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Detroit Industrial Market Braces as Big Three Adjust Investment Strategy

Detroit, MI (01/10/2019)

11:00 AM

Newmark Knight Frank (NKF) released its fourth quarter 2018 industrial trends data for the Detroit region this week. According to the reports, a shift in the automotive industry's investments will likely lead to a higher demand for more modern industrial facilities in the region.

General Motors and Ford Motor Company are shifting investments from traditional passenger cars to more profitable trucks and SUVs while also increasing investments in electric and autonomous vehicles. This reallocation of investments has led to the planned closing of five plants, including two in metro Detroit: Detroit-Hamtramck Assembly and Warren Transmission. Looking at automotive sales trends, the reallocation of investments makes sense. According to market researchers at J.D. Power and Associates, sales of traditional passenger cars have fallen to just one-third of light vehicle sales, compared with nearly half in 2014. Declining demand has left the Big Three (General Motors, Ford and Fiat Chrysler) operating at overcapacity in many plants. According to Reuters and LMC Automotive, after GM ends production next year at factories in Michigan, Ohio and Ontario, it will still have four U.S. car plants, all operating at less than 50 percent of rated capacity. By comparison, Ford Motor Company and Fiat Chrysler Automobiles NV will have one car plant each in North America after 2019. As demand for heavy vehicles surges, companies like Ford are shifting hundreds of automotive workers to plants producing SUVs. Although these cuts will likely lead to new industrial vacancies from suppliers close to the sedan market, investments elsewhere are likely to pick up much of those losses. The Big Three and their suppliers are increasing investments in electric and autonomous vehicles. In turn, these investments are spurring new construction and expansion in the metro Detroit industrial market. This is particularly evident in Auburn Hills with Samsung SDI America, Inc.'s new vehicle battery pack factory and WABCO's new autonomous and electric (ACE) commercial vehicles technologies facility. Additionally, Ford plans to invest hundreds of millions of dollars in a new autonomous campus in Detroit. With vacancies at record lows, new construction from both the automotive and e-commerce industries continues to drive the metro Detroit industrial market. During the fourth quarter of 2018, eight new facilities were completed for a total of 3.4 million square feet for Amazon, Inc., Flex-N-Gate Corp, Hino Motors, Esys Corporation, Orotex Corporation and Penske Logistics.

"The shifting dynamic in the automotive industry will likely lead to new industrial vacancies from suppliers close to the sedan market," said Fred Liesveld, managing director of NKF's Detroit office. "At the same time, increased investments in profitable trucks and SUVs as well as development of electric and autonomous vehicles will foster demand for more modern industrial facilities."

Southeast Oakland County
The Southeast Oakland County industrial vacancy rate fell 10 basis points to 3.3 percent during the fourth quarter, as just over 259,000 square feet was absorbed. Investments in electric and autonomous vehicles continue to spur construction and expansions in the submarket. In Auburn Hills, WABCO completed construction of its 102,000-square-foot build-to-suit facility at 1220 Pacific Drive, where the company will develop its autonomous, connected and electric (ACE) commercial vehicle technologies. Samsung SDI America, Inc. will complete the build-out of its new, 137,000-square-foot, $62.0 million electric vehicle battery pack factory at 50 Continental Drive in Auburn Hills. Meanwhile, Esys Corporation moved into its newly completed 124,000-square-foot building on Brown Road. In addition to building new space, many companies are expanding at their existing facilities. Rand Construction recently completed a 24,000-square-foot expansion to the MiDAS Foods International building in Oak Park. Kirco Manix is building a 50,000-square-foot addition to Kay Graphics' facility in Orion Township, while Alpine Electronics is expanding by 11,000 square feet on Atlantic Boulevard in Auburn Hills. New construction does not appear to be abating, either. German auto supplier KOSTAL Kontakt Systems Inc. plans to begin building in 2019 a 250,000-square-foot manufacturing facility in the Avon Industrial Park in Rochester. On the speculative construction front, Ashley Capital is clearing the way for a new development at Hazel Park's former horse racing track. This development follows the highly successful 575,000-square-foot Tri-County Commerce Center, which was completed in 2017 and nearly fully occupied by Amazon.com, LG Electronics and Bridgewater Interiors. Ashley Capital is planning two additional buildings for the former race track, one comprising 650,000 square feet and the other 840,000 square feet, which will accommodate manufacturing or bulk warehouse users. Southeast Oakland has been a hotbed for new construction with 24 new industrial facilities completed since 2014, totaling just over 3.1 million square feet. During the fourth quarter, the only active construction project underway was FANUC America Corporation's 461,000-square-foot build-to-suit on Entrance Drive in Rochester Hills. Notable deals during the quarter included GST Auto Leather's 65,000-square-foot lease on Waterview Drive in Rochester Hills; Superior Electric Great Lakes Company's purchase of a 52,000-square-foot building at 1740 East Maple Road in Troy; and P3 North America, Inc.'s 35,000-square-foot lease on Spartan Street in Madison Heights.

