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Market Intelligence Report 2013: Detroit

Greater Detroit is bridging a recovering automotive industry with investments in competitive emerging technologies and hospitals. These and other efforts at economic recovery will prove crucial for Detroit’s hotel industry in the coming years.
Preston Puleo

Birthplace of the automobile, Detroit’s legacy still largely depends upon the strength of the “Big Three” car companies: General Motors, Ford Motor Company, and Chrysler. These companies produce more than vehicles and jobs along the assembly line; in April of 2013, Crain’s Detroit Business reported that up to 650 IT workers are being sought this year by General Motors, Ford, and Chrysler. This announcement underscores the efforts that Detroit has made to diversify and modernize its economic base. Greater Detroit has become competitive in emerging technologies such as biotechnology, nanotechnology, information technology, and hydrogen fuel cell development. There is no doubt that the city has suffered years of financial disarray on levels worse than virtually any other U.S. big city, and in March of 2013, an emergency manager was appointed to oversee Detroit’s efforts at economic recovery. Nevertheless, it is an understatement to say the city has much room to grow, and the right moves in the next several years will be crucial for Detroit’s hotel industry.

Economy Update
Detroit’s economy rests on its century-old auto-making foundation. The Big Three automakers have made significant efforts to retool their business strategies over the past several years, with financial difficulties temporarily halting production at General Motors’ and Chrysler’s manufacturing facilities. Production for these companies resumed in 2010, which has had a positive impact on the Metro Detroit economy. Measures taken by the federal government have aided the recovery of the automotive industry over the past few years, with the Big Three each posting significant increases in revenue in 2011 and 2012. Attendance at the 2013 North American International Auto Show in January was reportedly the strongest since 2004, another sign of the auto industry’s contribution to the local economy.

Metro Detroit ranks among the nation’s top five financial districts, with major employers including Quicken Loans, KPMG, Fifth Third Bank, Comerica, Deloitte, Ernst & Young, and PricewaterhouseCoopers. Leading information technology (IT) and computer software companies with a major presence or headquarters in the metro area include Compuware, Electronic Data Systems (EDS), IBM, Google, and Covansys. EDS's regional headquarters in Detroit constitute one of the company's largest global employment centers.

Detroit’s network of highly regarded hospitals includes the Detroit Medical Center (DMC), the Henry Ford Health System, the St. John Providence Health System, and the John D. Dingell VA Medical Center. In January of 2011, Vanguard Health Systems acquired the Detroit Medical Center and has agreed to invest an estimated $350 million in routine capital improvements and an additional $500 million in specific capital projects. Henry Ford Health System, one of the nation's largest and most comprehensive integrated healthcare systems, expanded its reach with the opening of the Henry Ford Medical Center–Ford Road, two Oakland County medical centers, and the expansion of the Henry Ford Medical Center–Harbortown in 2011; the institution is also constructing a medical distribution center for Cardinal Health in 2012/13.

The primary convention facility serving the southeastern Michigan region is Detroit’s 2.4-million-square-foot Cobo Center. The center is attached to Cobo Hall, an entertainment venue, and Joe Louis Arena, home of the Detroit Red Wings. Cobo Center is also linked to Downtown Detroit hotels and entertainment districts via the Detroit People Mover, an elevated railway system. The Detroit Regional Convention Facility Authority plans to invest more than $300 million in state funds in the Cobo Center by 2014 to fully renovate and expand the facility, a project that is currently in its final phase.

Metro Detroit’s economy suffered major setbacks due to the near collapse of the U.S. automobile industry between 2008 and 2009. The resultant restructuring and rebuilding of the auto industry in the years that followed, along with continued challenges in the residential real estate market, left the Detroit market one of the hardest hit in the nation. Factors contributing to an improved economic outlook for the region include the resurgence of the Big Three automakers and the continued diversification of local employers.
The following table illustrates historical and projected employment, population, and income data for the overall Detroit market.

