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When experts expect to see demand return for office space in southeast Michigan

Demand for office space in Metro Detroit is weakening as the coronavirus pandemic persists, but experts predict southeast Michigan could recover sooner than other parts of the country.

Metro Detroit’s office market was largely inactive during the third quarter amid the pandemic, according to real estate firm Savills, which maintains an office in Detroit. The region saw a small improvement in transaction activity, up 2.8% compared to the previous quarter, but transactions were down more than 50% compared to last year and few large tenants were known to be seeking space.

“It’s unbelievable how many lease properties are going on the market every day,” said Ellen Mahoney, broker owner of RE/MAX Commercial Connection in Ferndale. “So the volume is going up.”

The availability rate increased from 20% to 21.9%, reaching its highest point in nearly two years. While there has been a decrease in demand for office space locally and nationwide as workers continue to work remotely, some experts say a recovery is expected. The true impact the pandemic will have on the market for office space won’t be revealed for another 18 to 24 months, some say.

“The question is if you’re working remotely, and it’s working, the need for office space declines,” said Russell Long, partner and managing director with Bloomfield Hills-based financial and strategic advisory firm O’Keefe. “How that’s resolved, I think, is a year or two down the road.”

Building occupancy across the country is forecast to drop by about 145 million square feet in 2020 and 2021 amid job losses and remote work, according to a recent report by commercial real estate firm Cushman & Wakefield. And the firm warns it could take years for office real estate to recover.

However, Greg Bockart, executive managing director for the Savills Detroit office, said he sees market stability and normalcy in Detroit as early as next year. He anticipates a wave of businesses to return to offices in January, with larger organizations, such as the Detroit automakers, returning in June or July.

“I anticipate that more subleases are forthcoming, but I believe Detroit is a special situation,” Bockart said. “We have all waited to see the vibrancy that downtown Detroit now offers. Most business leaders I have spoken to that lease office space downtown don’t want to abandon what’s been created over the last 10 years. Most of us want to get back to our offices and the Detroit we all love.”

Meanwhile, developers such as Bedrock in Detroit are forging ahead with marquee mixed-use developments that include office space, including the Book Tower on Washington Boulevard, the Hudson’s site on Woodward, and the Monroe Blocks. They insist planned office space within the projects has not been impacted by the pandemic.

‘Dynamics had changed’

Earlier this year, the Chicago-based auto insurance company, Clearcover Inc., came to Detroit looking for office space.

The company stopped its search as the pandemic shuttered offices across the country, sending employees home to work remotely. Clearcover instead announced in August it would open a virtual Detroit office creating up to 300 jobs. Hiring is underway for the remote positions.

“We actually went to Detroit and met with city officials and Michigan officials literally right before we went on lockdown,” said Heidi Craun, Clearcover’s head of customer experience, at the time of the announcement. “We did look at spaces in Detroit with interest in that. However, given that dynamics had changed since then, that is something we will pursue if and when we can.”

The pandemic led to an office downsizing for Mara Topper, CEO of Senior Counseling Services. Topper occupied 2,250 square feet of office space in Farmington Hills, where she manages mental health counseling for seniors and home-bound individuals.

When the COVID-19 pandemic was first reported in Michigan earlier this year, Topper moved staff to Zoom calls for meetings and training. Therapists went virtual with clients. And she decided she had more space than she needed, so she downsized to an almost 1,600-square-foot office about two miles away.

“It was just on my mind,” she said. “I was kind of waiting to see what would happen. I took the plunge.” She doesn’t anticipate bringing staff into the office, or for therapists to visit clients in their homes, until there is a proven COVID-19 vaccine and treatment.

“Eventually, we would love to bring everyone together in person, but again, can we be safe?” she said. “People have underlying medical issues, too, and all of that so we just want to make the staff as safe as possible and our clients as safe as possible.”

Landlords wait and see

Overall gross asking rents in Metro Detroit were up slightly in the third quarter, increasing 0.8% to $20.09 per square foot as landlords take a wait-and-see approach, according to Savills.