Southwestern Oakland County
Southwest Oakland has the highest number of active construction projects with 13 buildings under construction, despite an influx of existing vacant space coming on the market. During the previous quarter, the submarket saw a 203,000-square-foot new vacancy at 30240 Oak Creek Drive in Wixom. This was followed by a 130,000-square-foot vacancy on Eight Mile in Southfield and a 101,000-square-foot vacancy on Martin Drive in Wixom during the fourth quarter. For the year, submarket's vacancy rate has climbed 70 basis points to 6.7 percent during the fourth quarter. The latest construction completion was Hino Motors' 124,000-square-foot facility on Taft Road and Orotex Corporation's 60,000-square-foot expansion on Venture Drive in Novi. The submarket has more build-to-suits and speculative developments in the pipeline. In Novi, build-to-suit projects for Berkshire E-Supply (211,610 square feet) and A-123 (128,936 square feet) are scheduled for completion in early 2019. In addition, Autoliv ASP is expected to complete construction of an 180,000-square-foot build-to-suit on Bridge Street in Southfield by mid-2019. On the speculative front, the submarket has nine developments. Burton-Katzman Development Company has the largest with an 110,000-square-foot facility on Beck Road in Wixom. Meanwhile, Quadrants Inc. is developing a 95,000 and a 61,000-square-foot speculative development on Automation Court. The balance of the speculative developments are geared toward mid-market-size users requiring 20,000 to 40,000 square feet.

Macomb County
The Macomb County industrial submarket vacancy rate fell 10 basis points to 2.0 percent during the fourth quarter, as just over 1 million square feet was absorbed. Amazon completed construction of its new, 1.0 million-square-foot fulfillment center in Shelby Township. This is Amazon's third million-square-foot distribution facility in Metro Detroit. Notable deals included the sale of 65,000 square feet at 23751-23801 Hoover Road in Warren to Verdant Realty Group; Daiek Woodworks' purchase of a 33,000-square-foot building at 14981 Thirty-Two Mile Road in Romeo; and Great Lakes Trucking MI, Inc.'s purchase of a 25,000-square-foot facility at 2700 East Nine Mile Road in Warren. On the construction front, HTI Cybernetics Inc. announced plans to finish-to-suit a former 189,000-square-foot speculative manufacturing facility on the former Sunnybrook golf course in Sterling Heights. Other ongoing build-to-suits include Lanzen Fabricating Inc.'s 92,000-square-foot facility in Romeo and Mor-Tech Design's 43,000-square-foot facility in Sterling Heights. Meanwhile, four ongoing speculation construction projects will add just over 671,000 square feet of space to the market in 2019, the largest being Ashley Capital's 569,000-square-foot Liberty Park development on Mound Road in Sterling Heights. The project is expected to fill up fast, as the county's 2.0 percent vacancy leaves very few options for companies looking for large-block/high dock density space. The four other speculative developments in Macomb Township, Romeo and Shelby Township are targeting smaller users, in the 20,000 to 40,000-square-foot range. These projects are expected to be completed in early 2019.

