11 November 2010

Detroit, Flint may be Diamonds in the Rough, real estate Investors say

Crain's Detroit Business

Commercial real estate executives put some perspective on a national report tagging the Detroit market as one of the worst in the country, saying there are bright spots and opportunities in the local real estate market.

The national Emerging Trends commercial real estate report was presented during the University of Michigan and Urban Land Institute's 24th annual Real Estate Forum today.

The study, by ULI and PricewaterhouseCoopers put the Detroit market at the bottom of markets to invest in.

The report was presented during the first day of the two-day event. Today's forum focused on Flint's efforts to re-invent its downtown.

"Sparking Reinvention: The Evolution of a Factory Town," today's opening panel, featured investors and developers who have leveraged private money against public money to develop and redevelop many of the city's downtown buildings.

But the dose of reality today came from the annual ULI Emerging Trends report, presented by Tom Murphy, former mayor of Pittsburgh and a senior resident fellow with ULI.

In a national context, Detroit ranked at the bottom of the list for markets to watch for commercial and multi-family real estate investment as well as the bottom for markets to watch for new development and for for-sale homebuilding.

All three of those lists were topped by Washington followed by New York, San Francisco, Boston and Seattle.

The report predicted a continued "bifurcated market" nationally where the trophy and trash properties are most popular. It said investors are looking for either highly sought-after buildings or bargain-basement deals expected to bring a high return.

It also called for tempered expectations from investors. While prices are low and opportunities plenty, it said "don't try to shoot the lights out and expect outsized returns."

Other best bets for 2011, the report said, are locking in debt at historically low rates, focused investment in global gateways and 24-hour markets, as well as favoring in-fill development over fringe development.

Following the report's presentation, local real estate executives said that while there are fewer national investors interested in the Detroit market, it makes for more opportunities for local investors.

In addition, the low point in the market is forcing communities and investors to make the hard decisions to put properties in position for the future.

"This is forcing us to do the right things," said Jim Becker, international managing director of the Detroit office of Jones Lang LaSalle.

"Cities, such as Detroit and Flint, are looking at ways to revitalize and retract into manageable zones."

On the retail side, everything changed in 2008, said Chris Brochert, a partner with the Lormax Stern Development Co.

"We went from calling ourselves developers to calling ourselves investors and property managers," he said.

And as the national investors leave, Brochert said there are more and more opportunities for local firms.

"Those who stay here have the ability to make a tremendous amount of money," he said. "They have the chance to get in on the ground floor."

Later in the day, the Real Estate Excellence Awards were presented for Lease of the Year, Development of the Year along with the overall Real Estate Excellence Award.

Crain's Detroit Business is a sponsor of the awards and of the Real Estate Forum.

• Lease of the Year was given to the 465,000-square-foot lease signed by Blue Cross Blue Shield of Michigan at the Renaissance Center in Detroit. Mark Wallace, leasing director for the Renaissance Center accepted the award.

• Development of the Year was given to the BAE Systems facility in Sterling Heights, the defense company making use of the vacant TRW manufacturing facility. Accepting the award was Brandon Podolski, a project manager with Southfield-based Plante Moran Cresa, the firm which has represented BAE on the project.

• The overall Real Estate Excellence Award was given to David Friedman, president and CEO of the Friedman Real Estate Group.

During a panel discussion of the winners following the event, Friedman said there is increasing demand in the city of Detroit as companies such as Quicken Loans Inc. want to use a city location as a recruiting tool.

"The reality is that the younger generation pool wants to be in an urban setting," said Friedman.

Podolski pointed out that there are more and more examples of the local economy diversifying into new industries such as defense.

"And as Michigan continues to diversify, the talent pool here remains tremendous, and is a draw for the companies interested in locating here," he said. "BAE came here for the engineers that are available."

Wallace said the key to new developments and business growth will be for the private sector and local governments to work together in public-private partnerships.

"I expect to see more collaboration in the future," he said. "It has to happen."

Earlier in the day, panelists gave presentations on the strategies needed to redevelop the Flint's downtown.

Calling themselves the "Uptown Six" a group of investors and developers gave specific examples of the disciplined approach to investing downtown.

"This morphed out of a few business leaders who had enough with the boarded-up buildings in town, who had done well for themselves and wanted to do the right thing and give back," said Tim Herman, president of the Uptown Reinvestment Corp., an umbrella group made up of public and private executives and leaders.

Asked how the private sector members got involved, Phil Shaltz, a member of the group, quipped "beyond stupidity?"

"So many times, you have seen the investors, the so-called carpetbaggers who aren't from the city," said Shaltz, president of Shaltz Automation. "They want to build casinos and other projects that a community doesn't really need.

"Our return on investment is different from what an outside investor would see as an ROI. We want to salvage downtown Flint, and that's part of our ROI."

The Uptown Six started with three rules:

• They would invest $167,000 each, and no more.

• There would be no personal guarantees on loans.

• And third, they vowed to never give up.

"Fortunately, we have only violated the first two," Shaltz said, noting there are more than $20 million in personal guarantees on their loans, meaning that if projects fail, the group members will be personally responsible for repaying the money.

The Flint panel was moderated by Scott Whipple, development manager for Uptown Developments LLC, the for-profit investment group which has overseen development and investment in the city.

Herman said the for-profit corporation was used to collect the private money, acquire loans and purchase properties.

It now has control over 12 properties representing $64 million in investment.

The process involved a series of bank loans which were paid off with a combination of grants from non-profit organizations and the Michigan Economic Development Corp.

"So what started with an $800,000 loan has now become nearly $70 million on the books," Herman said.

Troy Farah, co-managing partner of Flint-based development company West Second Street Associates said another key was to work on office projects that bring in the anchor tenant as a partner in the development.

"We've used a lot of investment tools," he said. "But the most important parts have been patient capital and sweat equity."

The use of fa├žade grants have been used, as well as brownfield tax credits and new market tax credits, as well as leveraged loans from groups such as the Flint-based C.S. Mott Foundation.

Shaltz added that as investors, this group has nowhere to go.

During a welcome address, Flint Mayor Dayne Walling gave a positive take on the city's progress, pointing to the crucial aspect of private participation from the business leaders in the city.

The keys to investment, he said, are collaboration, grassroots involvement, imagination, smart planning and preservation of culture.

Seeing the city's population drop from 200,000 at its peak in 1955 to the current level of nearly 100,000 shouldn't be a cause of concern, he said, choosing to focus on the recent redevelopment of buildings in the city's downtown.

"We truly are sparking a reinvention here," he said. "We are evolving from a factory town to a more diverse economy. And I'm fired up about our progress."

The event continues Thursday with guided bus tours of Flint and closing with a keynote address by Toni Griffin, the consultant hired to guide Detroit in its efforts to reconfigure the city.

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