Since I became a commercial broker in 2000, the metro Detroit office market has always had a significantly higher vacancy rate than the rest of the country. Today, although the office market is just starting to stabilize, the national vacancy rate for the U.S. is 12.3%, while Detroit’s vacancy rate is 11.8%. Although most Michigan companies are still unsure as to when and if they should recall their staff back to the office, it is important to note that our state’s vacancy rate is less than the national average. This is largely the result of Detroit’s stronger-than-average economic recovery from the shutdowns at the beginning of the Covid-19 pandemic. However, since the percentage of vaccinated Michigan residents has stalled out at below herd immunity rates, a lot of uncertainty about the future value of office space remains.
Q1 Office Report
The slowed pace of leasing in 2021 has definitely continued into 2022, with vacancy rates reaching as high as 24.4% in some urban submarkets. However, overall, the decline in leasing seems to have plateaued. In addition, several of the hardest hit submarkets, including Troy North and Troy South, have been the most active in 2022. Several of the largest leases in the past 12 months include Volkswagen of America’s renewal of the lease for their 338,276SF Auburn Hills location, US Ecology’s new 60, 991SF lease on the Southern I-275 Corridor in Livonia, and NYX Inc.’s lease of a 35,227SF space in Plymouth, also on the Southern I-275 Corridor.
Detroit rents have remained in the middle of the pack for both the Midwest region and the State of Michigan. Rents in Detroit are higher than Grand Rapids and Lansing but lower than Ann Arbor. The more expensive urban markets seem to have been hardest hit by recent downturns, with the higher-rent urban submarkets remaining in negative territory. However, as price-sensitive tenants turned to lower-cost submarkets, the growth in these areas improved, as did growth in some of the more expensive suburban submarkets. Continued subleasing growth may continue to affect rents until businesses finish transitioning into their new post-Covid working conditions.
Unfortunately, many of the submarkets with significant amounts of space under construction are the same submarkets with high vacancy rates, each issue contributing to problems for the other. However, the deceleration in new starts (a decrease of 85% since 2020) should help bring balance over the next year.
Here are the top submarkets in Detroit for the second quarter:
- Detroit West of Woodward
- Detroit – New Center
- Royal Oak
- Southern I-275 Corridor
Under Construction Properties
New construction starts this year currently total only 138,000SF, representing a significant decline from previous years, which may give the leasing market space to rebound in the next couple of years. The current space underway represents 1.1% of total market inventory. Meanwhile, 62% of the space currently underway is preleased. The largest of these projects are in Detroit’s central business district, including two buildings on Woodward Avenue and TCF Tower.
Here are the 7 largest properties that are, or were, under construction in the second quarter:
- Michigan Central Station, 2001 15th St.
- Hudson’s Site, 1208 Woodward Ave.
- 2025 Woodward Ave.
- Royal Oak City Center, 111 E 3rd St.
- 120 Henry St.
- 39000 W Seven Mile Rd.
- Bloomfield Hills Office Center, 40705 Woodward Ave.
Rebounding from subdued investment activity in 2020, sales over the past 12 months have totaled $521 million, returning to historical levels. Most investment was driven by institutional and private equity investors. The submarkets with the highest sales were Macomb West and the Southern I-275 Corridor, as well as the suburban markets of the Central I-96 Corridor, Southfield, and Rochester. In addition, pricing has also picked up, reaching $167SF during Q122 after ending last year at $107SF, while the market cap rate has decreased to 9.3%.
Responding to what has been identified as a generational downturn resulting from the Covid-19 pandemic, including a catastrophic unemployment high of 22.7%, Michigan’s Safe Start Plan took a phased approach to reopening and renewing the economy. In Detroit, increased vaccination rates and eased restrictions enabled a lot of people to go back to work, bringing the year-over-year job growth rate to 8.6%, above the national average of 5.8%.
The nature of office work has changed considerably, as 70% of office workers indicated an explicit preference for working from home when possible. Since they make up the largest sector of the workforce in Detroit, at 29%, this may result in significant changes in the Detroit office market in the future. For instance, one of the largest employers in the state, General Motors, has transitioned to what it calls a “work appropriately” plan, which allows employees to work wherever they work most efficiently and productively.
Meanwhile, the next two largest segments, industrial at 19% and healthcare at 13%, are also reeling from the impact of the pandemic. Healthcare facilities remain critical to combatting the pandemic, and although they have eased some restrictions, they continue to operate under Covid-19 workplace safety rules that have been dropped by most other sectors. Moreover, while back on the job, the industrial workforce continues to face logistical challenges, supply chain issues, and raw material shortages as a result of the pandemic.
This is a summarized version of an office market report that was originally created by CoStar. The full report can be https://www.compass-commercial.com/office-real-estate-report-2020/.