Michigan real estate news weekly brief

Weekly Brief – April 12, 2021

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With apologies to Dickens, 2021 is the best of times for residential sellers, and the worst of times for retail landlords. There are several stories this week that emphasize this divergence in the real estate market.

First, the good news. The residential market in Michigan is still thriving. It is still an incredibly strong seller’s market. This week saw multiple stories about the rising prices for residential properties. There are, however, some clouds on the horizon. Because prices in some areas are rising so quickly, the “appraisal gap” is becoming an issue. The appraisal gap arises when the home does not appraise for the purchase price. This generally means the buyer will have to come up with more cash for a down payment, as the lender will only finance the appraised value. If this were to continue in the long term, this issue could prevent younger, less wealthy buyers from purchasing homes. The second cloud on the horizon is that because inventory remains constrained, the market volume could remain artificially low.

Now, the bad news. Stories about the pummeling retailers are taking as a result of the COVID-19 pandemic as well as the systemic shift to online retailing continues to dominate. One analyst predicts 80,000 retail locations, or 9% of all retail locations, will close in the next five years, for an annual average of 16,000 closures per year. These closures will include major anchor retailers. This compares with the previous high of 9,832 per year. As I have noted previously, malls are taking the brunt of the damage, with the increase in vacancies hitting an all-time high in the past year. Some analysts believe a quarter of malls will close in the next five years.

 

Weekly Brief – April 5

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My focus this week is on the impact of COVID-19 on the future of office space. Although I have previously discussed the impact of the global pandemic on retail (bad) and industrial uses (good), I have not devoted much time to the impact on the future of the office sector.

At this point, there is not a lot of hard data on the impact of the acceleration of remote work caused by COVID-19 on office users. This is mainly due to the fact that most office leases have not yet expired post-pandemic. So the choices made by tenants about the contraction of office space have not become evident in the market.

We are, however, starting to see some anecdotal evidence that office space needs will contract in the near term.

Ford will likely be reducing the number of employees working on-site. This decision will necessarily reduce the office space needs of Ford. This could have a significant impact on the Dearborn marketplace, especially. (This may have a double impact on Fairlane mall, as the mall is being reused as office space by Ford after the closure of anchor retail tenants).

DTE Energy recently announced it would be selling its office building in downtown Ann Arbor. The 400 employees at the site are either going to work remotely or be relocated to existing DTE office space in Detroit.

This week Crain’s also provided more anecdotal stories. Some smaller office users are reducing office space. New entrepreneurs are reducing office space. A large law firm is maintaining its office usage in Detroit. However, that decision may be due to the space being completed, and the lease having been signed pre-pandemic.

Also anecdotally, I have spoken to office users who have renegotiated existing leases to reduce square footage. Apparently, some landlords have decided that getting 100% rent on 50% of space from a tenant is better than receiving 0% rent on 100% of space, notwithstanding existing lease terms.

As this year progresses, I expect we will receive more hard data about the contraction of office space. Each month, more office leases will expire and be renegotiated for a renewal. I expect tenants will be signing leases for less space, and the vacancy rates will start to tick upward.

Weekly Brief – March 29

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Michigan’s two largest metro areas are exceptionally different.

I had the opportunity to spend time in the Grand Rapids metro area in the past week. Metro Grand Rapids development is reminiscent of the sprawl in metro Detroit in the 1990s through the early 2000s. New subdivisions and neighborhood shopping centers are under construction in many areas of metro Grand Rapids. Grand Rapids remains in a growth and sprawl mode.

The Detroit metro area, on the other hand, has matured in its development. Development in metro Detroit (excluding, perhaps, northern Macomb County and the far western edges of Oakland and Wayne Counties) is infill or reuse. Redevelopment, rather than new development, is the primary project.

Grand Rapids still has plenty of greenfield development. Those developments have the potential to be less expensive to develop, as there is less assemblage to negotiate, and fewer legacy development issues to resolve (such as utility relocation).

Grand Rapids may, in a few decades, have to deal with the reuse and infill development issues that Detroit currently confronts. However, for the time being, development in metro Grand Rapids raises entirely different issues than development in metro Detroit.

