Growth Likely to Keep Landlords Aggressive on Lease Deals

Tenants Continue To Rule the Market - CoStar Group

By Mark Heschmeyer

June 6, 2012

This week's disappointing job growth numbers make it abundantly clear that it's still a tenants' market out there and no amount of aspiring to the contrary will make it easier for landlords fighting to attract and retain them. 

The job news "is an obstacle and a cautionary line creating uncertainty in the short-term outlook," said Carl Conceller, principal of NAI Desco in St. Louis, MO. "Landlords are keenly aware of the limited tenants in the market place and the need to maintain occupancy in a highly competitive market. Landlords will continue to be aggressive in structuring leases to capture tenants as early as possible, while blocking them from the competition." 

For the record, here's a summary of monthly jobs number released this past week by the U.S. Department of Labor: Total nonfarm payroll employment grew by just 69,000 jobs; following 77,000 new jobs in April. By comparison, the average monthly employment gain in the first quarter of the year was 226,000. 

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In May, employment rose in health care, transportation and warehousing, and wholesale trade -basically the industrial sector. While construction, accounting and bookkeeping services, in services to buildings and dwellings and professional and business services lost jobs - basically the office sector. 

"The report was disappointing, but not unexpected considering the negative economic news of late regarding the European debt and its potential impact on the U.S. economy," Conceller said. "The report, in conjunction with the European debt crisis, has obviously disrupted markets and caused uncertainty among U.S. businesses." 

Larry Hausman, senior associate of Marcus & Millichap in Louisville, KY, said that if landlords were smart they would make whatever deals they can get done and still make a profit. 

The job numbers don't make prospects for the investment market very attractive either, Hausman said. 

"Investors are going to shove their hands even deeper into their pockets, choosing to take their licks against inflation while staying in cash a while longer," he said. "There will be fewer buyers until Europe stabilizes and more than 125,000 new jobs are created each month (what is needed to break even after population growth)." 

NAI Desco's Conceller had a different take on impact of the disappointing job numbers on investing. 

"Investors recognize that the markets are at historic lows. The current environment provides unique opportunities to acquire investment properties well below replacement value with significant upside growth and returns far greater than can be achieved in alternate investments," Conceller said. 

"A major contributing factor to the investment market is the unusually low interest rates available to qualified investors," he added. "Additionally, foreign investors are reallocating capital into the US real estate market because of the relative stability of the U.S. economy when compared to many foreign markets, the aforementioned report notwithstanding." 

Still, the latest job growth numbers proved to be a double whammy with little new hiring and more announced reductions. In May, the nation's employers announced plans to cut 61,887 workers from their payrolls, the most since last September 2011, according to the latest job-cut report also released this past week by global outplacement firm Challenger, Gray & Christmas Inc. The May job-cut total was up 53% from April and 67% over May a year ago. 

May job cuts were dominated by the computer industry, propelled by Hewlett-Packards announced layoffs of 27,000 workers. 

"We may see more job cuts from the computer sector in the months ahead. While consumers and businesses are spending more on technology, the spending appears to favor a handful of companies. Those that are struggling to keep up with the rapidly changing trends and consumer tastes are shuffling workers to new projects or laying them off altogether," said John A. Challenger, CEO of Challenger, Gray & Christmas. 

Mark H. Fowler, senior vice president of Weichert Commercial Brokerage Inc. in Edison, NJ, said: "The market has definitely slowed down again. Smaller tenants were showing signs of entering the market, which we had not seen for a long time. However, that began to dry up well before last Friday's numbers." 

"We are still seeing activity from medium to large tenant requirements but the bread-and-butter transactions are lacking," Fowler said. "I am not sure that demand will worsen as a result of the numbers but we probably face a long, slow summer." 

"As for landlords, they have been itching to raise rents but this will only delay that process a while longer, as the advantage remains in the tenant's hands," Fowler said. 

We polled other commercial real estate industry executives to get their perspective on the jobs market. The following is a summary of some of those comments. 

Bottom Doesn't Mean We've Turned Around

With a vast majority of our commercial appraisal assignments currently involving foreclosures, REOs and bankruptcies, this recent jobs report is no surprise. Even healthy Class A/B office tenants are looking to cut costs, and some are also downsizingoffice space. Leases that were signed back in 2002 and 2007 are coming up for renewal at "market rental rates," which means the rates going-forward are going to be flat or below the original lease rates. 