Southern Wayne County
The Southern Wayne County industrial market saw the completion of two major construction projects during the fourth quarter, Amazon's 856,000-square-foot fulfillment center at 32801 Ecorse Road and Penske Logistics' new, 606,000-square-foot distribution center in Romulus. The submarket also saw a few sizable leases in existing space, notably General Transit and Warehouse's 85,000-square-foot lease at 18700 Meginnity Street in Melvindale and Daehan Solution's 26,000-square-foot lease at Aeroplex Two in Romulus. Southern Wayne County's vacancy rate remains critically low at just 2.5 percent. The submarket's only construction project is a 150,000-square-foot build-to-suit for ProTrans in Romulus. The submarket's 13 million-square-foot Class A bulk warehouse inventory has a vacancy rate of just 1.5 percent, while the Class B bulk warehouse inventory of 13.5 million square feet has a vacancy rate of just 2.3 percent. The lack of speculative construction in the submarket will continue to put a strain on bulk warehouse users in the market while keeping upward pressure on lease rates. Over the past three years, asking rates for bulk warehouse space have climbed 35 percent. With the high likelihood that vacancy will remain below 3.0 percent, developers are prepping new sites for development. Development firm Wildamere is planning a 311,000-square-foot bulk warehouse development known as the Airport Logistics Center on Cogswell Road in Romulus. Ashley Capital is planning an addition to its Crossroads Distribution Center in Van Buren Township that could total up to 660,000 square feet, while Spartan Real Estate Group LLC is planning a 416,000-square-foot development on Ecorse Road in Romulus.

Western Wayne County
The Western Wayne Industrial market vacancy rate fell 20 basis to 2.7 percent during the fourth quarter, as just over 146,000 square feet was absorbed. Notable deals included Anderson Process' 35,000-square-foot lease on Concept Drive in Plymouth and Best Supply Company, Inc.'s 31,000-square-foot lease on Sears Drive in Livonia. On the construction front, two build-to-suit projects will near completion going into 2019: Republic National Distributing Company's 500,000-square-foot bulk warehouse facility on Eckles Road in Livonia and Tenneco Inc.'s 100,000-square-foot facility on Technology Drive in Northville. In speculative development, Frankel Associates is building two facilities called the Haggerty II Corporate Park in Canton that will accommodate either a 67,000 or a 46,000-square-foot user.

The city of Detroit's industrial vacancy fell 20 basis points to 12.1 percent during the fourth quarter, as just over 518,000 square feet was absorbed. The bulk of the absorption came from Flex-N-Gate Corporation completing its 480,000-square-foot manufacturing facility on the city's northeast side. Meanwhile, Ford Motor Company began redeveloping Michigan Central Station. By 2022, Ford plans to create a 1.2 million-square-foot campus that will be a new hub for autonomous and electric vehicle research.

About Newmark Knight Frank
Newmark Knight Frank ("NKF"), operated by Newmark Group, Inc. ("Newmark Group") (NASDAQ: NMRK), is one of the world's leading and most trusted commercial real estate advisory firms, offering a complete suite of services and products for both owners and occupiers. Together with London-based partner Knight Frank and independently-owned offices, NKF's 16,000 professionals operate from approximately 430 offices on six continents. NKF's investor/owner services and products include investment sales, agency leasing, property management, valuation and advisory, diligence, underwriting, government-sponsored enterprise lending, loan servicing, debt and structured finance and loan sales. Occupier services and products include tenant representation, real estate management technology systems, workplace and occupancy strategy, global corporate services consulting, project management, lease administration and facilities management. For further information, visit www.ngkf.com.

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