Why some think metro Detroit’s office space market already hit bottom
Posted By: Detroit Free Press on January 11, 2024. For more information, please click here to read the source article.
Metro Detroit’s office space market, hit hard by the pandemic’s work-from-home trend, might have finally reached bottom last year when several big suburban buildings sold for what real estate insiders consider pennies on the dollar.
Some buyers of those buildings are anticipating a rebound in office space demand in 2025, prompted by more employers calling workers back to the office for more days of the week. Since the COVID-19 pandemic, a general trend in metro Detroit has been for businesses to downsize the amount of office space they use.
Meanwhile, certain pockets of the office market, such as downtown Birmingham, that stayed hot throughout the hybrid-work era continue to fetch top-dollar rents.
One of the large buildings that sold cheap was the six-story Raleigh Officentre, 25300 Telegraph in Southfield, that previously was occupied by auto finance firm Credit Acceptance Corp., which had bought the nearly 300,000-square-foot building for $15 million in 2018 and then spent money on renovations.
But once Credit Acceptance pivoted to a “remote first” work strategy during COVID-19, it found it no longer needed the late 1980s office building, and so last spring decided to put the vacant complex and nearly 15-acre site up for auction. The winning bidder: a group of investors from Maryland, who in June paid just under $3.5 million for the empty property.
“How much cheaper can it get? It’s impossible — you’d have to give it away for free,” the investor group’s organizer, Amit Patel, said Wednesday in an interview inside the building’s lobby. “To build this kind of building costs maybe $100 million. So we see the opportunity here.”
Although Patel’s group has yet to find tenants to fill the building, the recent phenomenon of some employers — locally and nationally — mandating greater in-person office attendance is giving them hope. General Motors and Ford last year began requiring salaried workers to be in the office a minimum three days a week, and President-elect Donald Trump recently warned that federal government employees could be fired if they don’t start returning to the office.
“A lot of my friends, they were working from home, now they’re in the office five days a week,” Patel said.
Vacating space
The predicted rebound in office demand isn’t yet showing up in the numbers.
In the eight-county metro Detroit region, there was “negative absorption” of about 757,000 square feet of office space in the fourth quarter of 2024, meaning that much space was vacated, according to the latest survey by real estate firm Colliers.
The official vacancy rate for office space was 12.6%, up 0.5% from the previous quarter. That compares with 9.4% vacancy in the fourth quarter of 2019 — just before the pandemic and explosion of remote work.
Overall, the average gross asking rent for office space was $21.43 per square foot, up about 30 cents year-over-year.
The highest vacancy rate in the Colliers survey was 25.4% in Southfield, a city where large and small office buildings proliferate.
In a phone interview, Southfield Mayor Ken Siver acknowledged his city still has a lot of empty office space, such as the old Blue Cross Blue Shield campus along 11 Mile. But he is observing and hearing indications that the work-from-home trend is fading, with more employers mandating a return to office for a majority of the workweek.
“What I’m seeing is more people back to work and I’m seeing more traffic, especially at 5 o’clock,” Siver said. “Again, it’s not scientific, but I drive all over the city and am invited out to offices, and I just see more traffic in buildings and the parking lots fuller.”
Downsizing space
One example of a downsizing is the planned move next summer by the Dykema law firm out of downtown Detroit’s Renaissance Center to another downtown building, One Kennedy Square at 777 Woodward, near the popular Campus Martius.
The law firm will be leasing only about half the space there that it did at the RenCen for its nearly 100 attorneys and staff.
Dykema marketing manager Tim Trunco said the firm, like others in the legal industry, requires less office space than in the past. Dykema has a flexible policy for in-office attendance, he said, although most of its people are in the office three days a week, some of them five days.
Dykema was among the first tenants in the Renaissance Center after the Detroit landmark began to open in 1976. Trunco said their move isn’t related to the RenCen’s uncertain future once General Motors moves out (those workers are expected to move to a building at the Hudson site), but rather the law firm’s desire to be in the heart of downtown.
Ford offloads 2 buildings
The largest office building sale last quarter was a package of two side-by-side 11-story buildings in Dearborn — 290 and 330 Town Center Drive — that were built in 1989 as part of the Fairlane Plaza development. Ford Motor Land Development, which originally developed the buildings, sold the pair for $4.5 million, or $13.36 per square foot, according to Colliers.
The buyer was a partnership of real estate investors, Martin Siersma and Tarik Dinha. A Ford Land spokesperson declined comment on why it sold the buildings.
“We’re very bullish on office. We think there will be a return to office,” Siersma said. “A lot of larger corporations are realizing people aren’t as productive at home as in the office.”
