NAFTA, Tariff Fears Slow Motor City Construction

DETROIT—This metro area has one of the lowest industrial vacancy rates in the nation, but developers and lenders currently seem reluctant to launch new projects, according to Newmark Knight Frank. The firm just released its second quarter 2018 industrial trends data for the Detroit region and found the metro’s rate fell 60 bps to 4.2% as just over two million square feet was absorbed.

However, new construction starts have dropped dramatically. The second half of 2017 saw 18 new construction starts, compared to ten starts during the first half of 2018. But the second quarter of 2018 saw just four starts and by year’s end, developers may have only eight projects still underway.

“As new construction starts to decline, Metro Detroit industrial users will likely see fewer space options going into 2019 with very little new supply in the pipeline,” says John DeGroot, research director of NKF’s Detroit office. “The scenario will further increase occupancy cost and demand will far outpace supply.”

And the overall vacancy rate does not tell the full story. The rates in some areas of Oakland, Macomb and Wayne counties are below 3% and bulk warehouse vacancy rate in Wayne is less than 2%.

The Detroit area does have a lot of underlying strength. Aside from the national economy’s sunny outlook, US automobile sales are still healthy, if not at the even faster pace of a few years ago. But DeGroot says uncertainty with NAFTA negotiations, ongoing tariff disputes and rising interest rates trump these positive market conditions. This uncertainty has created unease among companies looking to invest significant capital in new facilities. Nevertheless, the market will likely absorb another five million square feet by year-end.

“Once NAFTA negotiations and tariff disputes get resolved, there is a good chance we will see another boost in demand that will lead to more development,” adds Fred Liesveld, managing director of NKF’s Detroit office.