Under Construction: Michigan’s Build-To-Suit Market

By Paul Vachon

Several years into Michigan’s economic recovery has provided the business community with a unique perspective: One that has begun to show the fruit of years of rightsizing, innovating and reimagining their mission. The return of a healthy economy has cleared away excess inventories and set the stage for new expansion.

Despite significant industry diversification, however, automotive and manufacturing dominates Southeast Michigan, which makes the status of the industrial real estate market a key indicator of economic health. According to a recent report by Colliers International, the region’s overall vacancy rate stands at 4 percent — a historic low.

Justin Robinson, vice president of business attraction at the Detroit Regional Chamber, attributed this durability to a strong local economy and not just to the routine swing of the market pendulum.

Fraza“Right now, the market looks stable for the next several years. One factor is that during the last downturn many of the older, more inefficient buildings were demolished, thus removing that space from the market,” Robinson said. “These were mostly legacy buildings constructed from the 1950s to the 1970s that had been home to OEMs and tier one suppliers. The market has thus been rightsized, so even if it were to experience a downturn, I don’t think it would have a significant impact.”

Despite the tight supply, new space is being added slowly and cautiously, with build-to-suit as the predominate mode of construction. Industry experts say that this is due to a low appetite for risk on the part of many investors.

This approach has both pros and cons, Moran explained. A big disadvantage is the lead time involved with these types of projects. A company opening a new plant generally wants to be up and running within six to nine months, a realistic timetable if a preexisting building can be found. However, Robinson said the schedule for a build-to-suit project is much more time consuming.

“An average building can take as much as 18 months to deliver by the time you identify the site, address potential brownfield issues, get the infrastructure in the ground and put up the structure,” he said.

“This type of timeline can be difficult for many companies.” Robinson pointed out that in other major metropolitan areas, speculative building is common, but its relative scarcity in Southeast Michigan often forces tenants to be creative.

“They might have to take an older or smaller structure and modify it to meet their needs,” Robinson said. An advantage to the build-to-suit option is the ability for the client to specify features that will meet his or her unique needs and operate at maximum efficiency.

As Moran explained, some examples might include a minimal floor thickness to support heavy equipment, steel framing strong enough to accommodate overhead cranes or other equipment, and a sufficient HVAC system that meets state and federal regulations.

As the overall market matures, developers report that build-to-suit options are becoming more specialized. Ryan Dembs, CEO of Dembs Development in Farmington Hills, said that while his company’s build-to- suit volume is increasing, much of it is for technology-related companies. Dembs said his company does do a limited number of on-spec buildings and anticipates other developers will gradually fall in line as their confidence level increases. One developer that recently resumed embracing speculative development is New York-based Ashley Capital, which builds and manages industrial real estate throughout the eastern United States and has an office in Canton.

“In Michigan, we manage 18 to 20 million square feet, the clear majority of which is space we built on greenfields or brownfields, or existing, often blighted, buildings we renovated. In both cases, we worked without a tenant in hand and subsequently leased the buildings out,” said Susan Harvey, senior vice president at Ashley Capital.

“We’re just finishing our first speculative project since the end of the Great Recession, on the site of the Hazel Park Raceway, a 575,000-square-foot building,” she added. For Ashley Capital and others, the gradual emergence from the recession has been fraught with obstacles.

“Lending practices have changed, and it’s gotten more difficult for developers to put together deals for spec buildings,” Harvey said. She does, however, express cautious optimism for the future both locally and throughout the nation.

Paul Vachon is a metro Detroit freelance writer.

Read more from this issue below: 

Detroit-Area Developers Choose to Reuse

Dan Gilbert Taking Detroit to Overdrive

The Ilitch Touch: Transforming Detroit’s Downtown