Ann Arbor fights to keep its business attraction advantage amid falling building prices
When Mercedes announced in March that it would open a 60,000-square-foot R&D facility in Ann Arbor, the company accelerated its search for local real estate - and everyone involved believed this region could reasonably accommodate the need.
The search, I’m told, started to focus on vacant land in the South State corridor.
But then Mercedes pulled out of talks, and now appears bound for Redford Township, near Detroit.
The obvious question is: Why Redford?
The company told local officials it couldn’t ignore the economic benefits of using excess capacity that it already has in another building. That building, in this case, is the Detroit Diesel facility.
But the situation also raises questions about the drivers of corporate siting decisions in 2009 - and how Ann Arbor could be further impacted.
Ann Arbor, it appears, is now competing on a much larger regional playing field, with price taking the lead.
It’s a change for this region. The magnetism of Ann Arbor has powered commercial real estate for years. And even though the market here is smaller than many in Metro Detroit, the relative stability of its vacancy rate through most of the downturn spoke to its pull.
That pull comes from many factors, including how many companies value proximity to the University of Michigan, an international airport and an educated community and workforce, along with lifestyle amenities.
But today, Metro Detroit is filled with vast amounts of vacant industrial space tied to the automotive industry downsizing. And the falling rates for either leasing or buying those buildings means that our geographic “pull” may no longer be enough of an advantage.
Price is now the equalizer between Ann Arbor and Redford Township - and every other community saturated with vacant commercial real estate.
In raw vacancy numbers, that means Ann Arbor’s 1.3 million square feet of industrial feet is competing with about 50 million square feet across the region.
“Our big attractions are the talent pool, great universities and a great, livable community,” said Michael Finney, executive director of Ann Arbor SPARK. “Those are big factors (for recruiting).
“… But in this economic climate, existing facilities are becoming the dominant play - especially in Southeast Michigan.”
The relative small size of the Ann Arbor commercial real estate market - we simply have fewer large-scale options for any company looking for more than 30,000 square feet - has meant many corporate relocations have required build-to-suit solutions in industrial or office parks.
But the economy is stifling that.
“I used to see a (few) build-to-suits per year because companies were expanding,” said Neal Warling of Bluestone Realty Advisors. “Now they’re trying to make their existing facilities work because they’re so much more cost-effective.”
And if their own existing facility doesn’t work, the glut of cheap space in Metro Detroit can be alluring.
“Now it’s all price-driven,” said Jay Chavey, a broker at Signature Associates. “Why buy new … when you can get something existing for pennies on the dollar?”
Other regional companies that have made similar decisions include Johnson Controls and Ford. Another example is Eaton, which vacated its local operation on South State Street to consolidate into an existing Southfield office.
The new offices may not be perfect, in either layout or location.
But that doesn’t matter today - especially if the workforce in Ann Arbor is willing to commute 20, 40 or even 60 minutes to work.
“If the cost of doing business is significantly lower someplace else, and that gets a company a little lower outside of their perfect strike zone, they’re going to take advantage of that,” said Mike Giraud of Colliers International.
That makes it harder in the economic development realm, where large project activity has dropped by about 20 percent in the Ann Arbor region, Finney said.
Entrepreneurial activity is up, and Ann Arbor is holding onto its edge thanks to incubator space and small office availability.
But whether this region will be able to attract the biggest deals that will come to Michigan over the next year may be an issue.
“I’m amazed at the kinds of facilities that are vacant right now,” Finney said, mentioning the recent deal to put GE’s battery development facility into Visteon Village in Van Buren Township.
“I expect it to be an ongoing challenge for us.”
AnnArbor.com Business News Director Paula Gardner can be reached at 734-623-2586 or paulagardner@annarbor.com.
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