The Great Recession's negative impact on tenant demand for Class A/B office space in this market appeared to bottom out approximately a year ago. Currently, the demand curve is still at the bottom of the cycle and favors tenants and investors seeking bargains. 

However, the local market has too many Class A/B office properties in the foreclosure-bankruptcy-REO cycle which need to work their way through the courts and find their way back to new investors. As they go through the legal channels, these financially-distressed buildings generally are not properly maintained, which frustrates current tenants and makes the properties unattractive to prospective tenants. 

New tenants are being offered generous TI [tenant improvements], free rent and very low lease rates, especially in suburban Class B office complexes. As previously mentioned, even healthy, renewing tenants are looking for better rates and terms. 
John Irby, Appraiser, Pinel & Carpenter, Orlando, FL 

Definitely Probably

I have to think landlords have been anticipating this, swinging the needle more to the lessee. That shouldn't change in terms of concessions, etc. I think domestic and euro investors will still flock to CRE assets given the risk adjusted returns, risk premium (spread to cap rate over the 10 year Treasury) at all-time highs, even for core/core plus assets. This is also in the face of a lack of supply. And... QE3 [a third round of Federal Reserve quantitative easing] is definitely probably on the table now... We will see! 
Coley O'Brien, CMBS Research, MKP Capital Management LLC, New York, NY 

It Could Be Worse

The latest job numbers are an aberration, but numbers will continue to be week for six to eight weeks. The impact will be minimal unless consumer confidence takes a hit for a significant (eight to ten weeks) period of time. If things worsen longer term, tightening of concessions and rent could reverse course. 
Ryan Phillips, President, Signature Asset Management Inc., Dallas, TX 

We saw a significant upturn in demand for space in the fourth quarter of 2011 and in the first quarter of 2012, and took advantage of the upturn. We had enough stabilization the past 18 months or so in both occupancy and price that would cause us to remain consistent with our lease negotiations and pricing. The last two months has seen demand slow in each of the markets we serve. It's disappointing, but not surprising. Due to the upcoming elections and specific policy-related uncertainties, I would expect the trend to continue at a stagnant pace. 
Robert G. McDonnell, Senior Vice President, Ciminelli Real Estate Corp., Williamsville, NY 

With interest rates at near historic lows, strong operators/investors should be able to reduce their debt service cost. This reduction can then afford the investors the ability to manage occupancy levels and rental rate concessions. 
James M. Gottstine, Senior Vice President, Ciminelli Real Estate Corp., Williamsville, NY 

Expectations Too High and Press Too Bad

The report is not a surprise. There have been no fundamental changes in the economy that would spur sustained job growth. The only positive development has been the reduction in oil (gas) prices. Landlords will not be impacted by this jobs report. They have been reacting to the poor economy and higher vacancy rates for years now, their behavior is established. Local and regional tenants are more impacted by positive or negative sentiment. "Bad press" can reduce confidence among these tenants, which will make them more tentative to sign new lease commitments. Larger national tenants make decisions based upon a more macro view and will not significantly change course. 
David M. Barker, Broker / Owner, Acuity Commercial Group, Louisville, KY 

The job report is not surprising. The positive side is that overall we are adding jobs despite the public sector losses. The disappointment comes in reference to the expectations. I am not sure where the expectations come from, but perhaps that is the problem… the expectations are too high. 
Gary Goss, Senior Vice President, Cassidy Turley, San Diego, CA 

Don't Believe Everything You Read

The numbers don't surprise me. I don't trust the government numbers as the ways in which they track them are usually twisted in a positive way. Any negative news can stifle the confidence that has been building. There is a debate about the relevance of retail numbers regardless. I'd like to see more production numbers, both employment and output. The effect of unemployment isn't felt as quickly or badly as higher gas prices, rising interest rates, etc. 
Russell J. Bardolf, Director of Sales, Rock Commercial Real Estate LLC, York, PA 

I earned a great living in commercial for 25 years and now we are fighting to make a 1,000-square-foot office deal at 75 cents per square foot!!! Gross. I don't trust the numbers the government gives. I think it is worse. In more than 30 years in the business this is the worst I have seen it. 
Richard Dick Myers, Great Estate Realty, Roseville, CA 

