Cobo Center is a state-of-the-art meeting and convention facility along the Detroit River in downtown Detroit. The facility, currently undergoing a $279 million renovation, is home to conventions and special events year-round. One of the largest events is the North American International Auto Show. (cobo center)
In the 1970s, Detroit adopted a new nickname: “Renaissance City.” But for Michigan’s largest city, that designation was premature—at least until now. The city is experiencing an impressive real estate resurgence, which is expected to accelerate following its successful exit late last year from the largest municipal bankruptcy in U.S. history.
“Detroit has rebounded strongly,” says Gregg McDuffee, executive director of the Detroit-Wayne Joint Building Authority, which owns and operates the 745,000-square-foot (69,000 sq m) Coleman A. Young Municipal Center, the government office building and courthouse complex in downtown Detroit. “The city’s economic fortunes have improved significantly, and there has been a substantial recovery in the auto industry. Technology remains a key industry and is expanding. In-migration is increasing. We have a lot of people moving to the city, which is spurring real estate development. Detroit is enjoying a real renaissance.”
The Motor City is not the only metropolis in America’s heartland experiencing an uptick in its economic fortunes and real estate activity. So are metropolitan areas in Indiana, Ohio, Wisconsin, and Illinois.
Chicago remains the largest and most diverse metropolis in the Midwest, and its recovery is expected to accelerate over the next year, says Robert Bach, director of research for the Americas at Chicago-based Newmark Grubb Knight Frank. Consider the Windy City’s office market: “On the supply side, new construction is not expected to be delivered until late 2016, and over 3.3 million square feet [307,000 sq m] of [central business district] office inventory will likely be converted into apartments or hotels by 2017,” explains Bach. “A plethora of investors chasing limited purchasing opportunities, combined with rising interest rates—forcing owners to recapitalize at higher rates—will continue to push sale prices to historical highs.”
That scenario means global real estate investors are discovering the appeal of midwestern states, says Robert B. Monnat, partner and chief operating officer at Mandel Group, a real estate services firm in Milwaukee with development, construction, and property management operations. “As a tertiary market, Wisconsin has always had its share of challenges in terms of capital formation, especially compared to the coastal and southern markets,” he says. “But investors in the Badger State who will settle for slower NOI [net operating income] growth are usually rewarded with cap rates running 100 basis points higher than metro Chicago and as much as 250 basis points higher than the East and West Coast markets.”
The real estate sector in Indiana is also attracting investor interest, says Gordon Gill, partner at Adrian Smith + Gordon Gill Architecture, which is based in Chicago and has a number of projects in Indiana. “Across the state, projects range from strategic master planning to adaptive reuse developments,” he says. “Some of Indiana’s bright spots include economic planning strategies for mixed-use developments in downtowns, educational-based efforts that include research and development programs, as well as energy-based platforms that integrate sustainable approaches to adaptive reuse.”
Detroit’s M-1 RAIL Streetcar is under construction, thanks to a public/private partnership led by private businesses and philanthropic organizations, with the support of the local government, the state of Michigan, and the U.S. Department of Transportation. Construction began in July 2014. (m-1 rail)
Economic activity in neighboring Ohio—particularly Columbus and the central section of the state—remains robust, says Yaromir Steiner, founder and chief executive officer of Steiner + Associates, a national real estate development firm based in Columbus. “The region will continue to grow at a steady pace. A healthy market creates many development opportunities,” he says. “Retail is strong; residential is doing very well; industrial is doing well. Office is OK. There are still opportunities for the right multifamily products in the right neighborhoods.”
In Illinois, the economy will remain in a steady, controlled-growth mode for the next three to four years, predicts Jon P. Talty, chairman and chief executive officer of OKW Architects in Chicago. “Bright spots include all things urban,” he says. “Downtown Chicago is experiencing a resurgence in retail, mixed use, housing/multifamily, and entertainment, while the suburban market continues to see growth in senior housing, multifamily, and industrial.”
America’s midsection has consistently been the tortoise to the East Coast’s hare: slow and steady development that ultimately wins the real estate race. The region did not experience the real estate highs that the East and West coasts did, nor did it experience the subsequent lows. While the global economic downturn affected the region, developers kept plugging along, aided by expanding industries such as technology that created jobs and expanded demand for residential, retail, office, and industrial real estate.