Weekly Brief – March 22

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For your consideration this week:
  1. The death of malls, which I have been discussing all year, has another casualty this week. A receiver will be taking over Partridge Creek Mall in Macomb County. A sale by its lender is likley. The Mall has no anchors and a rotating cast of dining tenants. As discussed previously (perhaps too much), malls are in a death spiral initially caused by online retail but accelerated by the COVID-19 pandemic.
  2. The pandemic claims a major hospitality casualty in Detroit. The Westin Book Cadillac, once the image of Detroit’s resurgence, is headed for foreclosure due to a lack of customers. I expect we may see more hotel failures as we continue the path to normalcy. We recently saw plans for a brand new hotel converting to senior living.
  3. The reinvigoration of Detroit’s neighborhoods continues with a plan for the East Warren/Cadieux area being unveiled. Like many plans in Detroit, investment from the public sector and quasi-public sector anchors the plan. We will know Detroit’s neighborhoods are truly back when private sector investment drives redevelopment.

Weekly Brief – March 15

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A few random topics for your consideration this week:
  1. The topic of reuse of no longer desirable real estate is starting to appear more frequently in the media. As I have discussed in several updates, the use of real estate will continue to change as the market desires change. This week, Crain’s discusses the reuse of several sites, including the Holiday Inn in Farmington Hills (discussed here previously), as well as Fairlane Mall (discussed here previously) and Briarwood Mall (also discussed here previously). Watch for reuse of real estate to become a continuing topic as retail and office uses fade.
  2. I am hearing from some individuals who would be in a position to know that the foreclosure “boom” that has been predicted may be a much smaller boom than thought. A combination of governmental assistance, mortgage servicer leniency, and post-COVID economic recovery may make the expected boom more of a small bubble.
  3. The changing desirability of malls is a nationwide issue, and is impacting even one of the most storied and successful urban malls in the country, Water Tower Place in Chicago, which is losing one anchor (Macy’s), and watching a second anchor drastically reduce its footprint (American Girl Place). If Water Tower Place is being this dramatically impacted, perhaps pessimism about even the most successful malls in Michigan is warranted (perhaps even Somerset Collection, the fate of which I discussed previously).

Weekly Brief – March 8

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This week the focus is on the prospects for the housing market in Michigan in the summer 2021 selling season.

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Now, about the 2021 selling season. We have signs from all over Michigan that this a historic seller’s market. There are reports from West Bloomfield, Metro Detroit in general, statewide, and West Michigan. The reports indicate that the seller’s market is due to a combination of low inventory, as some sellers are reluctant to sell (because they will then have to buy), and low mortgage interest rates.

To be sure, the phenomenon is not unique to Michigan. There is low inventory nationally. However, listings in Michigan are down 54 percent in January, compared to only 42 percent nationally.

What can’t be known yet is what will happen in 2022. Will the market be flooded by foreclosed homes? Will mortgage rates inch up, bringing prices down? There is no crystal ball, obviously. But for this year, it appears the seller’s market is set. Prices are going to increase, and inventory will remain constrained.

Weekly Brief – March 1, 2021

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This week’s discussion is about change. Although it is hopelessly cliche, the only constant in the real estate marketplace is change.

In past weeks, I have discussed the change that will be caused by the decline of bricks and mortar retail (especially malls), the rise of cannabis-related uses, the decline of video stores, and the long-term impact of electric and autonomous vehicles.

This week brings several stories about further changes. In Farmington Hills, we see a brand new hotel development quickly pivoting to senior housing. Also in Farmington Hills, we see vacant industrial space being redeveloped into multifamily housing.

At the national level, we see L Brands shifting its Bath & Body Works store mix away from mall locations. L Brands is also continuing to see its store count for Victoria’s Secret, another mall retailer, decline. And near Kalamazoo, we have another mall that is about to fail. All of these mall locations will be the subject of reuse.

Change is constant in real estate.

 

Weekly Brief – February 22, 2021

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As I discussed last week, the impact of mortgage forbearance and foreclosures on the residential market remains unknown. There are multiple variables that could impact the ultimate effect: government intervention, the outcome of the COVID-19 pandemic, and the state of the economy and job growth when foreclosures are once again allowed.