I think their numbers are off ~ seriously. All we're seeing from a tenant rep's view are growth and expansion! 
Debra Lee Stevens, CCIM, Principal, The Stevens Group | ITRAGlobal, Boston, MA 

There are too many different reports on the economy, jobs, markets, and consumer sentiment. No one really feels tethered by these mixed reports. Government is trying too hard to read "Good News" into everything and not letting the market and businesses/consumers work thru these issues with normal maturation and normal demise. 
Ron Deem, Commercial Sales & Leasing, Long & Foster Commercial, Mitchellville, MD 

Most investors have known for a long time that the government has been skewing the numbers to make a horrendous situation look better. You cannot put earrings on this pig, without the pig showing up some day. If this is the new numbers with the best lipstick available, it is much much worse. My clients hunkered down for this storm years ago. We are on the front lines, not in the bubble of Washington, DC, or the Casino of Wall Street. We will survive at a different level. At the end of the day real estate is still there (more than I can say for derivatives). 

Ecker: Future of commercial real estate undergoing a fundamental shift | REJournals.com

Commercial real estate is experiencing a fundamental, disruptive and well-overdue shift.  People entering the workforce today have a completely different concept of work and the space in which they work than when I began my career, more than 40 years ago. They’re younger than they have ever been, more tech savvy and globally aware with social media consciousness baked into their DNA.

Back when I started, I worked hard during the day and spent evenings and weekends socializing.  I believe that today’s workforce goes to work to socialize, as they have the ability to work 24 hours a day, seven days a week from anywhere they are located.  As the habit of the workforce changes, space available for lease must adjust to the work and social needs of this “new worker,” or go unrented.

Companies must develop new ways to allocate space as the traditional office becomes obsolete —new floor plans within old spaces designed for new work habits – to cater to employee needs and eliminate costly reconstruction.  No longer do employees require “the accoutrements of success” (i.e. large offices) to bolster their egos.

Recently, I have witnessed corporations such as BP and United Airlines relocate from the suburbs to the city in order to build the best employee base possible. It is also rumored that Sears and Kraft are considering moving back to the city. If brought to fruition, these moves will help the companies regain the culture imperative to their success. I think that one thread runs throughout successful relocations: Space that reflects the culture, values and ethos of the company itself. Perhaps Sears should consider moving to its former headquarters at Homen and Arthington?  Sara Lee has made a bold and smart move with its recently announced relocation from Downers Grove back to the city, repurposing the 400 South Jefferson building.

For a period of time in the ‘80s and ‘90s, corporations lost track of the need for the workplace to reflect the values and culture of a company. I cannot tell you how many CFOs and real estate directors only asked one question—“Where is the best deal?” The bottom line today does not only equate to the cheapest cost per square foot but must relate to the market value of the company.

A new formula

My colleagues and I have developed a formula, RV (Real Value) = MV (Market Value) x SV (Symbolic Value). In other words, the cost of office space must take into consideration the dynamics of the real estate market in addition to the Symbolic Value of a space. No longer can we judge the value of space by the old “per square foot” metric. Today, we need to look at the real value of the full spectrum of issues that make up the fiscal and cultural well-being of a business.  Only then can a judgment be made as to the Real Value of any particular space.

The future of office space

Zappos is repurposing the old City Hall building in a blighted area of downtown Las Vegas and Google took over the former New York Port Authority building in the Meat Packing District of New York City. Forward-thinking companies will follow suit and continue to find older buildings to repurpose at favorable prices. In conjunction with organizations such as ArtPlace, which aims to develop creative space use to enliven communities, developers will gain long-term potential for successful real estate development.

It is my opinion that, after the non-traditional spaces start to be absorbed, companies will begin to repurpose iconic buildings, such as the Willis Tower. To succeed, ownership of these buildings will be charged with facilitating alternative uses of their traditional office space. Companies that will boom in the coming years are those that are comprised of the new employee—tech savvy, young, socially conscious—and are choosing homes for their businesses that reflect the needs of these employees and which rise to their cultural demands. 

Howard Ecker is CEO and President of Howard Ecker + Company, a commercial tenant representation company. He can be reached at howard@howardecker.com

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GlobeSt.com - Office Could Be CRE's New Problem Child - Daily News Article

GlobeSt.com - Office Could Be CRE's New Problem Child - Daily News Article

Vacancies in the Atlanta CBD are
greater than in the metro

area's suburban submarkets.

