Ann Arbor Business Monthly May 2016 : Page 1
BUSINESS MONTHLY • ann arbor • chelsea • dexter • manchester • milan • saline • whitmore lake • ypsilanti ann arbor area Volume 12, No. 3 May 2016 $2.00 Toyota To Open National Research Facility In Ann Arbor By Duane Ramsey Dr. Gill Pratt, CEO of the Toyota Research Institute (TRI), recently announced that Toyota will establish its third TRI facility in the U.S. located in Ann Arbor, near the University of Michigan (U-M) campus. The new facility (known as TRI-ANN) is scheduled to open in June with a staff of approximately 50 employees. “Beyond the extraordinary work that U-M is doing broadly in advancing automotive safety research -and in autonomous driving, in particular -Toyota has deep roots in the Ann Arbor community,” stated Pratt in keynote remarks he delivered at the GPU (Graphics Processing Unit) Technology Conference in California last month. “TRI was drawn to Ann Arbor because of the strength of the university; the utility of Mcity and the Mobility Transformation Center which we currently sponsor; the promise of the future American Center for Mobility at Willow Run; and the proximity to, and synergies with, our two well-established Toyota Technical Centers nearby,” Pratt explained. Toyota will fund research in arti ﬁ cial intelligence, robotics and materials science, joining INSIDE: Pretzel Bell Is Back In Downtown Ann Arbor – Page 6 Tax Cuts Beat Selective Favors In Boosting Economic Growth – Page 7 Small Business & The Internet By Mike Gould “Crowd Funding” – Page 8 Business Briefs – Pages 9-11 TD Ameritrade To Invest $5.75 Million, Create 75 Jobs In Ann Arbor – Page 12 Toyota Technical and Supply Centers South of Ann Arbor. the TRI facility established last January in Palo Alto, working with Stanford (TRI-PAL), and in Cambridge working with MIT (TRI-CAM). TRI-ANN is the third research facility established by Toyota in the area, joining its two technical centers in Ann Arbor and York Township. The facility will be located in an existing building on Green Road, near the UMTRI/ MTC campus. The Toyota Technical Centers have been conducting research in the area of autonomous cars for more than a decade. A group of about 15 team members will transfer to the new TRI-ANN facility when it opens in June. Additional people will be hired or relocated as needed to complete the staff there. “The team at TRI-ANN will be primarily focused on fully-autonomous vehicle research,” Toyota Ann Arbor (Continued Page 3) Area Business Growth Equals Less Of ﬁ ce Space Available By David and Margaret Baker Ann Arbor’s commercial real estate market is growing. Vacancy rates for of ﬁ ce and ﬂ ex space are generally heading down, and this tightening of vacancy rates can be largely attributed to business growth and related increased employment. For business owners, this means you should plan ahead for increased lease costs. For real estate investors, this may be a good time to explore investment options in the Ann Arbor commercial real estate market. This shrinking vacancy can be attributed to company growth and increased employment in the Ann Arbor area. In fact, Michigan overall has seen signi ﬁ cant job growth. The University of Michigan Research Seminar in Quantitative Economics (RSQE) publishes an annual economic Of ﬁ ce Space (Continued Page 4) Place Your Advertising Where Businesses Are Reading–– In the Pages of ann arbor area BUSINESS MONTHLY June 2016 Deadline is May 23 July 2015 Deadline is June 24 ann arbor area BUSINESS MONTHLY P. O. Box 460 Hamburg, MI 48139-0460 PRSRT STD US POSTAGE PAID ST JOSEPH MI PERMIT #335
Toyota To Open National Research Facility In Ann Arbor
Dr. Gill Pratt, CEO of the Toyota Research Institute (TRI), recently announced that Toyota will establish its third TRI facility in the U.S. located in Ann Arbor, near the University of Michigan (U-M) campus. The new facility (known as TRI-ANN) is scheduled to open in June with a staff of approximately 50 employees.
“Beyond the extraordinary work that U-M is doing broadly in advancing automotive safety research - and in autonomous driving, in particular - Toyota has deep roots in the Ann Arbor community,” stated Pratt in keynote remarks he delivered at the GPU (Graphics Processing Unit) Technology Conference in California last month.
