Whole Foods Bets Detroit

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By Maura Webber Sadovi, via Wall Street Journal

The opening this week of Detroit’s first Whole Foods Market WFM -2.22% is a welcome bright moment for a city that is in dire financial straits. The opening of the upscale grocery-store chain also marks the end of a 15-year effort to develop the property, showing how difficult it remains to complete relatively small real-estate projects in Detroit, even in well-regarded neighborhoods.

The property, located on Mack Avenue near the main city thoroughfare of Woodward Avenue, is part of a larger mixed-use project developed by an affiliate of Ram Realty Services Inc. of Palm Beach Gardens, Fla. The development also includes a 55-unit apartment and condominium complex and additional retail space. It is located in the Midtown area that is home to the Detroit Symphony Orchestra, Wayne State University’s College of Pharmacy and Health Sciences and the Detroit Institute of Arts.

Despite the store’s prominent neighbors, it took a lot of heavy lifting to complete the deal. The $12.9 million Whole Foods store was financed with $6.1 million in equity from Ram and Whole Foods. Ram contributed 1.9 acres of land for the store valued at about $1 million, said Peter Cummings, chairman of Ram. The remaining $5.8 million came from state and local grants and the sale of tax credits tied to the project. The subsidies were needed because most traditional lenders remain leery of any commercial-real-estate development in the city, said Olga Stella, vice president of business development at Detroit Economic Growth Corp. which provided a $1.25 million grant. The DEGC is a private nonprofit group that supports economic development in Detroit.

Although Ram invests largely in Southeastern real estate, Mr. Cummings has Detroit roots and a belief in the city’s resurgence. “Repopulating the city with a younger population is real,” said Mr. Cummings, who believes Detroit will evolve into a city with fewer residents than at its peak but with pockets of strong neighborhoods and more green space. “It will be reinvented.”

The Detroit location, which Whole Foods Market Inc. is leasing, will be a bold test for the grocer’s expansion efforts. The Austin, Texas, grocer known for selling healthy food in some of the country’s toniest neighborhoods is opening in Detroit in the wake of Michigan’s governor’s move earlier this year to tap an emergency manager to turn around the finances of the cash-strapped city.

The company is one of a number of supermarket chains that are pushing into urban areas as traditional suburban markets are saturated, analysts say. Whole Foods decided to open the Detroit store in part because it saw a rising number of people in the city who are seeking out farmer’s markets and high-quality produce and bread, said Red Elk Banks, executive operations coordinator with Whole Foods in the Midwest. “The city has some major challenges, but that doesn’t stop the resilience of the people who live in the city,” said Mr. Banks, who declined to comment on the financial details of the real estate. “You see a growing community that has rediscovered what good food is about.”

Mr. Cummings is one of a handful of developers who believe that Detroit will eventually turn around. Dan Gilbert, founder of Quicken Loans Inc. and a Detroit native, is making one of the biggest bets on the city. Mr. Gilbert has bought more than a dozen properties in Detroit in recent years and has filled many of them with thousands of his employees relocated from the suburbs.

But so far, Detroit remains an uphill road for developers. The city’s financial condition is so weak that some believe it could be nearing bankruptcy. “In a market as economically challenged as Detroit demand is a risk,” said Suzanne Mulvee, director of retail research with the CoStar Group Inc., CSGP +0.23% a real-estate research firm. “Even with subsidies and tax incentives, if you don’t have tenants or customers…how are you going to make money?”

Others continue to flee. Last week, Pulte Group Inc., PHM -3.70% one of the nation’s largest home builders, with a long background in Detroit, announced that it is moving its headquarters from the Detroit area to Atlanta.

In 1998, a Ram affiliate that involved Mr. Cummings with his father-in-law, Max Fisher, a prominent Detroit businessman, bought a controlling stake in the 4-acre parcel that now includes the land where Whole Foods was built. Ram ultimately paid about $3 million for all the land. .

But Detroit’s economic woes extended Mr. Cummings waiting time for developing the property. His original plan was to build a midrise apartment tower on the property in about five years. With initial demand weak, he didn’t see any cash flow from the property until he built a parking garage in 2002. He then built a condominium complex on the site just as the housing bust hit and Detroit’s auto industry collapsed. In 2008, he ultimately sold some two-bedroom apartments for prices in the $140,000 range, about half of the price he had expected to fetch. Prices have since risen. “Nobody who decides they’re going to work in Detroit has an easy ride of it,” said Mr. Cummings.

More recently, the outlook for parts of central Detroit has started to improve even as the overall city’s finances remain battered. Unemployment in the city has fallen to 16% in April from 16.8% a year earlier. That is still more than twice the seasonally adjusted national average of 7.5% in the same month but well below the city’s 23.1% unemployment rate touched in April of 2009, according to the Bureau of Labor Statistics.

Meanwhile, the region’s retail vacancy rate also stabilized at about 10.4% in the fourth quarter, down from 10.6% in the year earlier period and below the 11.4% in 2009, according to CoStar. “The car business is back and there’s just a whole better set of circumstances,” said Mr. Cummings.

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