Detroit is back in developers’ sights

Posted on April 28, 2014

EAST LANSING, Michigan—While Detroit has real and perceived problems with its economic health, sagging infrastructure and rust-belt image, the issues are beginning to disappear, speakers said during a panel discussion.

“We have five hotels under development right now, but our project in Detroit is one of the most important and our most proud,” said Michael Kitchen, director of acquisitions for Aparium Hotel Group, during a panel titled “Investment threats and opportunities in Detroit” at the 4 April meeting of the Real Estate Investment Management Advisory Council of The School of Hospitality Business at Michigan State University.

Aparium is part of a group transforming the former Detroit Fire Department headquarters into a 100-room independent boutique hotel. The property, which will be known as the Foundation Hotel, opens in 2015 following a $25-million restoration and transformation of the building.

“The (Detroit) market is coming back strong, and it is underserved from a hotel standpoint,” Kitchen said. “Beyond that, a new culture of innovation is being developed in the city. People, especially millennials, are coming back to the city because they want to rebuild, which is something that doesn’t exist in a lot of markets. There’s incredible camaraderie and incredible vision.”

Hotel performance in Detroit has rebounded since the end of the recession. Revenue per available room rose 9% in 2010, 12% in 2011 and 7.1% in both 2012 and last year, according to data from STR, the parent company of Hotel News Now. Year to date through March, RevPAR is up 8.6%.

According to STR, 23 hotels comprising 2,160 rooms are in the development pipeline in Detroit.

A new economy

The city’s broader economy is improving and broadening, said panelist Scott Watkins, director of market and industry analysis for Anderson Economic Group.

“We’re seeing the best of times, the worst of times, depending on where you are in the economic stratosphere,” he said. “The blue-collar, high school-educated or less segment of our population is still having a tough go of it.

Those manufacturing jobs in Michigan are gone, and they’re not coming back.”

Watkins said manufacturing jobs in Detroit have been replaced with design, engineering and technology jobs in the auto and life science industries.
“In the latest two years in which data is available, 2011 and 2012, southeast Michigan saw a 15% growth in technology business employment, whereas the nation as a whole saw about 1.2% growth,” Watkins said. “Metro Detroit has more engineering and architectural jobs than any other city in the state or the region or the country.”

The challenge for Detroit has been to broadcast the message that positive changes to its economy are underway, said Bonnie Knutson, a professor at The School of Hospitality Business.

“Detroit is a product but it is also a brand, and you can have the greatest product in the world, but you still have to sell it,” Knutson said. “And that’s the challenge for Detroit, but it is also the opportunity.”

Knutson said Detroit and the state of Michigan need to accept and build upon its culture and heritage, not run away from it.

“There’s an old saying in marketing that it costs too much money to change people’s perception,” she said. “We’re starting to see people embracing what Detroit is. It’s the kind of messaging the hospitality community and all businesses can build on: embracing the brand and turning lemons into lemonade.”

While Detroit has had to wrestle with its perception problems, the panelist said the city’s issues also have an effect on the rest of southeast Michigan and the entire state.

“Fairly or unfairly, the state of Michigan is judged by the world’s knowledge of Detroit, good and bad,” Knutson said. “Trying to compete economically with other states and countries without a strong Detroit is like being in a fight with one hand tied behind our back. Michigan is much better off with a strong Detroit.”

The panelists said these perception problems have had a chilling effect on investment and financing for all types of development, including hotels.
Kitchen said there wasn’t a lot of interest in Aparium’s Foundation Hotel project from typical lenders. Instead, the developers tapped into private investors and took advantage of state historic and community revitalization tax credit programs.

“We still need another two, three or four years of a solid track record before Wall Street looks at us in the way we would like them to look at us,” Anderson’s Watkins said. “It’s coming around, but we need a few more years of people putting their own skin into the game.”

Pure Michigan success

The state’s Pure Michigan tourism marketing campaign has yielded increases in awareness and return on investment, said Sarah Nicholls, an associate professor in Michigan State’s Departments of Community Sustainability and Geography.

Nicholls said the campaign, which launched in 2006 and went national in 2009, returns $6.66 for every dollar spent on the program. And she said awareness of the campaign has increased from 28% in 2010 to 40% last year.

“We know people who have seen our ads have a better image of the state, and we know people who have seen the ads and come here have an even better image of Michigan,” she said. “Not only is the campaign getting people here, but they’re having a good experience and hopefully going back home and telling their friends and relatives to come here, too.”

Nicholls said in recent years the campaign’s reach has spread overseas to the United Kingdom, Germany and other European countries.

“The German-speaking countries are our biggest overseas markets right now,” Nicholls said. “We believe our gritty, urban image appeals to them.”