“TRI was drawn to Ann Arbor because of the strength of the university; the utility of Mcity and the Mobility Transformation Center which we currently sponsor; the promise of the future American Center for Mobility at Willow Run; and the proximity to, and synergies with, our two well-established Toyota Technical Centers nearby,” Pratt explained.
Toyota will fund research in artificial intelligence, robotics and materials science, joining the TRI facility established last January in Palo Alto, working with Stanford (TRI-PAL), and in Cambridge working with MIT (TRI-CAM).
TRI-ANN is the third research facility established by Toyota in the area, joining its two technical centers in Ann Arbor and York Township. The facility will be located in an existing building on Green Road, near the UMTRI/ MTC campus.
The Toyota Technical Centers have been conducting research in the area of autonomous cars for more than a decade. A group of about 15 team members will transfer to the new TRI-ANN facility when it opens in June.
Additional people will be hired or relocated as needed to complete the staff there.
“The team at TRI-ANN will be primarily focused on fullyautonomous vehicle research,” stated Brian Watkins, manager of External Affairs for the TTC.
U-M Professors Ryan Eustice and Edwin Olson are joining TRI-ANN as the area leads for mapping/localization and perception, respectively. Both will be based at the Ann Arbor office, and will retain their U-M faculty positions, according to Toyota.
“Sensor hardware and algorithms are improving at a tremendous pace. TRI researchers will push the frontier even further, with the goal of providing safer vehicles and more helpful robots in the home,” Olson stated.
“Ann Arbor is a fantastic location for TRI to expand its autonomous driving efforts. We will benefit from Toyota’s existing team and U-M’s research talent and facilities where we can perform extreme-limit testing in a wide variety of environments,” Eustice added.
The Toyota Research Institute is an enterprise designed to bridge the gap between fundamental research and product development with initial funding of $1 billion.
Although the focus of each of the three strategically located facilities will be broad, each will feature a different core discipline. TRI-ANN will focus primarily on fully autonomous (chauffeured) driving.
Beyond the projects it will engage in with the three universities (U-M, Stanford and MIT), TRI is enthusiastically pursuing collaboration with other automakers, IT companies, suppliers, research labs and universities to jointly develop autonomous technologies, according to Pratt.
Expansion at the TTC in York Township is well underway, according to Watkins.
The addition to the existing building will house the supplier center as well as office and workspace for the purchasing department which is being relocated from Erlanger, Kentucky. An additional facility being constructed to the east of the main building will house the prototype development operations.
When completed in late 2016, the two new structures will provide an additional 390,000 square feet, reported Watkins. Once completed, the facilities will be home to a total of approximately 1,400 employees.
“This region is moving full speed ahead in staking a strong leadership position in the future of automotive technology,” stated Paul Krutko, president and CEO of Ann Arbor SPARK. “Toyota’s longstanding commitment and support for existing mobility research in the Ann Arbor region is foundational to our future success.”
“Additionally, the approval by the state to create the American Center for Mobility is encouraging companies like Toyota to make new investment and create jobs here through initiatives like the new Toyota Research Institute. Ann Arbor SPARK has worked with Toyota every step of the way along its growth path, with business development and site location support, and will continue to support future expansion.”
Area Business Growth Equals Less Office Space Available
David, Margaret Baker
Ann Arbor’s commercial real estate market is growing. Vacancy rates for office and flex space are generally heading down, and this tightening of vacancy rates can be largely attributed to business growth and related increased employment. For business owners, this means you should plan ahead for increased lease costs. For real estate investors, this may be a good time to explore investment options in the Ann Arbor commercial real estate market.
This shrinking vacancy can be attributed to company growth and increased employment in the Ann Arbor area. In fact, Michigan overall has seen significant job growth. The University of Michigan Research Seminar in Quantitative Economics (RSQE) publishes an annual economic forecast for Michigan using what they call the Michigan Model. In the most recent forecast released last month, RSQE Director George A. Fulton highlights Michigan’s employment growth.