“The pricing in my opinion is not changing much,” Mahoney said. “Depending how protracted this stay-at-home thing ends up being, there’s going to be a question mark. At some point, you would expect pricing to go down when there’s a lack of demand.”

According to commercial real estate research firm Trepp LLC, office buildings in the Detroit, Warren and Dearborn market have a total of $1.48 billion in commercial mortgage-backed security loans with 12.46% of that backed by leases expiring through 2022. The question is will those tenants renew.

Long-term leases don’t necessarily protect building owners, Mahoney said: “At some point, if a tenant insists, they’re going to look for a buyout. So you might see some of that kind of settlement. If they’re saving millions of dollars a year not putting people in an office, they’re not going to spend the money on the lease for any long term. They’re going to want to settle it.”

Jason Stough, senior associate with the office division for Signature Associates in Southfield, said some landlords and tenants are negotiating deals for the short term.

“People who had leases expiring who were thinking about moving, maybe did short-term renewals with the owners for a year or two,” he said. “We wouldn’t have seen a short-term, one-year renewal in the market last year. An owner wouldn’t have even accepted it as an option.

“You were looking at a minimum of three years on a renewal, and now with the uncertainly, the owners are saying ‘yes, we’ll do the one-year extension.’ Everybody kicks the can down the road until maybe next summer, next fall, and we can figure it out from there.”

Bedrock’s outlook steady

Yet there is some market activity, despite the slowdown. The Savills report notes Sachse Construction is relocating its offices to 33,000 square feet at the Orchestra Place building in Midtown Detroit, and STMircroelectronics renewed its lease of 21,000-square-feet of space in Livonia.

Sam Hamburger, vice president of acquisitions and leasing for Bedrock, said the company’s long-term outlook on office demand has not changed significantly. Bedrock, the real estate arm of mortgage mogul Dan Gilbert’s Detroit-based family of companies, owns and/or manages 6 million square feet of office space in the city.

“A lot of the deals that we’ve negotiated over the years have five, seven or 10-year terms,” Hamburger said. “The larger corporate tenants, it’s very typical for them. What is hopefully a blip on the radar won’t impact their long-term outlooks as well. And that’s what we’re anticipating.”

Hamburger said small business owners with short-term leases have concerns: “They are in a tough position when we’re looking at the future of their tenancy in our buildings in terms of what types of commitments they can make.”

The company is in contact with potential tenants who are taking a wait-and-see approach due to the pandemic, he added. As for future development, plans will continue for office space in its planned mixed-use projects: the Book Tower is scheduled for completion by the end of 2022, construction of the Hudson’s site was impacted by the quarantine and is expected to last at least the end of 2023, and the Monroe Blocks development is in its design period, and no estimated date was available.

Looking for deals

Rachel Pharis-Pannell, director of leasing and tenant success for commercial real estate firm Thomas Duke Co., said business has been a roller coaster since the pandemic with some businesses expanding their space, shrinking or terminating leases. The needs vary by sector.

“Everybody was impacted differently,” she said. “It was important for us to understand who is hurting and who was fine and who was going to be needing something as far as office space and how we were going to be able to accommodate that.”

The portfolio has maintained 85-93% occupancy rate, but foot traffic from workers who have returned to their offices is at about 40%, Pharis-Pannell said. Her company has held its rental rates steady, but businesses in competitive buildings have called hoping to get a good deal to relocate. There is a lot of competition among property owners along the Big Beaver corridor in Troy.

“I think with the pandemic, I think it’s caused people to not only downsize, but it’s also caused tenants to take advantage of the market there and kind of start looking around and seeing which of these landlords are really hungry to make a deal right now,” she said. “Which of these landlords are really trying to lock up space even if it’s a really low-rate deal.”

O’Keefe’s Long said he believes companies will use office space differently in the future, such as having more employees work remotely and coming into the office for meetings. He said he sees downtown Detroit poised for recovery.

“If this moves along and a vaccine is developed, I believe long-term the city will continue to come back as it had been,” Long said. “With all the new construction and the remodeling, rehabbing of the buildings downtown, I think Detroit will still do well once this passes.”


Posted By: The Detroit News on October 24, 2020.  For more information, please click here to read the source article.

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