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High returns bring foreign investors to Detroit real estate market

By KIRK PINHO November 29, 2015

Comparatively high rates of return on real estate investments in greater downtown and metro Detroit as a whole continue to drive foreign investors to the region in search of deals.

It's difficult to quantify exactly how much money from overseas has been spent on real estate investment sales in the past few years, but it's well into the several hundred millions of dollars, said Dennis Bernard, founder and president of Southfield-basedBernard Financial Group Inc.

The reason for the influx of international funds is simple: Compared with other hot markets, the payout in Detroit is greater.

Real estate investment returns are measured in capitalization rates, commonly called cap rates among industry experts. They are calculated by dividing the asset's total value into its net operating income.

In major markets like New York City, Los Angeles and Miami, investors can expect capitalization rates of 4.5 to 6 percent. Locally, they are between 6.75 and 7.75 percent, Bernard said, with the best investment-grade properties in prime locations having capitalization rates of 7 to 8.5 percent.

"That's why foreign money is coming here," he said.

The buyers are largely from Asia, the Middle East and Canada, said Mike Schick, director of Birmingham-based Q10 | Lutz Financial Services, which arranges debt financing on real estate acquisitions and development projects.

"These regions have more available capital to invest and fewer local investment opportunities," he said. "The U.S. becomes an economically and politically stable place to invest. Detroit is an area where the investment returns can make sense."

 

Most recently, a German investment group with its eyes set on more than a dozen multifamily conversion projects in the greater downtown area closed on its first purchase: The pre-Civil War era Charles Trombly House at 553 E. Jefferson Ave., which has 5,000 square feet that could be repurposed in a small apartment redevelopment. 

One of the brokers on the deal, Randall Book, executive vice president in the Southfield office ofColliers International Inc., said the investors have "no problem" putting between $400,000 and $600,000 into a conversion, putting the price tag at $80 to $120 per square foot. 

But that's just the beginning for the investors behind Optima Larned LLC, which purchased the Trombly House and lists a Toronto-based real estate developer, Thomas Yarmon, as an authorized agent on one of its filings with the state Department of Licensing and Regulatory Affairs

The group is also looking at Midtown properties and others throughout the 7.2 square miles of greater downtown, Book said. 

The investment comes on the heels of recent notable moves in foreign investment downtown, just one of which was Carlos Slim Helu's purchase of the 164,000-square-foot Marquette Building on West Congress Street downtown late last year. Helu, a Mexican telecommunications mogul who is one of the wealthiest men in the world, paid $5.8 million for the nearly vacant building near Cobo Center

But others are in the process of exiting the downtown market entirely, having seemingly reaped substantial returns on comparatively small investments. 

For example, DDI Group, a Shanghai-based group of investors, parted ways earlier this year with the David Stott Building and Clark Lofts building in Capitol Park, selling them to Dan Gilbert's Bedrock Real Estate Services LLC in May for a combined $18 million, nearly 50 percent more than the $12.05 million it spent two years ago buying them. 

Earlier this year, DDI also put the former Detroit Free Press headquarters building on West Lafayette Boulevard up for sale for $16 million, nearly four times what it paid for the building two years ago. The 302,000-square-foot building is the last remaining property in DDI's downtown portfolio. 

Some foreign investors, such as DDI, a few years ago were simply looking to park their money in Detroit real estate because the prices were so low and they knew they would only increase over time, Schick said. 

"That's worked for a number of people," he said. "What we are seeing now is the wave of people coming in and maybe they are paying a little bit higher prices, but they can pay more than what they would have (historically) and see that it's worthwhile to invest the money. 

"They seem to be building ties with the communities and be legitimate real estate owners in this market." 

Milan, Italy-based Akno Enterprises also struck a deal with Gilbert earlier this year, selling him nearly 500,000 square feet of space between the Book Tower, the attached Book Building and a nearby three-story community center building for a reported $30 million. 

Others, such as Packard Plant owner Fernando Palazuelo, a native of Spain who has been developing properties in Peru, are playing the long game on their initial investments. Palazuelo earlier this year anticipated his planned 10- to 15-year redevelopment of the 3.5 million-square-foot plant on the city's east side — for which he paid just $405,000 at a Wayne County tax foreclosure auction — would cost more than $400 million. 

It's not just downtown and other parts of the city where foreign money is making waves. In Southfield, a group of primarily Israeli investors purchased the 382-unit Solaire Active Adult Community on Providence Drive in March for $20 million. 

A Toronto-based company, Triple Properties Inc., owns the Pontiac Silverdome and is currently marketing its 127.5 acres and the stadium that sits on it for sale, with a massive redevelopment planned, possibly with 1.6 million square feet of space. 

And look for foreign investors to continue to scout the area for opportunities to get in on the action. 

"From an investment standpoint, Detroit still looks very good," Schick said. 
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Who owns downtown Detroit? Local governments aren't the big spenders anymore

By KIRK PINHO November 14, 2015
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It wasn't long ago that governments made big splashes in greater downtown real estate, buying landmark properties and turning them into executive offices.

These days, however, you'd be hard-pressed to find a real estate broker who reasonably expects a governmental unit to be a serious contender for greater downtown property in Detroit.

Case in point: Since the beginning of 2013, government units have only purchased two properties downtown. Those buildings, in Capitol Park and Paradise Valley, total just shy of 8,000 square feet.

Compare that with 2000 to 2010, when governmental units purchased 2.32 million square feet of space ranging from large office buildings to land, from parking decks to smaller properties inside the central business district, according to an analysis of property sales listed by CoStar Group Inc., a Washington, D.C.-based real estate information service.

All told, a Crain's review of 141 downtown properties shows that governmental/public ownership is down to seven properties, representing just 5 percent (rounded numbers) of those surveyed. But those properties account for 15 percent (2.6 million square feet) of the square footage (about 17 million square feet).

