The Elevator Building in Detroit presents a value-add investment opportunity with substantial upside potential. The property is in the city’s rapidly redeveloping Rivertown Warehouse District, one mile east of Downtown Detroit along the riverfront. It is at the intersection of the Dequindre Cut, a popular bike path that connects the waterfront to Eastern Market, and the Riverwalk which connects downtown to the waterfront and will ultimately extend to Belle Isle Park.
The loft warehouse structure was renovated in 2010 and is currently 89% leased to a variety of creative office tenants. On average, these tenants pay rents that are 30% below current market rates. We will make capital improvements to the building, professionalize management, and increase rents to market rates.
The site is ideally located for residential and retail redevelopment, once planned projects in the area are completed. Zoning allows a building nearly 100,000 SF larger than the current structure. A taller building would have expansive views of the river and downtown. This creates the potential for significant additional upside through future redevelopment.
After 60 years of continuous decline downtown Detroit’s population has increased by 15% since 2010. Millennials are migrating to Detroit and now make up nearly a third of its population. Office jobs in metro Detroit have grown even faster, increasing by 23% since 2010. Artists and entrepreneurs have been moving to Detroit in droves, attracted by the cheap cost of living and the growing pool of creative talent.
Since 2012, $6.6 billion of investment has been committed for construction and renovation in the downtown core. This activity has been led by Dan Gilbert, the founder of Quicken Loans, and his real estate company Bedrock Properties. They have invested over $2.2 billion in more than 100 downtown properties, and recently announced an additional $2.1 billion of investment in four new development projects.
Companies that long ago abandoned downtown for the suburbs are moving back, and tech companies are moving in. Google, Linkedin, and Amazon have all recently leased space downtown. WeWork just opened two co-working locations. Ford, which moved to Dearborn about 20 minutes west of downtown, recently purchased a renovated warehouse building near downtown where it will house its electric and autonomous vehicles teams. In addition, they are reportedly negotiating the purchase of Michigan Central Station, an iconic building that has been abandoned for 30 years.
The Elevator Building is located in the Rivertown Warehouse District, just east of downtown on Detroit’s waterfront. This neighborhood is undergoing a transformation from a blighted warehouse district into one of the city’s most desirable locations. In addition to the waterfront and numerous parks, the area’s proximity to downtown, its stock of attractive warehouse buildings, and its pedestrian friendly streets make it an ideal live/work /play destination.
Many tenants have endured roof leaks and drafty windows. Yet they want to stay in the building because they love their space and the location. We will replace a large portion of the roof, repair or replace windows, and upgrade older HVAC units. We also plan to update conference rooms and bathrooms, add amenities, and improve the overall appearance of the building.
A leading local property management company, Signature Associates, will manage the building. Our management style is professional, responsive and friendly. We want tenants to take pride in our building and to be our ambassadors in the market.
We are purchasing the building with existing tenants and cash flow in place. The average lease rate is 30% below market and more than half the building will roll in 2018 or 2019. We intend to bring the older tenants to market rent, or to replace them with new tenants at market rent. We expect this strategy to increase the unlevered cash return on the property to more than 10% by the end of the second year.