“Michigan is in its seventh year of economic recovery,” says Fulton, “having created 445,000 jobs from the previous recession’s low point in the summer of 2009 to the closing quarter of 2015, averaging 71,200 job additions per year.” In 2015, Fulton estimates that almost 70,000 net new Michigan jobs were added, with a significant 3% growth boost coming in the fourth quarter of 2015.
Fulton and his team see Michigan employment growth continuing for at least two more years, albeit at a slower pace. While 2016 net new employment is expected to be 73,200, 2017 is projected to slip to 56,000 net new jobs. So we can expect slower growth, but growth nonetheless.
To better understand these Ann Arbor vacancy trends, employment trends, and the ramifications for Ann Arbor Area business owners, we sat down with the team at Oxford Companies. Our roundtable discussion included four members of the Oxford Companies team:
• Jeff Hauptman, CEO of Oxford Companies, serves as managing member to several investment partnerships with hundreds of investors.
• Nick Zagar, Director of Oxford Commercial, conducts all the commercial leasing for Oxford Commercial.
• Alex Perlman, Associate Director, focuses on brokerage for Oxford Commercial, Andrew Selinger, Investment Analyst, performs market research and financial analysis to determine business opportunities.
Oxford Companies is an Ann Arbor-based, full-service real estate company with more than 15 years of experience investing in the greater Ann Arbor area. Oxford Companies’ 60 professionals offer leasing, property management, construction, and investment services to tenants, owners, and investors. What follows are some thoughts from the Oxford team on the commercial office space market in Ann Arbor.
Q: Where are we today with commercial office space demand in the Ann Arbor area?
We first went into a tenant’s market back when the bubble burst in 2001. While the rest of the country recovered in 2004 through 2007, this area did not. The Ann Arbor area remained a tenant’s market for an extended period of time, driving rents down. Even though we are fairly insulated in Ann Arbor, a lot of the continued tenant market stems from the effect of the slow auto industry. A number of thirdparty suppliers—technicians, engineers, other auto supplier companies, etc.—suffered during that time and have not really recovered until now. So, as far as we know, we’ve had the longest tenant market in the history of Ann Arbor.
Today, the vacancy rate for Ann Arbor is near the best point at which we’ve ever been. We’re projecting the vacancy rate to continue to stay low for the next few years. The total number of employed people in Ann Arbor is soon going to be higher than it’s ever been, and it’s going to keep going higher for the foreseeable future. That’s really the driver behind office space demand.
The Ann Arbor metropolitan statistical area (MSA) is Washtenaw County, but most of the jobs are concentrated in Ann Arbor. Looking at the RSQE economic forecasts, we can expect more than 10,000 new jobs over the next three years. What we’ve done is adapt this employment forecast to our own planning use by breaking down the job categories into what we see as jobs that translate into a person sitting at a desk. This gives us a sense of the office market demand.
What we came up was around 5,000 jobs that would require a desk. In other words, we expect roughly half of those 10,000 net new jobs projected over the next three years are people who are likely sitting at a desk. Our brokers use a ratio of 200 square feet per of office space needed per job. We can use this ratio to do some basic calculations to forecast that we may absorb one million square feet of office space if the employment forecasts play out.
Of course, this doesn’t include new construction or businesses relocating (e.g., Google’s relocation) due to lack of space and high leasing costs, which are both real possibilities.
Q: What do these vacancy rates mean for Ann Arbor area business owners?
If you’re a business owner, here’s how you translate this data into insight for your business. Since the market is getting tighter, vacancy will continue to decrease and rent prices will continue to rise. So, consider getting into a long-term lease and do it as soon as you can.
The rental rate in the South Ann Arbor area is at the lower end of the $22-$26 per square foot range. As you go outside the freeway belt, you have rents that go below $22. If you’re positioning yourself to build a new building, it would be unadvised for you to locate it in an area where you have a high competition for lower rents. There continues to be a good deal of office space supply down near the airport and near the Saline area.
Q: Do you consider South Ann Arbor an option for new building construction?