At the time of the sale, 290 Town Center was about 51% occupied and 330 Town Center was 17% occupied, according to the buildings’ current manager. Ford wasn’t the sole occupant; others include attorneys, accountants and financial planning firms.
The buildings’ manager said that to attract tenants, they are considering leasing space for less than what Ford was charging, which had been $19 to $22 per square foot.
At or near the bottom?
In the years following COVID-19’s arrival and the rise of more remote and “hybrid” work arrangements, it was common to see metro Detroit office tenants renew leases for less space than before. The size of any rent discount was highly dependent on location, with better deals typically available in high-vacancy markets like Southfield.
Paul Choukourian, an executive managing director at Colliers, is among those who think metro Detroit’s office market has bottomed out and is poised for rebound — spurred by employers calling workers back to the office.
“Companies follow trends and if your peers are letting their people work from home two days or three days a week, it’s hard for you not to follow that,” Choukourian said. “The new trends are you have to get back to the office more days than you are now.”
He added, “I do think we’re at the bottom or very near the bottom of the cycle. I still think there’s going to be some examples of buildings that sell cheap, because there are still buildings out there that need to get worked out. But I think throughout 2025, we’ll start to see things come back upward.”
AJ Weiner, managing director at real estate firm JLL, said he is also hearing a preference among some office tenants for having more workers back in the office more days of the week.
Tenants and landlords have gone back to signing longer-term leases with seven- or 10-year terms, he said, in contrast to the shorter-term deals that were common in the early pandemic years when there was more uncertainty.
And not all tenants are after the absolute cheapest space on the market.
Weiner said some businesses have been willing to pay high rents for new high-quality “Class A” office space, a phenomenon that some in real estate call a “flight to quality.” For instance, JPMorgan Chase will be taking office space on the first and second floors of a new four-story building that is under construction at 370 Brown St. in downtown Birmingham. The building is expected to open next year, and will feature luxury housing on its top floors.
“I can remember previous downturns when everybody said, ‘Just give me the cheapest space you have.’ And now there are companies saying ‘I need the nicest space you have,’ ” Weiner said. “In those cases they may be downsizing, but upgrading their environment. So their budget stays the same but they’re going to get a better building.”
Demos, conversions and construction
Besides return-to-work, other factors in the metro Detroit office market are building demolitions, adaptive-reuse conversions and all-new construction.
Some 670,000 square feet of office in Dearborn was permanently removed from the market last year when a new owner of the Regent Court office building on Executive Plaza Drive opted to demolish the massive structure. The building was previously occupied by Ford Motor Co.
A similar fate might await two of the five original towers of Detroit’s Renaissance Center, which is owned by GM.
Late last year, the automaker and Dan Gilbert’s Bedrock real estate firm unveiled a plan to tear down the two 39-story towers closest to the riverfront, reconfigure the remaining three to add some housing and transform the base of the complex.
Their $1.6-billion proposal was pitched as a way to “right-size” the RenCen for an era of less demand for office space, including GM’s forthcoming relocation of its global headquarters in late 2025 or early 2026 to Gilbert’s new Hudson’s site development in another part of downtown.
However, the RenCen redesign is said to hinge on at least $250 million in public funding assistance, which has yet to materialize.
Each of the four RenCen office towers contain between 576,000 to 593,000 square feet of rentable space, according to commercial real estate reports. The center tower of the complex is a Marriott hotel. GM hasn’t publicized the current occupancy rate for the site.
Demolishing and converting the RenCen towers according to the plan would instantly eliminate lots of downtown office space, meaning less competition for other downtown buildings — existing and new — in need of occupants.
The Hudson’s site features a 12-story building with some 400,000-square-feet of office space, and so far, GM is its only announced tenant, with plans to lease four floors. The Hudson’s site also has a 45-floor skyscraper that will contain a luxury hotel and condos, but no office space.
Recently hitting the market is new office space within Ford’s rehabbed Michigan Central, in Detroit’s Corktown neighborhood. The seventh floor (16,500 square feet) and the 11th floor (24,500 square feet) of the former train depot are now on the market and seeking tenants.
Some of the “negative absorption” of office space last quarter was that formerly occupied by the Detroit Free Press and the Detroit News, whose competing newsrooms, yet joint business-side operations, once leased five floors in a downtown building — a former Detroit branch of the Federal Reserve, 160 W. Fort St. — that is owned by Gilbert’s Bedrock.
The Free Press downsized in December to a WeWork co-working space in downtown and the Detroit News moved to a Midtown building.
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