HISTORICAL & PROJECTED EMPLOYMENT, HOUSEHOLDS, POPULATION,
AND HOUSEHOLD INCOME STATISTICS




For the Detroit market, of the roughly 1,850,000 persons employed, 30% work in offices and are categorized as office employees, while 18% are categorized as industrial employees. Total employment decreased by an average annual compound rate of -3.5% during the recession of 2007 to 2010, followed by an improvement of 1.6% from 2010 to 2012. By comparison, office employment reflected compound change rates of -3.4% and 1.3% during the same respective periods. Total employment is expected to expand by 0.8% and office employment by 1.0% in 2013. Total employment is anticipated to improve at an average annual compound rate of 1.4% from 2012 to 2017, and office employment is forecast to improve by 2.1% on average annually during the same time frame. With a significant number of potential workers still unemployed in Metro Detroit, this pace of employment gains would have to continue for several years before the labor market markedly strengthens.

The following table illustrates unemployment statistics for Wayne County, the Detroit MSA, the state of Michigan, and the U.S. from 2002 through 2011.

UNEMPLOYMENT STATISTICS



The extraordinarily high unemployment rates in Detroit from 2009 to 2011 stem from the difficulties automakers faced during that time, including shutdowns at plants and many of the area’s 4,000 manufacturing facilities. General Motors and Chrysler emerged from bankruptcy restructurings in 2009, which began to reverse the trend of massive job losses. Most recently, unemployment rates rose in both the county and MSA as the city government's restructuring resulted in layoffs.

One key constraint on employment growth in Metro Detroit is the privately owned, aging Ambassador Bridge, which links the city with Canada. According to market officials, Canada will assume the cost of what the nation says is its “top infrastructure project,” the proposed Detroit River International Crossing. The proposed $140-million M-1 rail circulator and 35-acre, $650-million entertainment district anchored by a new multipurpose arena for the Detroit Red Wings should be catalysts for continued job growth, economic vitality, and urban renewal throughout Detroit.

Office Space Market Update
The following table details Detroit’s office space statistics, which are important indicators of the market’s propensity to attract commercial hotel demand.

OFFICE SPACE STATISTICS – MARKET OVERVIEW



The majority of Metro Detroit’s office space is located in the Central Business District (CBD), Southfield, and Troy submarkets. The area’s overall vacancy rate of 26.1% is among the highest in the nation. Average asking rent stands at $18.87. New supply is limited to a few projects, and total inventory is falling due to conversions, demolitions, and abandonment. Nevertheless, demand for office space remains weak.

The following table illustrates a trend of office space statistics for the overall Detroit market.

HISTORICAL AND PROJECTED OFFICE SPACE STATISTICS – GREATER MARKET



Following several years of declining occupancy, the Detroit office market strengthened in 2011 and again in 2012. The Downtown submarket, currently under redevelopment, is becoming more attractive as a relocation destination for businesses and corporations. Amenities such as the Detroit People Mover, a burgeoning entertainment district, an expanding number of retail outlets, and various infrastructure improvements are helping to secure this reputation. The City has cleared sections of land while retaining a number of historically significant vacant buildings in order to spur development in the downtown area. Other advantages include a wireless Internet zone, business tax incentives, loan assistance, and the Detroit International Riverfront. David Broderick Tower, David Whitney Building, Iodent Building, Elliott Building, and 1001 Woodward represent various stages of the development pipeline, ranging from new construction to rehabilitation. Revitalization efforts have strengthened a migration trend to the CBD from the suburbs, with Blue Cross Blue Shield of Michigan, Compuware, DTE Energy, General Motors, Quicken Loans, and Strategic Staffing Solutions either moving headquarters or more employees downtown.

Hotel Construction Update
According to HVS research, two new hotels are currently in the pipeline:

     • Crowne Plaza Detroit Downtown Convention Center
     • Aloft Detroit

While many new hotels are expected to enter the market in the coming years, the percentage increase to the overall market supply will be minimal. The 367-room Crowne Plaza Detroit Downtown Convention Center is slated to enter the market in June of 2013. The hotel was originally constructed as The Pontchartrain in 1965 and later operated as the Crowne Plaza Detroit Pontchartrain, the Sheraton Detroit Riverside, and the Detroit Riverside Hotel. In March of 2012, investors purchased the property, which is undergoing a $5-million renovation.

