On June 18, hundreds gathered around the Michigan Central Depot, Detroit’s 500,000-square-foot decrepit former central train station. The building has served as a symbol of the city’s various ailments wrapped up in one gigantic piece of real estate: globalization, lack of opportunities, civic mismanagement. Yet, this time the crowd was not gathered for a pity party.

Attendees were watching Bill Ford Jr., Ford Motor Company’s 61-year-old executive chairman, discussing the 115-year-old train station’s future. Like the city itself, the former station is undergoing a rebirth: it will be home to Ford’s autonomous vehicle team after a $740 million renovation.

Since bottoming out during the halcyon days of former-mayor Kwame Kilpatrick’s corruption scandal, modern-day Detroit has emerged as “America’s Great Comeback City.” By day, 80,000 workers occupy the city’s various office buildings, resulting in a decade’s low office vacancy rate of 5 percent according to CoStar Group.

At night, millennials in Yeezys dot the streets, hanging out at hipster bars filled with $13 cocktails. There are more than 1,000 multifamily units under construction and another 600,000 square feet of Class-A office in the works. But it’s not just the CBD that’s experiencing a rebirth. Neighborhoods like Midtown, Corktown and many of the city’s suburbs are experiencing a burst in values that has not been seen in decades.

Multifamily

Detroit’s rebirth can be traced to billionaire entrepreneur Dan Gilbert’s decision to relocate his Quicken Loans family of companies to the CBD in 2009. Since then, his commercial real estate company—Bedrock—has purchased and refurbished close to 100 commercial properties, mostly in downtown. Because of today’s youth demographic favoring urban living over suburban sprawl, there was pent-up demand for downtown apartments. Many buildings opened completely full and had waiting lists for months. Other entrepreneurs got in on the action, developing marquee projects in key neighborhoods like Midtown, the West Village and Corktown to keep up with demand.

According to CoStar Group, average rents in downtown Detroit range from $890 for a studio to $3,100 for a three-bedroom. Average vacancy rates are only five percent. From a financing perspective, lenders are aggressively targeting the city for acquisition, renovation and development financing.

In May, Northern Equities Group and Lutz Real Estate Investments acquired and secured financing from a West Coast-based lender on the Albert Kahn Building, a 240,000-square-foot office property that will be converted into 211 residential units. In Detroit’s Gold Coast, the December, 2017, sale of the 400-unit Jeffersonian apartment building for a sub-6 percent cap rate garnered much press. The buyers, Joe Barbat of Houze Living and Arie Leibovitz of ARI-EL Enterprises, secured financing through Jill Jasinski of Q10|Lutz Financial Services, who sourced an aggressive bridge loan from a Manhattan lender that provided an 80 percent loan-to-cost (LTC), non-recourse loan for the acquisition.

For Detroit multifamily, spreads on value-add transactions like these tend to be at 300 to 400 basis points over the 30-day LIBOR rate. Regarding The Jeffersonian, co-owner Arie Leibovitz said, “The [property] has had a very nice reception. We’ve been going through a period of renovations, but based on what’s shown at this current junction, we are seeing some nice rent bumps as we complete the decorative and renovations work.”

Detroit’s suburbs are also seeing a significant amount of multifamily action. Properties throughout the MSA are trading at 6.5% cap rates or lower. Notable recent sales include The Franklin & 12 North Apartments ($30.6 million), The Point at Canton (6.10% cap rate) and Chimney Hill Apartments in West Bloomfield (5.70% cap rate at $52,100,000).

Greg Coulter and J.J. Zwada, investment sales professionals with I.P.O., believe that “we are in the ‘perfect’ storm [for a sellers market]. Low interest rates, an abundance of liquidity and a limited supply of multifamily assets have resulted in unprecedented demand for multifamily assets.” Investors interested in acquiring multifamily can expect leverage of up to 80 percent on non-recourse loans, with interest rates hovering around 4.90 percent.

One program proving particularly popular for borrowers is the Freddie Mall Small Balance loan program. A recent quote for a 34-unit, $2 million deal in Warren, Michigan, saw an interest rate of 4.66 percent, 80 percent leverage, 10-year term and 30-year amortization on a non-recourse basis.