The improvement in economic and commercial property fundamentals may be too gradual for some office loans this year. Office rents have ticked upward and vacancies have ticked downward in many markets, but neither metric is on par with the pro formas that often were used to underwrite office CMBS at the market’s peak. There’s also the question of five-year leases that are due to expire this year.

Earlier in the recovery, hotels were seen as the problem child of commercial real estate. Now the lodging sector has rebounded strongly and it may be office’s turn for struggle. In January, theWall Street Journal ran a story titled “Trouble is Brewing for Office Market,” profiling some specific large properties that are facing this combination of maturing debt, rolling leases and spotty recovery in fundamentals. More generally, Fitch Ratings said earlier this month that late-pays on CMBS loans backed by office assets have reached an all-time high, and last month Fitch gave office CMBS a negative outlook for 2012, the only property sector to achieve this dubious distinction.

In a sampling of 11 specially-serviced office loans provided by Trepp to Distressed Asset Investments, all but one—Golden Triangle I&II in Greenbelt, MD, which transferred to special servicing this past December—originated during the 2005-2007 market peak. Largest of the loans by unpaid balance is $65.6 million on One Main Place, a one-million-square-foot office property in Dallas that was 34% vacant as of this past October. At that time, Fitch downgraded seven classes of circa-’05 GE Commercial Mortgage Corp. pass-through certificates due mainly to specially serviced loans, including the one on One Main. Eight of the properties in Trepp’s sample are REO or in foreclosure. One Main Place, which transferred to special servicing in December 2009, is 90-plus days delinquent, while the Golden Triangle complex is 30 days past due.

Although delinquency among Fitch-rated office CMBS is still well shy of multifamily’s 12.77%, its current 7.30% delinquency rate is no longer the lowest. That honor now falls to retail, which also saw a marginally smaller basis-point increase in its delinquency rate between December 2011 and January of this year: 42 bps to 7.21% compared to the 46-bp rise seen in office. Hotel and industrial CMBS experienced smaller monthly increases, while multifamily’s 165-bp decline pulled down the delinquency rate overall for January, the sixth month in a row that CMBS late-pays have declined, according to Fitch.

Even so, say Fitch and other sources, not all office properties will face headwinds in 2012. During a seminar sponsored by the Real Estate Board Of New York earlier this month, John Sikaitis, SVP and director of office research at Jones Lang LaSalle, said the best-recovering US office markets are those with a concentration of technology and energy tenancies. For its part, Fitch is concerned mainly by suburban office space and properties in “struggling markets.” According to Integra Realty Resources, suburban markets in the Chicago, Las Vegas, Sacramento, Tulsa and Tampa metro areas average greater than 22.5% vacancy, while CBD offices in Vegas, Atlanta and Dallas average greater vacancy than their suburban counterparts.

Vegas and Atlanta both figure in IRR’s ranking of the top 10 office markets for distress, coming in at numbers three and eight, respectively. The top market for office distress as a percentage of 2001-2010 annual transaction volume is Detroit, followed by the Inland Empire, according to IRR, although the Motor City fares better than many other CBD markets in terms of the amount of time it will take for office fundamentals to stabilize. IRR figures that it will take the nation’s CBD markets an average of four to five years to stabilize, a range that dovetails with its projection for Detroit’s office fundamentals. By contrast, office fundamentals in Atlanta, Memphis, Northern New Jersey and Columbus, OH, among other markets, aren’t expected to achieve balance for 10 years or more.

Unlike the CBDs, where there was little new construction in recent years, the suburban markets have seen slight increases in supply. IRR says this negatively impacted the balance between supply and demand. “Additionally, the economy’s inability to create sustainable job growth appears to be impacting absorption expectations in the suburban office sector more than in the CBD office sector,” according to IRR’s Viewpoint 2012 report.

In an interview with the Seeking Alpha website earlier this month, Victor Calanog, head of research and economics at Reis Inc., predicted that the office sector will continue improving at a modest pace. He cited consensus forecast showing little hope for a ramping-up of job creation. “If we continue to proceed at a roughly 100,000- to 150,000-per-month pace in terms of job creation, it will continue to nudge office vacancies down, but not at a very fast rate,” Calanog told Seeking Alpha. Absorption in the sector will be positive, he said, but the total absorption across the span of 2012 will be equal to what we’d see during the course of a quarter in a more robust market.