Although office jobs are overwhelmingly responsible for Detroit’s employment bounce back after the pandemic shutdowns, a return to actual office spaces has not accompanied that trend. The ongoing pandemic and workers’ desire for the flexibility of hybrid and work-from-home arrangements have transformed business as usual, and it’s looking more and more like some of these changes are here to stay, particularly in terms of effects on the office real estate market. Demand for office space has continued to drop over the past 12 months, with a current vacancy rate of 11.7%. While approximately 250k SF. have been returned to the market and the pipeline remains full, annual rent growth has returned to positive territory at 0.1% overall and 0.7% for 3-star properties.

Q2 Office Report

Leasing

While still slow, leasing has picked up in recent months, with 245k SF absorbed during Q2 of 2022, which is the largest uptick since the start of the pandemic. Vacancy rates seem to have plateaued, but worrisomely high rates remain in Troy South (25.1%), Southfield (18.4%), and Detroit West of Woodward (20.8%). These troubled areas may experience a slower than average recovery as a full development pipeline puts pressure on the leasing market. The largest recent leases include Proctor Financial’s renewal of a 68,244 SF space in Troy North and Pipetek Infrastructure Services’ new lease of a 32,089 SF space in Plymouth.

Renting

Detroit rents remain in the middle of the pack for both the Midwest region and the State of Michigan. With average asking rents of $21/SF as of 22Q2, rents in Detroit are higher than Grand Rapids and Lansing but lower than Ann Arbor. As year-over-year rent growth turns positive at 0.1%, the more expensive urban markets seem to be hardest hit by recent downturns, remaining in negative territory. However, as price-sensitive tenants turn to lower-cost submarkets, the growth in these areas has improved, as has growth in some of the more expensive suburban submarkets. Co-Star’s Base Case forecast suggests that improvement should continue through the second half of 2022 and 2023.

Construction

Roughly 2 million SF of space, representing 1% of total market inventory, is currently underway. Approximately 266k SF of that was started in the past 12 months, and this number is expected to go down as construction starts continue to decelerate. Of the space currently under construction, about 73% is preleased.

Here are the top submarkets in Detroit for the second quarter:

1. CBD
2. Detroit West of Woodward
3. Detroit – New Center
4. Royal Oak
5. Macomb East

Under Construction Properties

As new construction starts continue to decline in response to a full pipeline, the office leasing market is expected to rebound in the next couple of years. Net deliveries totaled 680k SF over the past year, with 4-&-5-tar properties accounting for over 80%. The current space underway represents 1% of total market inventory, and most new construction projects are within the city of Detroit. The largest of these projects is GPC Adams’ TCF Tower on Woodward Avenue.

Here are the 7 largest properties that are, or were, under construction in the second quarter:

1. Michigan Central Station, 2001 15^th
2. Hudson’s Site, 1208 Woodward Ave.
3. 2025 Woodward Ave.
4. Royal Oak City Center, 111 E 3^rd
5. 120 Henry St.
6. 111 Henry St.
7. 22510 Harrington St.

Sales

Rebounding from subdued investment activity in 2020, sales over the past 12 months have totaled $558 million, surpassing the 5-year average of $522 million. Most investment continues to be 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%.

Economy

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 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/