Dan Gilbert made hundreds of millions of dollars’ worth of risky bets on downtown Detroit.
Now, he has pulled off his most unexpected — but possibly his safest — real estate maneuver.
By purchasing the 37-acre former Sakthi Automotive Group USA Inc. property in southwest Detroit out of receivership, the billionaire mortgage mogul has staked his claim in an area far-flung from the downtown core where his vast real estate empire is concentrated, but also in a property class widely considered to be among the strongest in the region: industrial space.
With the COVID-19 pandemic ongoing and no end in sight, retail and hospitality space — a pair of Gilbert’s core property types — have been battered as people turned increasingly to online shopping and travelers and convention-goers stayed within their own four walls, either by government mandate or by choice.
Office space — Gilbert’s largest asset class — remains a looming question mark, as landlords and brokers sit on edge trying to grasp the true fallout as many people remain working from home, leaving some offices virtually empty.
“I was on a conference call last week and we talked about what scares us next,” Jim Shevlin, president and COO of Bethesda, Md.-based special servicer CWCapital, whose special servicing portfolio has quintupled to $5 billion or so since the start of the pandemic, said in an interview with Crain’s. “We have been through retail and hospitality, and office is next. You are not going to see the blow up until the tenants roll. Do they renew, leave or reduce?”
Sam Hamburger, vice president of acquisitions for Gilbert’s Bedrock LLC real estate firm, said the company “remains confident in all those asset classes” and that exploring the need for industrial space came over a year ago when it encountered difficulties finding Waymo space in the city (ultimately the company ended up at American Axle & Manufacturing’s Holden Avenue campus).
“We view this as a way to further diversify our portfolio in an area that has a lot of potential and also has significant economic development impacts along with job creation, bringing Fortune 500 companies to the market and satisfying demand,” Hamburger said, noting that Bedrock already has space it considers industrial at 1800 18th St. and the Quicken Loans Technology Center on Rosa Parks Boulevard in Corktown.
For years, industrial space has been at a premium as Detroit’s automakers rebounded from their nadirs last decade leading up to and during the Great Recession, causing an increase in space demand from suppliers and other users. Because much of the area’s post-war industrial building stock has aged into obsolescence as manufacturing technologies and requirements have changed, new buildings and retooled factories have sprouted up throughout the region.
Speculative building — virtually unheard of in the office sector these days — is common for industrial space.
According to a second-quarter report from the Southfield office of Los Angeles-based CBRE Inc., some 3.3 million square feet of speculative building — buildings under construction without a signed tenant — totaled 3.3 million square feet, while build-to-suit projects under construction for specific users were just 1.8 million square feet. Hamburger said Bedrock is exploring both building types.
The region’s 400 million-square-foot industrial and warehouse market is just 4.4 percent vacant and average asking rents ($5.97 per square foot per month) are creeping toward the $6-per-square-foot figure, according to a second-quarter report from New York City-based brokerage house Newmark Knight Frank. In Detroit, there is 45.9 million square feet, with a 12 percent vacancy rate on space that commands $5.03 per square foot per year on average.
Also in the city, there is a lack of contiguous large chunks of land for new development.
“The size of the acreage is probably the biggest thing, and its close proximity to the bridge, are I’m sure the driving forces behind the sale there,” said Alan Holt, an associate broker in CBRE’s Southfield office focusing on industrial space. “Some of the buildings can be salvaged and that is a bonus there, too. I’m not sure if he’s looking to do another industrial park, but the city is in high demand for quality industrial space.”
All that leads to Gilbert’s $38.5 million bet on the Sakthi property, which has about 10.4 acres of land for development, and 618,000 square feet of building space (not including the vacant Southwest High School, which Sakthi paid $1.6 million for in 2015 and was included in the deal).
Hamburger said the school is in “poor condition” but its future has not yet been determined.
“It’s a logical move,” said Daniel Labes, executive managing director specializing in industrial space in the Farmington Hills office of Newmark Knight Frank, said of Gilbert’s purchase. “They dominate the downtown office market and control much of the parking. They have hundreds of residential units. Industrial is the next step and has been in demand for decades, but huge barriers to entry that have been discussed ad nauseum. The Big Three have all made major commitments to Detroit, and so has Bedrock. This space will lease very quickly.”
Gilbert, the head of Rocket Companies Inc. (NYSE: RKT), began about 10 years ago buying and renovating downtown Detroit real estate as Quicken Loans Inc., the Rocket Companies predecessor, brought 1,500 people to the central business district from the suburbs.
He has been on a buying spree in and around downtown ever since, laying claim to iconic office towers like the First National Building, Chase Tower, Chrysler House, 1001 Woodward, One Woodward Avenue and Ally Detroit Center, to name just a handful.
He has also developed and redeveloped multifamily and retail space, bringing things like microapartments and luxury lofts to Capitol Park and the Woodward corridor, and attracted retail tenants like H&M, Nike, Lululemon and Under Armour to the first-floor retail space there.
Gilbert has also been building new, with major residential, hotel and office developments underway or nearing completion on the site of the former J.L. Hudson’s department store site as well as in Brush Park, plus elsewhere.
But the splash of shopping, apartments and glitzy office is a far cry from the industrial landscape, which laid the foundation for the city’s middle-class a century ago.
Detroit has seen a spate of industrial developments and plans in recent years.
A joint venture between Detroit-based Sterling Group and Texas-based Hillwood Enterprises LP is working on a new development of a $400 million, 3.8 million-square-foot shipping and distribution center for Amazon.com Inc., the proposed user, at the former Michigan state fairgrounds property at Eight Mile Road and Woodward Avenue.
The former Cadillac Stamping Plant is slated to be demolished and turned into a large speculative warehouse development totaling 682,000 square feet by Riverside, Mo.-based NorthPoint Development LLC is anticipated to cost $47 million.
FCA US LLC is investing $2.5 billion on Detroit’s east side to convert its Mack Avenue engine plants into a new Jeep SUV assembly plant and modernize its Jefferson North Assembly plant. Hiring for the 4,950 jobs is under way and production is expected to start in the first quarter.
Those are just three of the more high-profile ones.
Hamburger said the exact amount of space the 10.4 developable acres can accommodate hasn’t been determined because the fate of the vacant school is not yet known.
The deal for the property, which is on West Fort Street south of I-75 and west of Livernois Avenue, was in the works as Gilbert was gearing up to take his Quicken Loans Inc. public.
His Fort Street Company LLC, incorporated with the state using a registered agent service to mask who is behind it, submitted a May 24 bid — about six weeks before the Quicken IPO — of $38.5 million, beating out a stalking horse bidder that offered $37 million for the property, according to federal court documents in a lawsuit against Sakthi by Huntington National Bank.
Since the property is in a federal Opportunity Zone, that means that if Gilbert bought it using capital gains, he can defer taxes on that through capital gains tax benefit folded into the 2017 Tax Cuts and Jobs Act. The zones are designated according to U.S. Census tracts where the poverty rate is at least 20 percent and the median household income is less than 80 percent of that in the surrounding areas.
Proceeds from the sale will be used to pay back a slew of creditors owed money by Sakthi, which came to the city with great fanfare — and public tax incentives, both at the local and state level — six years ago with the promise of hundreds of jobs for Detroit residents.
Perhaps that promise can be renewed, said Sean Cavanaugh, vice president in the Royal Oak office of JLL specializing in industrial space.
“The potential to redevelop the land on Fort Street into a large single-tenant building will be attractive to a number of users, I’m sure.”