Does commercial real estate in southeast Michigan offer the most outstanding investment potential anywhere in the country right now? Some investors think so. When the great recession fully took hold in late 2008, the entire real estate market, both locally and nationally, plummeted in price creating a once in a lifetime opportunity for all cash investors. There have been a handful of high-profile transactions in the past few months with the promise of more to come in 2012. The buyers range from out-of-town value seekers to savvy local investors. Here are two examples:
West Tech Park is one of the premiere R&D/Flex developments in the suburban west side market. It sits prominently at the corner of Haggerty Road and the busy I-696/I-275 Interchanges in Farmington Hills, Michigan. Totaling nine (9) buildings, and over 278,000 SF in size, it was originally developed in the late 1980’s by a partnership of well-known local developer REDICO and TIAA-CREF, the giant teacher’s pension fund in New York. West Tech Park has had a few other prominent owners over the years, including Pennsylvania based Liberty Property Trust, Iowa based Principal Life Insurance Company and of late, ETC Capital LLC, which is backed by local 5-Hour Energy entrepreneur Manoj Bhargava. ETC Capital was able to acquire West Tech Park for $8.5 million, or $30 per square foot. This is less than 50% of the cost to construct the property back in 1987, when asking rents alone topped the market at $12.00 to $13.00 per square foot. Now granted, the new Landlord will have to invest additional dollars to maintain the property and outfit it for new tenants (the property was only 32% occupied at the time of purchase according to CoStar.com), but ETC Capital will be competing for those tenants with a base investment significantly lower than many of the competing area properties. Bhargava, through another entity, recently purchased a modern Plymouth Township building formerly occupied by Johnson Controls for a mere $22 per square foot. Again, this just is a fraction of the cost to construct this building back in 1996. One can only conclude that Bhargava knows great value when he sees it, and believes in the long-term prosperity of Metro Detroit.
There is an old adage that says “you make money in real estate when you buy, not when you sell.” Having a lower basis in your investment than your competitor allows you to undercut the market in good times and bad, attract and keep more tenants and keep cash flow strong.
The David Stott Building in downtown Detroit, located at 1150 Griswold Street, is a 163,000 square foot, 41-story classic icon on the Detroit skyline that was constructed in 1929. After years of neglect and yet another foreclosure action, enter Fort Lauderdale investor Emre Uralli. Through his investment firm Citi Investment LLC, Uralli purchased the property for just under $900,000.00, or $5.52 per square foot according to CoStar. Yet another example of value investing, this property was originally constructed for $3.5 million in 1928, or $46.3 million in today’s dollars according to Crain’s Detroit Business. Uralli is new to the area, and in an interview with Crain’s reporter Dan Duggan stated of Detroit, “there is no better value in the world and that’s why I’m here.” From Fort Lauderdale to Detroit? There must be some Elmore Leonard twist in Mr. Uralli’s plan, but I cannot quite put my finger on it. Here again, the new Landlord will have to invest additional dollars (millions in this case) to maintain the property and complete tenant improvements, but will be able to compete at a much lower basis than much of the competition. In 2008, the 289,000 square foot, 14-story, former headquarters for the Detroit Free Press, located at 321 West Lafayette, was purchased by Free Press Holdings LLC, another Uralli investment firm. Having traded the sun soaked beaches of Fort Lauderdale for the harsh winters of Detroit you can only conclude that Uralli sees great value here in something other than our weather!
The unprecedented swoon in the commercial real estate market has created a once in a lifetime opportunity for value investors. It’s time to buy commercial property in Detroit!