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SE Michigan real estate market still sitting pretty, experts say

By: Tiffany Esshaki | C&G Newspapers | Published February 18, 2020

 Class A mall assets, like Somerset Collection in Troy, which offer customers something different than what they can get online, are the future of malls, according to an expert from Taubman Co.

Class A mall assets, like Somerset Collection in Troy, which offer customers something different than what they can get online, are the future of malls, according to an expert from Taubman Co.

File photo by Donna Agusti

BIRMINGHAM — Good news: 2020 is looking like another fabulous year for both commercial and residential real estate purchases.

But it won’t be quite as fabulous as 2018 or 2019, and that slowdown is a good indicator that developers and local governments should take a second look at their goals.

That was one of the takeaways from the annual Real Estate Forecast, hosted by the Birmingham Bloomfield Chamber of Commerce Feb. 14. Members of the local business community gathered at the Townsend Hotel for a little breakfast and a lot of good information from experts in the retail and residential real estate markets.

A better mousetrap
First to address the crowd was Scottie Lee, the vice president of strategy and research for Taubman Centers, based in Bloomfield Hills. Lee assured guests that, despite what they might be hearing, we’re not on the cusp of a “retail apocalypse.”

“(Retail apocalypse) was coined by The Atlantic in 2017, and it’s taken on such a fervor that it has its own Wikipedia page,” Lee said. “The death of the mall has been called for years and years. You probably know the Mark Twain quote, ‘The reports of my death have been greatly exaggerated,’ so going back to 1998 we were all going to buy everything on Yahoo! (Founder) Jerry Yang was going to put us all out of business. … Going forward, the mall industry is expected to thrive.”

Lee explained that malls of the future and brick-and-mortar stores in general likely won’t look the way they did a decade ago. As department stores consolidate their resources and close down locations, retail shows a kind of “barbell effect,” with a hollowing out of stores targeted to middle-class shoppers. Luxury stores, like Hermes — coming to Somerset Collection this year — and Louis Vuitton are doing as well as ever, and lower price-point stores, like TJ Maxx, Burlington and even Dollar Tree are performing extremely well.

The middle-of-the-road department store spaces are replaced, but not with other department stores.

“We need a better mousetrap — a new competitive supply,” Lee explained, saying that brick-and-mortar locations are choosing to be more of an experience venue than just a point of distribution.

“Retailers want to express their brand. There’s nothing that can express their brand more than in the three-dimension. I know RH might be a bit of a controversial example in this room and this community, but they are really one of those retailers that is really focused on brick and mortar.”

Lee said the experience of an RH Gallery is a trend keeping malls relevant, like the one that was pitched for downtown Birmingham but was scrapped after the development around the North Old Woodward bond proposal failed last fall.

“This is a retailer who probably 50% of their business happens online. But people want to experience the RH brand in its totality. (Inside) you have a café that’s one of the hottest reservations in town,” he added. “Brick and mortar isn’t dead. Bad brick and mortar is dead. Stale brick and mortar is dead. If you do something unique, something exciting, you’ll get that turnout.”

RH isn’t the only brand to figure out that a mall presence can improve online performance. Direct-to-consumer companies and digitally native brands, with products primarily sold online, are flocking to high-end centers with showrooms where customers can experience the goods before they buy. At Somerset Collection, Warby Parker eyeglasses, Peloton fitness machines, Lovesac seating and UNTUCKit clothing have experience-focused storefronts.  

Speaking of experience, Lee said, the country’s most successful middle-class malls, which includes Great Lakes Crossing Outlets, are replacing lost retailers and department stores with entertainment and socially centered businesses, like bars, restaurants and arcades. He cited examples like the Peppa Pig-themed playscape and Round One game bar at Great Lakes Crossing Outlets.

“You can’t eat online. Even if it’s to sit at a table together and stare at our phones together, we’re at least together,” Lee said with a laugh.

New malls are expanding on that concept with more mixed-use facilities.  