By comparison, Dan Gilbert and his related companies own 40 percent of the surveyed properties, totaling 7 million square feet, and other private owners own 52 percent of the properties, totaling 7.3 million square feet. Nonprofit and religious organizations own 4 percent of the properties, totaling 1 percent of the total 17 million square feet.

 

There were two giant government deals from 2000-2011. Wayne County bought the 643,000-square-foot Guardian Building at 500 Griswold St. downtown as part of a portfolio deal for $14.5 million from Detroit-based Sterling Group in 2008. 

In 2011, the Michigan Strategic Fundpurchased Cadillac Place outright from New Center Development Inc., an ownership entity in which the state had an ownership stake as part of a deal hammered out afterGeneral Motors Corp. left the 1.36 million-square-foot New Center area office complex for the Renaissance Center. The last of 5,200 GM employees moved into the RenCen from the Albert Kahn-designed Cadillac Place on West Grand Boulevard in 2001. 

But times have changed. 

Governments, particularly the county and the city of Detroit, are much more wary of making significant real estate deals. Simply put: Detroit, which emerged from its historic Chapter 9 municipal bankruptcy a year ago, and Wayne County, which is operating under a consent agreement, don't have the cash to invest in downtown property. In fact, both governments have been unloading or are looking to unload some of their key properties in cost-savings efforts. 

Among them: The Guardian Building itself, which the county bought in 2008 along with the First Street Parking Garage and the building at 511 Woodward Ave., and the Old Wayne County Building; the county had owned the land on which the 226,000-square-foot building, built between 1897 and 1902, sits. 

The building had been Wayne County's executive office home until it purchased the Guardian Building following a disagreement with the previous owner, Old Wayne County Building LP, over rental rates. The Old Wayne County Building sold for $13.4 million to 600 Randolph SN LLC, a private New York-based investor. 

The county also sold the Philip J. Neudeck office building at 415 Clifford St. last year to businessman Joe Barbat, who plans a multifamily conversion, for $2.3 million. 

Detroit also sold its former fire department headquarters building at 250 W. Larned St. to a Chicago-based hotel company that plans a hotel conversion with 80 rooms in a $28 million redevelopment of the 63,000-square-foot building. A number of properties, including the Joe Louis Arena and some riverfront land, among others, also went to bond insurers Syncora Guarantee Inc. and Financial Guaranty Insurance Co. during Detroit's bankruptcy.

 

Dan Gilbert

So just as the city and county have been eager sellers of unused or underutilized properties in efforts to bring in revenue and cut operating expenses, there too have been an increasing number of eager buyers downtown looking to capitalize on higher property values and demand for things like multifamily housing and quality office space.

A review of CoStar data shows that between 2005 and 2010, there were just 29 total downtown property sales. That has increased steadily every year since as market conditions and demand improve, growing from 15 sales in 2011 to 41 last year. As of Nov. 3, there had been 25 total this year, according to CoStar.

Yes, an undeniable factor in the increase is Dan Gilbert's downtown buying spree. But smaller yet formidable private investors and property owners also are stepping up downtown.

"The key factor is that we don't need (government deals) the way we used to need them," said AJ Weiner, managing director in the Royal Oak office of Jones Lang LaSalle. "When the market was extremely soft and there was a limited amount of real estate activity, you needed the state and city to step up" with things like tax incentives.

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Michigan Home Price Rise Among Fastest in the Nation

By TOM GANTERT November 5, 2015

Michigan Home Price Rise Among Fastest in the Nation

Local and state government will cash in on housing rebound

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Michigan is in the midst of a real estate market rebound, with only six other states and Washington D.C. seeing larger increases in home prices over the past five years, according to a report from theFederal Housing Finance Agency.

Washington D.C. had the largest average home price increase from 2010 through this past August, followed by Nevada, North Dakota, California, Arizona, Colorado and Florida.

The rise in real estate prices compared to their Great Recession low point translates into higher property tax collections by Michigan's state and local governments. Local governments rely heavily on property taxes to fund their operations, and a state education property tax is a key revenue source for public schools. Higher sales prices mean higher property tax assessments, and that means higher revenue for governments.

Property selling at higher prices also increases the revenue collected by the state under a 0.75 percent real estate transfer tax ($3.75 per $500). In the last fiscal year, Michigan collected $235.8 million from this tax, 18.7 percent more than the previous year. Revenue from the tax goes to public schools, state colleges and state universities.

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Greg Moore, a real estate broker in Livonia, said that Michigan's ranking in the federal report is a bit misleading because the state had to climb out of a deeper hole than most others.

“Because Michigan lost so much value from 2008-2012 (up to 70 percent in some areas), the gains seem that much greater,” Moore said in a message. He said 2010 was the bottom of the real estate market in Michigan.

“And that bottom (for Michigan) continued through until the spring of 2012,” he said.

Gary Reggish, the president-elect of Michigan Realtors, said he wasn’t surprised by Michigan’s ranking. He said property values were hit very hard in this state during the Great Recession and some areas had a decline of as much as 70 percent in property values.

He said with an improving economy, housing prices will go up. Reggish said there are still homeowners who are “underwater” on their mortgages — they owe more than the house could be sold for — and that fact is holding down the supply of houses coming onto the market. But, he said, historically low interest rates have kept demand high.

The Federal Housing Finance Agency described its methodology: "The HPI is a broad measure of the movement of single-family house prices. The HPI is a weighted, repeat-sales index, meaning that it measures average price changes in repeat sales or refinancings on the same properties. This information is obtained by reviewing repeat mortgage transactions on single-family properties whose mortgages have been purchased or securitized by Fannie Mae or Freddie Mac since January 1975."

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