Mixed signals from Detroit’s commercial property market

Lehman Brothers Holdings Inc. has said it plans to be patient in selling real estate holdings four years after filing the largest US bankruptcy in history. In Detroit, it’s willing to accept less than 10 cents on the dollar to get out while it can.

Lehman is selling a 251,000 square foot office property in suburban Farmington Hills. In June, the bank offered it at auction for $10 a square foot, which would have recovered less than 10 per cent of the $27.5 million mortgage it extended in 2007. It’s also selling 1 Woodward Ave., a tower overlooking the city’s riverfront and on border with Canada that’s 44 per cent vacant.

Detroit’s metro office market is missing out on Michigan’s revival three years after the government rescued General Motors Co. and Chrysler Group LLC. Borrowers 30 days late or more on Detroit-area office loans packaged into commercial mortgage-backed securities rose to 24 per cent from 15 per cent in August 2011, according to data compiled by Bloomberg, compared with 9.9 per cent nationally.

“This is probably not a market where you’re going to see much growth and for that reason, it might make sense to just move on,” said Shaw Lupton, a senior real estate economist at data provider CoStar Group Inc.

Lehman said in July it’s attempting to recover as much as $12.9 billion for creditors by selling real estate holdings that range from condos in Hawaii to Archstone Inc., the eighth-largest apartment manager in the US. Lehman has said it plans to hold some assets as long as 2015, waiting for opportune times to dispose of properties as the commercial and residential markets recover. It moved to take Archstone public last month.

Lehman had $260 million in outstanding senior loans secured by Detroit-area property at the time of its September 2008 demise, in addition to $13.2 million in mezzanine or junior loans, according to court documents.

The bank had extended some of the loans as part of a joint venture with affiliates of developer Kojaian Management Co. The partnership, which had dated to 1995, was dissolved a year after the bankruptcy and Lehman took title to 15 properties in lieu of foreclosure.

There were 3,037 Class-B buildings totaling more than 100 million square feet in the Detroit area at the end of the second quarter, according to CoStar. The vacancy rate for Class-B buildings in the region was 21.2 per cent.

Asking rent for office space in the Detroit region was $17.81 per square foot in the second quarter, the lowest on record, according to data from CoStar going back to 2000. The national average was $22.70 in the period. Vacancies were 18.4 per cent in Detroit, compared with 12.7 per cent nationally.

That’s not deterring some investors. Detroit office properties sold for an average of $89 per square foot in the second quarter, more than double the value they sold for in the second half of last year, according to data from research firm Real Capital Analytics Inc. The cap rate, or investment yield, which declines as the price of assets rise, was 7.2 percent - the lowest since the fourth quarter of 2008.

“We’re entering a whole new cycle in Detroit after we’ve been bumping along the bottom for three years,” Emmons said. “The automobile business isn’t going away. This is still the world headquarters.”