Levi Smith Comments on GM/Chrysler Merger

If GM were to move into the Chrysler headquarters in Auburn Hills, Detroit's office vacancy rate would increase from 30.5% to 46.5%.

It's an unlikely scenario.

But, if Chrysler LLC were to give up all of its space in its Auburn Hills headquarters building, the city's office vacancy rate would go from 3% to 62%, according to a Crain's analysis of data from Bethesda, MD-based CoStar Group.

There are few answers to what will happen with a consolidation or merger involving Chrysler, General Motors Corp. and possible Nissan-Renault. But one answer, however, is clear: any consolidation would cause great harm to the area's real estate market.

"It would be a disaster for the area," said Levi Smith, a Principal in the Southfield office of GVA Detroit. "There are a lot of older buildings without suitable power services, and without the ceiling heights and truck docks to suit most of the users out there."

And there is a lot of real estate out there.

General Motors Corp. owns and leases 84 million square feet of industrial space in Southeast Michigan and 10 million square feeet of office space, said Dan Flores, GM manager of corporate news relations.

Chrysler controls 21.6 million square feet of industrial space and 4.8 million square feet of office space, 4.4 million of which is the headquarters, according to data from CoStar, Chicago-based Grubb & Ellis and Crain's research.

While the office markets would face distress, brokers are most worried about the industrial market.

Industrial corridors in Sterling Heights, Warren and Detroit stand to go vacant with no hope of finding new tenants.

And with real estate comes taxes.

The city of Warren brought in $8 million in taxes from GM last year and $4 million from Chrysler, said Warren Mayor Jim Fouts. With a general fund budget of $100 million, the two companies prop up much of the city's services and municipal payroll.

"No good can come from this," he said.

The industrial buildings and factories up and down Mound Road in Warren would be very difficult to fill, said Bill Lichwalla, CEO of Southfield-based real estate company Plante Moran Cresa, LLC.

"A lot of the real estate portfolio that the combined companies have is so specialized by size and nature of use that our clients would have little use for it," he said.

Doing anything with the massive facilities would require large amounts of creativity, said Smith, who represents tenants in office and industrial transactions. Under the right circumstances, there could be great opportunities.

A good example, Smith said, is the move by The Parade Co. to take the former Chrysler factory at 9600 Mt. Elliott St. in Detroit to use as a staging area for its floats.

"The owners were able to buy right and make it very attractive for lease rates," he said. "So the Parade Company got a great deal."

The more realistic scenario is that opportunistic buyers would purchase old facilities at a deep discount, Smith said. "They would then be able to offer discounted lease rates to tenants to move in, undercutting the existing landlords and moving vacancy around.

"You just have more musical chairs," he said.

In some cases, a large plant can be broken up and used by smaller users, said Geoff Hill, a senior vice president in the Southfield office of Grubb & Ellis. he worked on the redevelopment of a 1.2 million square foot tank plant in Warren, which was subdivided and leased to two companies.

"But that's only if they're functional," he said. "If there is some obsolescence to it, it would be sitting on the market forever."

Identity is also a major issue on the minds of regional leaders.

For Fouts, it's the image the GM Tech Center brings to our city.

"Chrysler has a tech center in Auburn Hills, GM has one here," he said. "They'd only need one. If we lose that tech center, we lose a big part of our identity."

Similar worries fall in Detroit.

If GM were to consolidate its space into the Chrysler headquareters building in Auburn Hills, it would increase Detroit's vacancy rate from 30.5% to 46.5%, according to a Crain's analysis of market data from Grubb & Ellis.

The scenario is considered a likely one among real estate brokers, who note that there is very little room to move Chrysler employees to Detroit with the Renaissance Center 94% leased.

The six tower office center would be 48% leased if GM and GMAC were to move to Auburn Hills. GM leases 1.5 million square feet in the Renaissance Center, with GMAC leasing another 226,000 square feet, according to real estate sources.

Impacting Detriot the most, however, would be the loss of what GM has brought to the city since it moved downtown in 1996, said Paul Beitz, a first vice president in the Southfield office of CB Richard Ellis.

"I hope GM continues to be part of Detroit," he said during the Engineering Society of Detroit's economic outlook forum last week. "Without GM and what they have done for the city, you wouldn't have the growth in retail and restaurants, with small entrepreneurs taking bets there and showing faith in the city."

In Auburn Hills, it would be possible - but difficult - to move other tenants into the Chrysler headquarters building, said Russ Sykes, CEO of Detroit based SmithGroup, Inc., the architecture firm which designed the building.

"They could sublet pieces of it, but it would have to be in certain wings of the building," he said. "The building was designed to be open and collaborative."

The other problem in making the building multi-tenant is the combination of office space with research and development space.

"A lot of the space isn't just office," he said. "If you were a tenant and only wanted the office space, you'd have a lot of unused space."

If there's any bright spot to be found, it's that there is an estimated increase in demand for automobile production capacity to start in 2010 and continue for several years, said Bernard Swiecki, senior project manager for Ann Arbor based Center for Automotive Research.

"We've been taking so much capacity out for years," he said. "With an uptick, there will be a need for more."

Daniel Duggan, Writer For Crain's Detroit Business