While the amount of leverage and aggressive pricing may cause consternation amongst some observers, commercial lenders—whether it be agency, life insurance companies or CMBS shops—are underwriting loans more conservatively than at the peak of the last property bubble in 2008. Whereas in the past, lenders would underwrite to pro forma income and expenses, lenders today require a minimum trailing three-month rental income and trailing 12 expenses. They are further limited by DSCR or debt yield restrictions of 1.20x and 8.0 percent respectively.

Office: City vs. suburbs

Like its residential properties, Bedrock has invested a significant amount of money into rehabbing its office properties, too. According to JLL, average Class-A office rents in downtown Detroit are just north of $24 a square foot, the second-highest average in the Metro (after Birmingham/Bloomfield). Whereas in years past, downtown office rents often struggled compared to the suburbs, today’s tenants desire a downtown presence because of changing employee work-life preferences, specifically amongst the coveted millennial demographic. Recent moves by companies like Ford, Google and Microsoft underscore this trend.

Downtown’s recent explosive growth set off a complicated act of musical chairs that is sending tenants who formerly had long-standing presences downtown to other parts of the city and metro. Crain’s Detroit Business recently reported that United Way is moving from downtown to the Fisher Building in New Center, a major score for owners The Platform. United Way cited the escalating cost of rent in downtown Detroit as the key driver for its decision.

Other building owners, like Brad Foster of Foster Financial, sees the accelerated rent growth in downtown Detroit as an opportunity. He and his partner, Doug Noble, have been buying office properties around metro Detroit’s suburbs, including a $5.1 million acquisition of Central Park Plaza in Southfield.

“Our strategy is to target tenants who want to be very close to downtown, but don’t want to pay [downtown[ rents,” says Foster. “With suburban office prices where they are, we are able to deliver rents almost half as expensive as the CBD while still offering high-end, turnkey build outs.”

Foster Financial took Central Park Plaza from sub-50 percent occupancy to stabilization in less than a year. While borrowers do have to battle high vacancy rates (15 percent to 20 percent) in markets like Southfield and Troy, lenders are willing to underwrite loans up to 70 percent LTV of the property’s value, often at 8 percent to 8.5 percent cap rates.

Industrial: A once-shunned asset class emerges

An unpredicted positive development that still has legs during this bull market has been the emergence of the industrial asset class in the capital markets. Whereas during the doldrums of the mid-to-late 2000s, it would have been hard to give away industrial properties in Michigan, borrowers today are scurrying for any piece of vacant land within an hour of metro Detroit. Cap rates for single-tenant industrial properties are often just above 6.5 percent, especially if the tenant is investment-grade.

The industrial growth is not just due to the reemergence of the automotive sector in metro Detroit, but the rapid rise of e-commerce and the logistical demands that come with it. With more consumers shopping online, retailers like Amazon need additional storage space and up-to-date distribution centers for its products.

Besides industrial, multi-tenant flex properties are proving popular, too.

“We see a good number of engineering firms looking for flex space,” says Arie Leibovitz. “The economy is good and, therefore, small mom-and-pop businesses are more comfortable renting space.”

Several recent loan quotes for industrial saw spreads of 175 to 200 basis points over the 10-year U.S. treasury with 15-year terms and up to 30-year amortizations (depending on leverage). Life insurance companies have proven to be particularly desirable of industrial or flex space, specifically if the tenant is credit=rated.

Conclusion

Like the red beacon atop The Penobscott Building, Ford’s $740 million Corktown investment represents the cherry on top of Detroit’s rebirth. It’s quite possibly the best time to be living in the city since the early 1960s when Berry Gordy and Motown were churning out hits along Grand Boulevard.

With ample retail, restaurants and Class-A residential, downtown Detroit and its immediate surrounding neighborhoods have become a thriving metropolis. The city’s rebirth is a testament to demographic trends, investor appetite and the tenacity of its citizens who never gave up.

As the city stabilizes, legacy challenges are finally on the horizon—namely, the deplorable state of the city’s public education system. Yet civic leaders and business professionals have created a strong base to build from and continue Detroit’s narrative as “America’s Great Comeback City.”

Steven Siegel is senior analyst with Birmingham, Michigan-based Q10|Lutz Financial Services and Lutz Real Estate Investments.