Comparatively high rates of return on real estate investments in greater downtown and metro Detroit as a whole continue to drive foreign investors to the region in search of deals.
It’s difficult to quantify exactly how much money from overseas has been spent on real estate investment sales in the past few years, but it’s well into the several hundred millions of dollars, said Dennis Bernard, founder and president of Southfield-based Bernard Financial Group Inc.
The reason for the influx of international funds is simple: Compared with other hot markets, the payout in Detroit is greater.
Real estate investment returns are measured in capitalization rates, commonly called cap rates among industry experts. They are calculated by dividing the asset’s total value into its net operating income.
In major markets like New York City, Los Angeles and Miami, investors can expect capitalization rates of 4.5 to 6 percent. Locally, they are between 6.75 and 7.75 percent, Bernard said, with the best investment-grade properties in prime locations having capitalization rates of 7 to 8.5 percent.
“That’s why foreign money is coming here,” he said.
The buyers are largely from Asia, the Middle East and Canada, said Mike Schick, director of Birmingham-based Q10 | Lutz Financial Services, which arranges debt financing on real estate acquisitions and development projects.
“These regions have more available capital to invest and fewer local investment opportunities,” he said. “The U.S. becomes an economically and politically stable place to invest. Detroit is an area where the investment returns can make sense.”
Most recently, a German investment group with its eyes set on more than a dozen multifamily conversion projects in the greater downtown area closed on its first purchase: The pre-Civil War era Charles Trombly House at 553 E. Jefferson Ave., which has 5,000 square feet that could be repurposed in a small apartment redevelopment.
One of the brokers on the deal, Randall Book, executive vice president in the Southfield office of Colliers International Inc., said the investors have “no problem” putting between $400,000 and $600,000 into a conversion, putting the price tag at $80 to $120 per square foot.
But that’s just the beginning for the investors behind Optima Larned LLC, which purchased the Trombly House and lists a Toronto-based real estate developer, Thomas Yarmon, as an authorized agent on one of its filings with the state Department of Licensing and Regulatory Affairs.
The group is also looking at Midtown properties and others throughout the 7.2 square miles of greater downtown, Book said.
The investment comes on the heels of recent notable moves in foreign investment downtown, just one of which was Carlos Slim Helu’s purchase of the 164,000-square-foot Marquette Building on West Congress Street downtown late last year. Helu, a Mexican telecommunications mogul who is one of the wealthiest men in the world, paid $5.8 million for the nearly vacant building near Cobo Center.
But others are in the process of exiting the downtown market entirely, having seemingly reaped substantial returns on comparatively small investments.
For example, DDI Group, a Shanghai-based group of investors, parted ways earlier this year with the David Stott Building and Clark Lofts building in Capitol Park, selling them to Dan Gilbert’s Bedrock Real Estate Services LLC in May for a combined $18 million, nearly 50 percent more than the $12.05 million it spent two years ago buying them.
Earlier this year, DDI also put the former Detroit Free Press headquarters building on West Lafayette Boulevard up for sale for $16 million, nearly four times what it paid for the building two years ago. The 302,000-square-foot building is the last remaining property in DDI’s downtown portfolio.
Some foreign investors, such as DDI, a few years ago were simply looking to park their money in Detroit real estate because the prices were so low and they knew they would only increase over time, Schick said.
“That’s worked for a number of people,” he said. “What we are seeing now is the wave of people coming in and maybe they are paying a little bit higher prices, but they can pay more than what they would have (historically) and see that it’s worthwhile to invest the money.
“They seem to be building ties with the communities and be legitimate real estate owners in this market.”
Milan, Italy-based Akno Enterprises also struck a deal with Gilbert earlier this year, selling him nearly 500,000 square feet of space between the Book Tower, the attached Book Building and a nearby three-story community center building for a reported $30 million.
Others, such as Packard Plant owner Fernando Palazuelo, a native of Spain who has been developing properties in Peru, are playing the long game on their initial investments. Palazuelo earlier this year anticipated his planned 10- to 15-year redevelopment of the 3.5 million-square-foot plant on the city’s east side — for which he paid just $405,000 at a Wayne County tax foreclosure auction — would cost more than $400 million.
It’s not just downtown and other parts of the city where foreign money is making waves. In Southfield, a group of primarily Israeli investors purchased the 382-unit Solaire Active Adult Community on Providence Drive in March for $20 million.
A Toronto-based company, Triple Properties Inc., owns the Pontiac Silverdome and is currently marketing its 127.5 acres and the stadium that sits on it for sale, with a massive redevelopment planned, possibly with 1.6 million square feet of space.
And look for foreign investors to continue to scout the area for opportunities to get in on the action.
“From an investment standpoint, Detroit still looks very good,” Schick said.