Q2 2012 Detroit, Michigan Commercial Real Estate Economy

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Q2 2012 Detroit, Michigan Commercial Real Estate Economy


If metro Detroit was a newly developing area, rather than a once far more prosperous area in the middle of an economic and social disaster, one would say it was booming. According to Current Employment Survey (CES) data from the U.S. Bureau of Labor Statistics (BLS), total non-farm employment was 39,100 (2.2%) higher in June 2012 than it had been in June 2011, and private sector employment was up by 45,900 (2.9%). This follows similar increases in the previous 12 months, for a 24-month private sector gain of nearly 100,000 jobs (6.3%). Household-based data from the BLS shows a gain of 18,400 (1.0%) in the number of employed residents living in the metro area during the year to June 2012, including the self-employed. “Comerica Bank’s Michigan Economic Activity Index jumped 1.9 points in May to 103.9, its highest level since January 2005 and 44 points, or 73.0%, above the cyclical low of 59.9 hit in 2009, during the depth of the recent recession,” according to Crain’s Detroit Business.


But alas, Detroit is not starting from zero, and while the past brings benefits in the form of the institutions and infrastructure of a far larger and richer metropolitan economy, it also brings the burden of many older people with fewer workers to pay them, and more real estate and public facilities than the economy and tax base can support. The BLS reports yet another decrease of 29,300 (1.4%) in the Detroit area labor force in the year to June. After years of decline, Moody’s Economy.com predicts the metro area population will edge up by 0.1% (2,630) in 2012, but that would only reverse the loss of 2011 alone. Many older parts of the metro area have become depopulated.

The effects of many pensioners and a diminished tax base are having a severe effect on the public sector and its services. Local government employment fell by 6,800 (3.4%) in the year to June 2012, following larger losses in the previous 12 months. According to Grist, earlier this year “early in the afternoon, a four-foot water main ruptured on the city’s west side, sending what one resident described as ‘a little tidal wave’ rushing through the street and swamping the nearby Lodge Freeway. Water reached the windows of cars trapped in the lower part of the roadway.” With maintenance spending cut, “there is an obvious correlation between how much we spend on upkeep for our infrastructure and how often that infrastructure fails.”

The bankrupt City of Detroit is under pressure to transfer Belle Isle, a 932-acre island in the middle of the Detroit River that is the largest urban park in the U.S., over to the state or private developers. It was designed by Fredrick Law Olmstead, also responsible for Central Park in New York, and losing it would be the equivalent of New York City selling off Central Park. “The state of Michigan has previously offered to lease the park for 99 years, a plan Mayor Bing has reportedly resisted,” according to Crain’s. “In a rare display of public testiness, he told the NAACP during a speech Tuesday that the state has pushed for the lease without providing more details about their plans.” Those plans might include a $10 fee for Detroit residents driving to the park.

The tax base, however, is recovering rapidly. The largest year-over-year employment increases as of June, according to CES data, was in the office-based Professional and Business Services sector, with a gain of 20,000 (6.1%). The Financial Activities sector added 1,900 jobs (1.9%) during the period. The industrial sectors continued to grow, with Manufacturing sector employment up by 8,400 (4.1%) year-over-year in June, Wholesale Trade up 4,600 (5.6%) and Transportation and Warehousing up 500 (1.0%). Leisure and Hospitality employment surged by 7,500 jobs (4.2%) compared with a year earlier, but Retail Trade lost 2,900 (1.5%) and Construction and related sectors lost 600 (1.0%).

There has been some recovery in commercial real estate, according to Crain’s, but the metro area’s unprecedented situation makes evaluating deals difficult. “It’s a complication born of the metro area’s real estate woes of the past five years: A decrease in traditional sales activity plus a healthy dose of foreclosures and bank sales have led to difficulty for appraisers in finding comparable sales, which means headaches for lenders and brokers working to make deals happen.”