Detroit: The Motor City is no longer The Forgotten City

NATHIC Midwest, Nov. 16 and 17 at the InterContinental Hotel Chicago Magnificent Mile, will focus on hotel investment, development, financing and operations in the Midwest's top MSAs and secondary markets.

DETROIT—The long-term view for Detroit is sunny, sources said, as the Motor City is seeing a commitment from its government and developers to make the once-dilapidated town shine again.

“It’s no longer the forgotten city. The city has done a good job to make it a desired location,” said Paul Breslin, managing partner at Horwath and adjunct professor at Georgia State University. “That’s not easy when you think about where it was just a few years ago.”

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Bob Kraemer, principal of Kraemer Design Group, a Detroit-based architecture and design firm, agreed. Not only is Dan Gilbert, the majority owner of the Cleveland Cavaliers and chairman and founder of Rock Ventures and Quicken Loans, investing a billion-plus dollars into the city, but Kraemer said national developers are trying to get into the market due to its “incredible vibrancy,” which is causing hoteliers to see growing average daily rates.

When it comes to performance, Breslin said Detroit doesn’t compare to big cities, but hotels are definitely seeing growth.

Year-to-date June, ADR for Detroit hotels has grown 4.4 percent to $97.74, according to STR data. Revenue per available room has increased 5.4 percent to $62.87, while occupancy is up 1 percent to 64.3 percent.

Kraemer said Detroit hotels are accommodating a mix of business, and he is seeing a lot of weekend SMERF—social, military, education, religious and fraternal—business. He pointed to a town filled with entertainment options and pro baseball, football and hockey teams helping to drive demand to the city.

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Additionally, the proposed Detroit River International Crossing; the $137-million M-1 rail circulator; and the 35-acre, $650-million entertainment district anchored by a new multipurpose arena for the Detroit Red Wings also will be demand drivers for the city, according to HVS’ “2016 HVI Hotel Valuation Index.”

Supply

Detroit has 385 hotels with 42,276 rooms, according to STR data. Year-to-date June, the city has seen a supply increase of 1.7 percent and a demand increase of 2.7 percent.

Kraemer said most of the supply coming into Detroit is in the way of boutique hotels and brands, and much of the development is coming in the way of adaptive reuse projects.

The 136-room Aloft Detroit opened in December 2014 in the historic David Whitney Building in the city’s downtown. The building was purchased by JV Whitney Partners for $3.3 million, and the renovation cost $94.5 million.

One reason for the surge in boutique hotels and brands? “Millennials in the city are pushing for local and authentic experiences” causing hotel development and F&B to be heavily boutique, Kraemer said.

Breslin said he’s seeing a mix of conversion and new-construction projects for Detroit. A couple of key projects include:

Breslin said a story in itself for Detroit hotels is being told through renovations. “The amount is significant. It’s necessary. In the downturn, it was put off and now it’s much needed.”

For instance, the $279-million renovation of Cobo Center, Detroit’s convention center, was recently completed. The Detroit Marriott at the Renaissance also recently completed a $30-million renovation.

Transactions, Valuation

Breslin said there were good deals to be had in Detroit due to the downturn, allowing buyers to purchase at low cost to see a more meaningful return on investment.

“Follow the money and look at the buyers [in Detroit],” he said. “The top 20 buyers are real players.” He said such investments came from the likes of New York City-based NorthStar; Chicago-based AJ Capital Partners; and investors from Canada, Kuwait and Singapore, to name a few.

“Limited sales volume occurred in Detroit in 2014 and 2015, with most sales occurring in the surrounding suburbs and representing limited-service lodging facilities,” according to HVS’ “2016 HVI Hotel Valuation Index.”

One recent transaction occurred in Dearborn, Mich. The former 772-room Dearborn Hyatt Regency, also known as the Edward Village Michigan, sold this year to an offshore Asian group known locally as 600 Town Center LLC. The company purchased the hotel and convention center from Israel-based Royal Realties LLC for $20 million.

“No transactions of noteworthy importance took place in Downtown Detroit. We expect these factors to support continued, strong value gains in 2016, before tapering off somewhat through 2018,” according to HVS.

Valuation in Detroit grew 10 percent in 2015. Growth in 2016 is at 1 percent, while growth over the next four years is forecast at 8 percent.

At the end of the day, Breslin said Detroit’s success will all come down to the city’s commitment to itself.

“The hotel business is all about local, even though foreign money is coming in,” he said. “How you get people to invest is cities have to believe in the city and make it better.”

Excited about Detroit's prospects? Want to learn more about what's going on in The Motor City, and Midwest hotel development and investment as a whole? These topics and more will be covered at NATHIC Midwest, Nov. 16 and 17, at the InterContinental Hotel Chicago Magnificent Mile. To learn more about the event and to register, click HERE.

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