The Biden administration bought more time for job growth and to bring an end to the economic impact of the COVID-19 pandemic this week by extending the foreclosure moratorium, which was set to expire on March 31. The moratorium now lasts until (at least) June 30. This gives the economy another three (3) months to recover. From an optimistic viewpoint, this could blunt the impact of foreclosures, as more borrowers could get back on firm financial footing during this three-month period. A pessimist might argue that this only kicks the can down the road another three months.

Regardless of your viewpoint, this extension does delay the potential impact of foreclosures on the residential market. As has been noted in several articles, residential prices are growing at a brisk pace. A glut of foreclosures could slow down that price growth. However, given the timing to process a foreclosure, the redemption period, and the post-possession sale process, it does not appear that foreclosed properties will hit the market until late in Q3 2022, or early Q4 2022, given this new extension of the foreclosure moratorium.

The residential market in Michigan remains strongly favorable to sellers. Inventory is limited, and demand remains strong. Perhaps in 2022 the entry of foreclosed properties to the marketplace will shift the pendulum back in the buyer’s direction.

Weekly Brief – February 15, 2021

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One of the biggest unknowns of the real estate market in 2021 is the impact of the lifting of COVD-19 forbearances, and the expiration of foreclosure moratoria.

The number of mortgage loans in forbearance is still quite high, at 5.38%. And the pace of borrowers exiting forbearance plans is the lowest since tracking began in the summer of 2020. This could mean that borrowers are unable to resume regular mortgage payments due to continuing weakness in the economy.

However, some commentators argue that an accelerating economic recovery due to the reduced impact of the COVID-19 pandemic will lead to borrowers being in a position to resume mortgage payments. If this is the case, the rate of foreclosures once moratoria are lifted could be lower than expected.

The other unknown variable is whether we will see further governmental relief targeted to the housing and mortgage industries. This could be an x-factor that upends the normal market forces.

Obviously, the rate of foreclosures will have a significant impact on home prices. Right now, home sales are increasing at a healthy rate. Perhaps even too quickly. Too many foreclosures, however, could shift that pendulum back to stagnant, or even decreasing home prices.

The ultimate outcome of the COVID-19 economic crisis and its impact on housing prices will be a trend to watch this summer and in 2022.

Weekly Brief – February 8, 2021

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The mall is dead. Actually, in my opinion, the mall has been dead for several years. But no one has bothered to tell the mall.

COVID-19 may have dealt the final blow to malls. But the downward spiral began, quietly, on July 5, 1994: The founding of Amazon.

Amazon provides a virtually limitless selection of consumer products in one location. Gone are the days of leisurely strolling from store to store to find the perfect item. That item is a few clicks away on Amazon. The introduction of Amazon Prime in 2005, with two-day shipping, has accelerated the demise of bricks-and-mortar retail.

In the past year, over 20 national retailers have filed for bankruptcy protection. The next 12 months will be worse. Paycheck Protection Program loans and landlord leniency have merely kicked the can down the road for most retailers. In Metro Detroit, both Partridge Creek and (especially) Fairlane are doomed to fail as currently constituted. Lakeside Mall has already been sold to an owner (for less than $18/sf). The new owner is planning reuse involving “dynamic mixed-use destinations.”

Even the once-untouchable Somerset Collection has been impacted by vacancies, as well as the recent bankruptcy of one anchor (Neiman Marcus), and the potential bankruptcy of a second anchor (Macy’s). Even Nordstrom is not immune to the impact of online retailing, closing 15% of its full-line stores in 2020.

So what is to become of these once-proud regional malls? Expect reuses involving a mix of alternate uses (mega-churches, fitness centers), multi-family residential, and other less desirable uses (waterparks, etc.). One potential user is the villain itself: Amazon. Amazon could be a prime user of anchor space for fulfillment, order pickup, and small-scale retail (4-Star stores). But Amazon will not be paying the rent, and will not be drawing the foot traffic, that malls need to survive as currently constituted.

The mall is dead.