“The U.S. in general doesn’t need more retail. … We have an endless supply of retail on our phone and on our laptops. We’ve essentially reached a saturation point,” Lee said, citing a $4 billion development in Dallas that he foresees as the future of malls. “There is some retail and entertainment involved. There’s hotels, office, residential, lots of green space, hiking trails, biking trails and so forth. Really provide a 360 experience, the live-work-play and all the other urbanist trends you might be hearing about.”

A long climb back up
Coldwell Banker Weir Manuel CEO John North assured forecast guests that the housing market in Oakland County is still thriving.

“The numbers are good; 2018 versus 2019: up, up, up. Everything is looking good. A little variation as you start to spread out across the county. That’s very normal,” he said.

Median house values in the area had increased into 2019 and so did home sales, with one exception.

“We’re here in beautiful downtown Birmingham, and you’ll see the overall sales went down 8.6%,” North said. “That seems really concerning, but I would be careful when we’re looking at numbers like this. That represents a much larger amount of sales in comparison to Bloomfield Township — well, certainly Bloomfield Hills.”

It might not surprise many that homeowners in the Birmingham-Bloomfield area have seen a steady growth in wealth overall in the past five years. That’s great for those residents who aren’t renting, but North said the rate of homeownership hasn’t recovered at the same rate as the rest of the economy, and the “easy answer,” he explained, is a shortage of housing starts.

“In this nation, we are well below what we’ve historically built. We started that path during the downturn, and we’ve been unable to recover from it in any kind of meaningful way,” he said, noting that new housing developments are short of demand by about 5 or 6 million units. “If you go back to the peak of it there in 2005, you can see we’re way behind in our housing starts. So we need more homes being built, more skilled labor. We need a lot of stuff to help that get there.”

Housing starts are in low supply, but so are affordable housing opportunities in general, North acknowledged. Asked what developers and municipalities can do to ensure that less-established buyers can achieve homeownership, he suggested a review of policies at the local level to entice builders, particularly in the Birmingham-Bloomfield area, where even the land itself is expensive.

“I do think there are things that Birmingham or Bloomfield Hills could do to increase affordable housing if they chose to make that something they felt was needed in the community, whether it’s through maybe creating some tax breaks and incentives for developers to work that land that is perhaps a little more expensive than other places,” North said, explaining that developers need to offset the high costs incurred between the time they purchase the land and put a shovel into the ground.

“They could, of course, relax the zoning and development rules, which would have a great impact on their ability to build those facilities and provide that. So I think, as a community, that’s a decision they’ve got to make and we’ve got to make together.”

As for the immediate future, say, through the rest of the year, North told the crowd they can breathe easy.

“New home sales growth at about 11%, existing home sales are going to grow by about 4%, median sale price growth at 3.6% across the board, and the (30 year) interest rate to stay hovering around 3.8(%),” North said, citing “relatively conservative” statistics he got from the National Association of Realtors.

Is a ‘burst’ on the way?
Sometimes good news can be too good. Lee and North were asked if the thriving markets they described could be described as experiencing a bubble, similar to what led to the last recession. North was quick to quell that suggestion.

“I’m not a big believer that we’re in a bubble of any sort as it relates to real estate, residential or commercial. I believe due to a lot of the changes that were made during the last downturn, and I think most experts believe, that if we have a recession, it would probably be short lived, and certainly there’s no indication that housing will play any role in leading us into it like it did in the past one,” he said.

Is there really enough reason to be that optimistic, considering southeast Michigan’s recovery from the recession has been slower than that of the rest of the U.S.?

“I think we should all be very hopeful,” North said. “I think all the signs are very good. I think a healthy, major city like Detroit is essential to all of us, and I think they’ve made remarkable strides moving forward from where they were even 10 years ago. … The fact that we’re hovering a little below than the rest of the nation, I think Detroit was extremely hard hit during the last downturn, and I don’t think anyone would argue that. So our road back up should take us a little bit longer.”