Michigan
New jobs are increasing the need for mixed-use projects across the state, says Katharine Czarnecki, director of community development at the Michigan Economic Development Corporation (MEDC). “The outlook appears to be consistent across new construction and renovation projects,” she says. “We’ve seen several urban infill deals, especially in Detroit. On the west side, we’ve seen more renovation and rehabilitation projects, especially in Grand Rapids. Again, it depends on the individual city and what their market demand will support.”
Fifth Third Bank Eastern Michigan is moving its regional headquarters and 150 full-time employees from the suburbs to downtown Detroit, Czarnecki notes. The bank’s relocation is part of an $85 million commitment to Detroit that includes loans to small businesses, charitable donations, Community Development Corporation tax-credit investments, and economic contributions over the next five years.
“It is a sign of continued movement back towards the urban core,” Czarnecki says. “Michigan, and Detroit in particular, has built an environment conducive to entrepreneurs. The state has been very aggressive in securing venture-capital dollars, and our focus for the next few years will be on developing our skilled-trades workforce and the energy sector.”
Detroit’s expanding technology sector is also fueling real estate development. “There is a tremendous amount of research and development going on, says McDuffee. “Ford, Chrysler, and General Motors all have their high-tech hubs in southeast Michigan. We’re seeing a lot of techies from both coasts that have been priced out of their neighborhoods finding their way to Detroit. You can buy a home here for $1,000!” (McDuffee is referring to Building Detroit, an online site that auctions homes for rehabilitation to Michigan residents, non-Michigan residents who will live in the home after it is rehabbed, or companies or organizations authorized to do business in Michigan. A program of the Detroit Land Bank—a public authority dedicated to returning Detroit’s vacant, abandoned, and foreclosed property to productive use—Building Detroit emphasizes that “the rehab cost will often cost more than the winning bid price.”)
Illinois
Relatively inexpensive real estate, especially when compared with cities such as New York or San Francisco, continues to attract international interest. “The Midwest, and Chicago in particular, is a steal compared to the East Coast,” says Talty. “And a major contributor to the city’s economic explosion is the influx of technology. Young, smart, and entrepreneurial people want to be here. Google, Groupon, GrubHub, and 1871—Chicago’s new tech incubator at the Merchandise Mart created with backing from local venture capitalist J.B. Pritzker and the state of Illinois—are creating new jobs.”
OKW is involved in a number of developments in the region, including Structured Development and Bucksbaum Retail Properties’ New City in Lincoln Park, with more than 1 million square feet (93,000 sq m) of retail, residential, and hospitality space planned. OKW Architects also designed the three-story Brooklyn Bowl, a development of DRW Holdings that includes 55,000 square feet (5,100 sq m) of performance space and is slated to be completed in 2015.
Indiana
Sustainable real estate developments are being undertaken with more frequency in the Hoosier State, says Gill of Adrian Smith + Gordon Gill Architecture. The firm’s work in Indiana includes the adaptive use of entrepreneur Kevin Smith’s Studebaker 84 development in South Bend. The project is expected to establish a high-energy platform as the basis of the adaptive use of the building—originally part of the Studebaker automobile manufacturing complex but now envisioned as a platform for technology firms.
“The concept is to create a balanced energy ecosystem that uses waste heat generated from that energy platform to heat and provide energy for the building,” Gill explains, “thus becoming a cyclical energy loop within the structure and all the while offering flexible space that accommodates a range of programs.”
Studebaker 84 is designed to be physically and virtually flexible. “The adaptive reuse of existing building stock based on energy to attract new programs and intellectual capital to the region serves as an example to every town or city in the U.S. that is considering the management of their older buildings,” says Gill. “We are very optimistic about the future.”
Wisconsin
Mandel Group is adding the third phase of its North End neighborhood on the Milwaukee River to an overall 8.5-acre (3.4 ha) site of prime urban land once occupied by a tannery. The tannery’s water tower was saved and reinstalled at the primary corner of the development. When completed, the North End will have more than 650 apartments. (HGA Hammel Green & Abrahamson)
Because rising numbers of international investors are considering investments in secondary and tertiary areas in Wisconsin, including Milwaukee, competition for key assets and development opportunities is strong. “Milwaukee enjoys one of the highest concentrations of Fortune 500 headquarters in the country,” says Monnat. “While the entrepreneurial economy is beginning to make inroads, these major employers—Johnson Controls, Northwestern Mutual Life, Manpower Group, Kohl’s, Rockwell, Joy Global, and Harley-Davidson—continue to drive an in-migration of young, talented employees who typically acclimate to urban lifestyles.”
