MONDAY, DECEMBER 14, 2009

Detroit a "city in crisis"

by Meagan Hardcastle
Detroit

Meagan Hardcastle

While the economic recession has slammed every state across the country, Michigan has suffered more than its fair share of financial woes, thanks largely to its reliance on the beleaguered domestic automakers.

The U.S. Department of Labor reported a national unemployment rate of 9.8 percent in September. Michigan topped the list, as usual, recording the highest unemployment rate among the states at 15.3 percent. This is a 6.4 percent year-over-year increase in unemployment since September 2008, when the rate stood at 8.9 percent, again the highest in the nation. With Michigan's economy mired in a severe recession, and no bright spots on the horizon, the state's real estate market is destined to suffer a brutal and extended downturn.

Detroit, in particular, is a city in crisis. Shocking incidences of incompetence, corruption and scandal among city officials have thrown the local government into turmoil and left the city with a daunting leadership void. Local unemployment rose to a record high of nearly 29 percent during the summer of 2009. City services (police, fire, sanitation, 9-1-1, etc.) have deteriorated to deplorable levels. The school district is the worst in the nation. Population is declining. There are more than 80,000 abandoned lots and buildings within the city limits - a decaying landscape. The city has so much potential, but today Motown is in a very sad state of affairs. And as goes Detroit, so goes Michigan.

Grubb & Ellis reported in its third quarter 2009 national market study that Detroit has the worst vacancy rate for downtown office buildings, a staggering 29.3 percent. The vacancy rate for office space in the Detroit suburbs is a slightly less depressing 23.3 percent. In comparison, the nationwide office vacancy rate in the third quarter of 2009 is 17.1 percent, up from 13 percent in the third quarter of 2007. Similarly, the vacancy rate for industrial buildings in Detroit is 14.8 percent, while the national vacancy rate is 10.4 percent, up from 7.6 percent in the third quarter of 2007.

The effects of the commercial real estate downturn in Motown are becoming increasingly apparent. An investor group holding three iconic office buildings in the downtown area - the Cadillac Tower, the First National Building, and the Penobscot Building - is currently in the media spotlight. The group is being sued by contractors owed more than $2.2 million, and by disgruntled tenants alleging persistent and egregious maintenance deficiencies.

Payments to lenders stopped earlier in the year, triggering loan defaults. Lenders are seeking judicial foreclosures, and court-appointed receivers have assumed management of the three buildings, which contain more than 2.3 million square feet of commercial space.

Vacancy rates at the Cadillac, First National and Penobscot are reportedly 18 percent, 35 percent and 36 percent, respectively. All indicators point to a continuing decline in the market, with the banking crisis adding an additional degree of difficulty to the situation. Unfortunately, when the dust settles, it's likely very few commercial property owners will be left standing in the D.

Meagan Hardcastle is a director in the corporate finance practice at O'Keefe & Associates in Bloomfield Hills, Mich., where she assists middle market companies with business turnarounds, lender workouts, financial restructuring, business valuation, litigation support and financial due diligence. She can be reached at mhardcastle@okeefeandassociates.com or 248-593-4810.

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