Download Report

Prepared by Michael Grammatico, Senior Sales Executive, CoStar Group, Inc.

Retail owners across Detroit are navigating the weakest demand environment since the onset of the pandemic. Net absorption has been negative for five straight quarters, and preliminary data project another low reading for the July to September period.

Financial difficulties at retailers with Detroit-area locations, such as Forever 21, JOANN Fabric & Craft Store, and Party City, account for a notable share of the retail space hitting the market over the past few months. Gross move-out activity was elevated in the first half of the year, totaling more than 4.7 million SF and marking the highest level since the comparable period in 2008. Meanwhile, move-ins amounted to just 3.6 million SF and resulted in a net absorption reading of -1.1 million SF.

Despite more space being returned to landlords, Detroit's retail availability rate has hovered around 6.7% for nearly three years. A dearth of new construction since the end of 2017 has helped keep the metro's space markets fairly balanced, and limited supply-side pressure is poised to help keep the availability measure steady in the near term, as there's just 940,000 SF in the pipeline, representing 0.4% of existing inventory.

Elevated financing costs and declining rent growth have weighed on construction starts the past two years, and last year's tally of 334,000 SF set a new all-time low for the metro. That pushed the measure of new construction far below the five-year pre-pandemic average of 1.4 million SF.

Looking ahead, occupiers' hesitancy to commit to space in an uncertain macroeconomic environment will lead to a continued slowdown in annual rent growth. The Base Case forecast anticipates retail space to remain negative at least through 2026, pushing the average vacancy rate towards 6% early next year, a decade high. This dynamic will weigh on rental performance over the next year, as asking rents are likely to decline by the end of this year and are not expected to grow again until the second half of 2026.

Beyond lackluster space demand, retail property owners across the Detroit metro are also confronting weakening demographic tailwinds. While household incomes are still rising, population growth is rapidly deflating. Additionally, payroll growth remains below the long-term average, and should the labor market weaken materially during an economic slowdown, that will weigh on consumer confidence and cause a pullback in discretionary spending.