Mandel Group has four developments representing more than $100 million of capital investment in Milwaukee. “We are finalizing three additional developments in the downtown area, which together will add another $75 million of investment,” Monnat says. “We are focused on balancing downtown/urban center development with walkable, suburban infill opportunities on one-of-a-kind sites in mature suburban communities.”
At the same time, construction activity has picked up in the multifamily, build-to-suit, and office/retail markets in Wisconsin’s south-central market, says David C. Keller, owner of Madison-based Keller Real Estate Group. “New restaurant building activity has also been healthy,” he says. “Multifamily construction has been strong in Madison since 2012 and looks to continue. My sense is that more single-family tract development will ramp up as pent-up demand outstrips supply as median home prices rise.”
Hiring by technology companies and other businesses is driving the multifamily construction, Keller says. “It is having spillover effects in the downtown Madison area,” he adds. “New restaurants and bars are filling available space in the Capitol Square area, prompting additional redevelopment projects. Over 3,000 new multifamily units targeted to these new arrivals have been constructed or are now underway in the central Madison market.”
Keller is constructing a new $2.5 million mixed-use infill development, the Nouveau, in Madison’s Bassett District. “This will be our sixth new development in the 12-square-block area west of the state capitol,” says Keller. “In addition, we are involved in a 20-acre [8 ha] development on Madison’s north side that will include a major senior housing development, 20 single-family lots, and numerous commercial lots.”
Ohio
A historic former schoolhouse, the Guilford Building in downtown Cincinnati was renovated in 1996 and now serves as the headquarters of real estate investment services firm Eagle Realty Group, a member of the Western & Southern Financial Group. The building (shown lighted behind the statue) is on the site of Fort Washington and later was the boardinghouse where songwriter Stephen Foster stayed in the mid-1800s when he was a steamboat worker. (Western & Southern Financial Group)
With its diverse economy, educated and skilled workforce, natural resources, and vibrant urban centers, Ohio remains a hotbed for real estate development, according to Mario San Marco, president of Cincinnati-based Eagle Realty Group. “We continue to view Ohio as a place where there are many development opportunities,” he says. “Cincinnati’s center city has undergone a real estate rebirth thanks to the nine Fortune 500 companies located here, its outstanding cultural and art venues, top universities and hospitals, professional sports teams, and affordable housing.”
The company, which developed the Great American Tower at Queen City Square and the Marriott Residence Inn in the Phelps Building, continues to evaluate potential projects. “Eagle Realty Group, along with its operating manager Winegardner and Hammons, is currently studying the adaptive reuse of the Anna Louise Inn property and the adjacent office building in Cincinnati,” San Marco says. “The current vision would be to house both a Marriott-branded hotel and restaurant.”
With a strong economy driven by the presence of the state government, the 65,000-student Ohio State University, and technology and medical research facilities, Columbus continues to lead the state in growth, says Steiner. Ohio is expected to add a half million people over the next 30 years.
“Most of the jobs created by that population increase will be located in central Ohio,” Steiner adds. “Columbus is one of the most dynamic cities in Ohio, so we are seeing an influx of talent, people, and energy, and that creates a strong economic climate for development. What makes the Columbus economy healthy is that young people want to live in the area.”
Among the developments by Columbus-based Steiner + Associates is Easton Gateway in Columbus, a 54-acre (22 ha) project that will add more than 600,000 square feet (56,000 sq m) of retail space to Easton Town Center’s existing 8 million square feet (743,000 sq m) of retail, office, hotel, and residential space. A collaboration of Steiner + Associates, the Georgetown Company, and Limited Brands, Easton Gateway is positioned around a central main street–style plaza and is expected to be completed this year.
In Cincinnati, Ohio Partners, Steiner + Associates, and Bucksbaum Retail Properties are developing the 1.2 million-square-foot (115,000 sq m) Liberty Center, which includes a 200,000-square-foot (18,600 sq m) Dillard’s, an 80,000-square-foot (7,400 sq m) Dick’s Sporting Goods, and a 150-room AC Hotel by Marriott. Liberty Center is expected to open in fall 2015.
With U.S. economic growth expected to accelerate in 2015, the Midwest will come along for the ride, says Bach of Newmark Grubb Knight Frank. “Look for job growth to continue at a slightly faster pace this year, which will fill existing commercial properties and generate demand for new development,” he predicts. “Growth in a handful of midsized Midwest metros such as Indianapolis, Columbus, Madison, and Grand Rapids will outpace the region. Leasing and investor demand will be robust across the Midwest.”
Mike Sheridan is a freelance writer in Parsippany, New Jersey.