Most of the rents in that area are $22 to $26 per square foot. Some are below $18 and some above $30, but the bulk of them are in the $22-$26 range. You really need to see a market at the $32-$33 per square foot to support a need for a new building.
A lot of the buildings on the South side were built as flex buildings. The idea behind the flex building is you can get dirty in the back, machine the parts, and use the back door for deliveries. Meanwhile, in the front office you do business and day-to-day transactions. Some of that parted garage space has been consolidated since the need for it isn’t as strong as it was.
These flex buildings have also started being converted into office buildings, turning more of what’s available to useable space for companies. A lot of what’s on the South side are these single story buildings that had garage doors and truck wells, and those that are vacant today will continue to transition to office space today as long as they can recover the build-out to turn it into office space.
Q.What growth or investment opportunities do you see for Oxford Companies?
We’re buying office space for far less that it costs to build new, so for now we can charge rents below what we think they will eventually be. That low cost includes replacing roofs, fixing parking lots, and doing other needed renovations. We expect this to continue for about another year. We only have a few more projects that we’re going after, and then we’re going to stop.
We’re also looking at potential new construction projects. One example is at Forest Cove [near Miller Rd. and M 14]. We think this is an attractive opportunity for several reasons. First, from a broad standpoint, there’s little else in this area in terms of office space. The office space at Forest Cove is class A space, and there is just not much space like it in that section of Ann Arbor.
Second, Forest Cove is 100% occupied, so there’s no vacancy at all. Third, tenants are already paying a relatively high price per square foot, so they’re not far from the price to support new construction. So, what we’re looking at is building a new 30,000 square foot building. We already have companies expressing interest, and the building can be supported.
We’re making a significant investment in our director-level positions as well. We brought in someone who managed for the largest regional property owners, we brought in a very talented controller, and we just hired a marketing director who oversaw marketing for a company almost ten times our size. So, we’re really growing scale and applying it to a much more sophisticated operations team so we can continue to deliver a better level of service.
We’ve been acquiring properties for 18 years. We took a bit of a break during the recession. In 2011, we felt it was the right time and created the Ann Arbor Opportunity Fund. We hadn’t identified any specific properties, but we realized that the market was warming up again and the time was right. Since then, we have more than doubled the square footage of our portfolio. We’re now by far the biggest commercial property manager in town. We’ve been doing acquisitions nonstop since 2011 because we continue to see the market improve.
We have solid economic drivers. You have the University of Michigan, tech and healthcare, and generally the needed building blocks of a strong economy. Ann Arbor unemployment is at 2.9%, putting it 8th among all 387 MSA’s in the US. So it’s really playing out as we thought it would.
Our investors get the Ann Arbor story. They’re excited by what we’ve done in the last couple of years. We are looking at a couple of acquisitions now and are doing some fundraising for those. We are fundraising at a faster rate than ever before.
If you’re a business you’re realizing that market rent is going up and space is getting hard to find. At the same time, a company like ours is going in and improving the space. We’re coming in with the cash to fix your building and fix the roof. And, because we’re now by far the biggest, we have a level of service and a concentration of people focused on real estate.
Q: Any final thoughts about the Ann Arbor area?
I’d say that the consequences for introducing an organization like SPARK has really helped develop this growth in employment. SPARK has done a phenomenal job making Ann Arbor, Washtenaw County, and parts of Livingston Country a business-friendly environment. We’re seeing the consequences of these large employers becoming magnets for their suppliers or organizations that are in their ecosystems. The consequence is that these companies want to be near those central hubs, and the difficulty will be in making it possible to co-locate near these central hubs without making it a huge cost to them.
With the success of the office market, you’re seeing landlords investing more in their spaces, and it just brings everything up. When parking lots are repaired, when buildings are looking better, when landscaping is being taken care of, it just brings the whole town up. This leads to some of the projects that we’re going to be undertaking, such as developing a BIZ zone on the south side which will improve all the freeway entrances. These are the kinds of things we see happening as the Ann Arbor area improves.
David A. Baker and Margaret J. Baker, Ph.D., are partners at Ann Arbor-based Baker Strategy Group, a strategy consulting firm in specializing research and strategy.