Investors holding on to industrial real estate are seeing opportunities to cash out as selling prices have been on the rise since the second quarter of 2006.
Driving up prices and demand are risk-tolerant national investors eager to buy at prices lower than in other national markets, betting that the market will stabilize and net a high return.
Industrial property in the Detroit market sold for an average of $50.61 per square foot in the second quarter of 2007, according to Rosemont, Ill.-based Grubb & Ellis, up from a 2006 average of $45.32 and a 2005 average of $48.50.
Dealmakers are keeping an eye on capitalization rates for properties — net operating income divided by property value — and finding indicators of high rates of return in the future based on the leasing rates and current property values.
“People are looking at cap rates of 6 or 7 percent in other markets, but here they’re finding some at 10 or even 11 percent cap rates,” said Lauren Scarpace, a senior associate specializing in industrial brokerage services with the Southfield office of El Segundo, Calif.-based CB Richard Ellis. “So local investors are seeing a chance to get a higher price for their property.”
At the end of the second quarter, Bethesda, Md.-based CoStar Group reports an average cap rate for the market at 8.67 percent, compared with a national average of 7.48 percent. That gap, professionals say, has drawn greater interest from companies not typically involved in the Detroit-area market.
“We buy and sell a lot of real estate in Michigan, but lately we’ve been doing more selling than buying,” said Larry Emmons, regional director in the Southfield office of Chicago-based REIT First Industrial.
The REIT, which has owned property in Michigan since 1994, sold 400,000 square feet of space in 2007 — all to companies new to the market, he said.
A property at 27651 Hildebrandt Road in Romulus is an example. First Industrial was the developer and owner of the 302,000-square-foot property and sold it to Houston-based Pinchal & Co. in April for $17.6 million.
Brokers also point to the ongoing sale of properties owned by Philadelphia-based Liberty Property Trust, which has been in Michigan since 1998. Company officials previously announced plans to sell all of the roughly 4 million square feet in the area.
In May, Bloomington, Minn.-based WelschCo, through Welsch US Real Estate Fund L.L.C. bought 1.4 million square feet of property from Liberty, marking Welsch’s first entry into Michigan. (Crain’s, June 4)
Scarpace said companies selling properties in Michigan have been buying property in growth markets such as Louisville, the Carolinas and Florida.
Dan Labes, a senior vice president with Grubb & Ellis, expects the second half of the year to show continued out-of-town interest.
He also expects leasing and sales to pick up later in the year. Some companies have yet to execute lease expansions or sales because they are waiting for signs the market has bottomed out, for example.
“Once the labor negotiations are completed and the dust has settled on the acquisition of Chrysler, I think you’re going to see more momentum in the market,” he said.
By ">Daniel Duggan, Crain’s Detroit Business