The 136-room Aloft Detroit is scheduled to enter the market in July of 2014; the property will also offer 108 condominium units. The hotel was originally constructed as an office building in 1914 and is currently undergoing an extensive $82-million renovation.

A 75-room boutique hotel, the only proposed property confirmed at present for the market, would be located adjacent to the Cobo Center in the former Detroit Fire Department’s headquarters building.

Outlook on Market Occupancy and Average Rate
Chrysler, Ford, General Motors, and other companies in the automotive industry are expected to increase room-night production in the near term with training, research and development, and manufacturing efforts. The recent resumption of recruiting and training at entities such as Detroit Medical Center, Wayne State University, and state and federal agencies also bodes well for commercial and government room-night generation. Demand within the meeting and group segment should increase as well, concurrent with the extensive renovation and expansion of the Cobo Center and the continued recovery of the automotive industry.

Leisure demand in the area is generally seasonal and is driven largely by the presence of the Greektown Casino Hotel, the MotorCity Casino Hotel, and the MGM Grand Detroit; however, the entrance of casino gaming in neighboring states and the expansion and renovation of Canada's largest casino, Caesars Windsor Hotel & Casino, will lessen the draw of Detroit’s gaming venues in the near term. Nevertheless, downtown revitalization efforts and the presence of Comerica Park, Joe Louis Arena, and Ford Field have brought an increasing number of sporting and music events to Detroit. With economic conditions continuing to strengthen, demand within the leisure segment should note modest growth.

Long-term occupancy growth will be tempered by the entrance of new supply and the restructuring of Detroit’s city government, while the introduction of new businesses to the area should support increases in average rate. Competitive new supply, renovations of existing hotels, and owners’ focus on increasing rates over occupancy should further bolster average rate growth in the Detroit market.

Recent Hotel Transactions
The following table summarizes hotel transactions in the state of Michigan since January of 2010.

REVIEW OF HOTEL TRANSACTIONS



Despite a valiant recovery effort from the national recession, market values for hotels across Metro Detroit still lag behind those of the nation and other major metro areas, with the exception of some standout assets such as the Marriott in the Detroit suburb of Troy. The table below illustrates historical and forecasted per-room values for Detroit hotels.

TEN YEAR ESTIMATED PER-ROOM VALUES FOR DETROIT



Detroit’s per-room values declined from 2007 through 2009, but began to recover in 2010 and rose substantially in 2011. The HVS 2012 U.S. Hotel Valuation Index forecasts moderate growth in Detroit’s hotel values through 2016.

Conclusion
While the recent history of Detroit’s automotive industry has been rocky, the healthcare sector has remained stable, as Detroit benefits from hosting some of the leading healthcare providers in the U.S. Recent investments in emerging technologies are expected to further support the city’s economic recovery, and the Cobo Center, once fully renovated, should position Detroit to attract more and larger conventions. Proposed developments such as the Detroit River International Crossing, the downtown entertainment district, and the M-1 light-rail project represent major improvements to the local market as well. The intended result is increased generation of commercial, leisure, and meeting and group demand for area hotels, making for a cautiously optimistic outlook for the lodging industry in Detroit.
Preston Puleo, a Vice President with the HVS Boston and New York offices, executes hotel consulting and appraisal assignments in hospitality markets throughout New England, as well as New York and New Jersey. Preston graduated with honors from Cornell University's School of Hotel Administration and has worked as an associate with a hotel asset management firm in Providence, Rhode Island. His prior hospitality experience also includes internships at resorts and country clubs in Georgia and North Carolina. For more information contact Preston at +1 (910) 723-3579 or ppuleo@hvs.com.

1 Comments

  1. Great article Preston!

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