Defining Detroit’s appeal

DETROIT – What was once, then wasn’t and now just might be?

The riddle whether Detroit is a viable place for hospitality investors to lay their money down is increasingly getting some answers from owners and developers leaning bullish toward the Motor City.

“Those who know Detroit understand it well and I would say those who really know Detroit have a good opinion of it, but I think there’s always the education piece for the people who don’t,” said Will Woodworth, senior vice president of investments for Peachtree Group, which has been active in the market.

Atlanta-based Peachtree is no stranger to the area. “We’ve been there in the thick of it of when it was a little tougher,” Woodworth continued. “Over the past 10 years we started with our lending business, got exposure to the market and then in recent years have had increasing interest in equity positions and ownership there.”

Many might consider things being “a little tougher” an understatement when recalling Detroit’s recent past. Historically, thriving via the dominance of the labor- and wealth-generating auto industry, over the past several decades, social, political and economic turmoil characterized much of the city’s profile. Indeed, a dozen years ago it declared Chapter 9 bankruptcy, although it ultimately exited the process in December 2014.

Within the time period, however, investors, notably Rocket Mortgage Founder billionaire Dan Gilbert, who had earlier moved his business to Detroit, began seeing the market’s potential, particularly in the Midtown/Downtown area. He started developing, acquiring and managing a variety of properties in a concentrated—and ongoing—effort to revitalize the area and stimulate interest, which has yielded positive results. A variety of funding sources—city, state and private—also support revitalization efforts.

Among his more than 100 business ventures, Gilbert’s real estate company, Bedrock Detroit, owns the 260-key Courtyard by Marriott Detroit Downtown in the Millender Center, along with the high-profile, lifestyle Shinola-branded hotel.

“The Detroit hospitality market has become very dynamic and has many more demand drivers than just automotive companies,” said Adam Dahan, vice president of business development for Azul Hospitality Group, which has been active in the market since 2016. “In that time, we opened the Element Detroit at the Metropolitan [Building], where we also operate the Monarch Club rooftop bar and The Lone Goat pub on the ground floor, and then converted [an] Aloft to the Hotel David Whitney, Autograph Collection (which opened last year).”

Both properties are housed in historic buildings.

Great bones

Dahan tagged Detroit as a strong adaptive-reuse market, noting there is “incredible architecture,” with many buildings still underutilized or sitting vacant.

“Historically, the state of Michigan has incentivized developers to take on these complicated projects, which has been helpful to getting them done. With that being said, we always caution adaptive reuse, especially in historic buildings because they are often times more work than a new development but if executed right, can be very successful,” he said.

In a hotel play that included new construction, Peachtree Group jointly developed the AC Hotel Detroit at the Bonstelle Theatre with local real estate development and investment firm The Roxbury Group, which is led by principals David Di Rita and Stacy Fox. Located at 10 Eliot St. in the Brush Park neighborhood, the 10-story, 154-key new-build hotel is managed by Azul Hospitality.

The project additionally involved restoration of the early 20th century Bonstelle Theatre (the former 1903 Temple Beth-El), which will host a variety of events, including live performances. The venue is connected to the hotel via the glass-enclosed Conservatory that includes a bar and private event space.

Active locally, The Roxbury Group is a joint-venture partner with the Means Group in an LLC (Metropolitan Hotel Partners) that developed and owns the Element Detroit. It also owns the David Whitney building.

Woodworth said their focus on new construction through that AC was really capitalizing on that Midtown/Downtown market. “You have the four major sports franchises downtown… committed revitalization of the Downtown neighborhood by the city with a lot of public support behind it. This made it a pretty attractive place between corporate and leisure travelers; just a big hub of demand,“ he said.

Peachtree also gained greater exposure in the market by partnering with area-based Group 10 Management, bringing 14 hotels into its managed portfolio.

“We like it when we have opportunities to have a critical mass in a given region and being able to partner with Group 10—an experienced owner within the Detroit/Midwest area,” Woodworth said. “It gave us a chance to not only enter that market but enter it with a lot of exposure and the ability to commit resources to it.”

Luxury leads

When it comes to construction, STR/CoStar data shows 50% of the total rooms under construction in Detroit (by scale) are luxury, 22% are upscale, 10% are upper midscale, 6% are midscale and 5% are upper upscale; 7% are unaffiliated. Data on economy rooms is negligible.

Among the luxury properties expected by 2027 are the 600-key JW Marriott Detroit Downtown, which is being developed by Sterling Group, and will be connected to the Huntington Place Convention Center via a skybridge; the 225-key Edition being developed by Bedrock Detroit as part of the Hudson’s Detroit mixed-use development; and the 180-key NoMad Detroit, which will be housed in the historic Michigan Central Station via a partnership between Ford Motor Co. and Sydell Group.

While the significant skew toward lodging’s upper tiers might give pause, luxury and upper-upscale demand “has held up very well” post-pandemic, according to Jan Freitag, national director, hospitality analytics, for CoStar Group. “[This] has given owners/developers faith in the higher-end performance. Most of the hotel stock is a bit dated and developers feel they can provide more updated amenities and services to their audience,” he said.

Commenting on the dearth of projects at the opposite development end, Freitag noted, “Economy-class projects are hard to pencil given the high interest rates and the relatively small ADR that they achieve.”

He added: “Given the price per key to develop, midscale properties might be an easier product type to underwrite” in the market.

“We continue to remain bullish on Detroit and are working on more projects with our local partners, The Roxbury Group. Detroit has done a very good job stimulating development, while also keeping downtown very clean and safe,” Dahan observed.

As to making more inroads in the market, Woodworth said while Peachtree currently is not under a fresh contract for land or for a property, “every day we’re continuing to evaluate opportunities and certainly are fans of the market.”