The Detroit office market has struggled to recover amidst the ongoing Covid-19 pandemic. Although many companies prepared to return to business as usual following the arrival of vaccines, Michigan’s failure to reach a herd immunity rate of 70% (only 50% of Michigan residents are vaccinated) and the emergence of the Delta variant, put a wrench in those plans. Like most of the country, Detroit’s office demand dropped rapidly last year (over 2 million SF returned to the market), recovered slightly during Q1 of 2021, and then dropped again, closing out Q3 with vacancy rate of 11.8% and an availability rate of 15.8%. The majority of new development is happening in the already over-saturated Central Business District, New Center, and Detroit West of Woodward areas, while over half of the investment for the year has gone to the suburban submarkets of the Southern I-275 Corridor, the Central I-96 Corridor, and Southfield.

Q3 Office Market Report

Leasing

As return-to-work plans waivered due to the Delta surge, leasing in Detroit’s urban submarkets continued to decline. In an attempt to save money, many businesses are vacating leases early or attempting to sublease, resulting in an 8-year high of more than 1.88 million SF sublease space. Meanwhile, the suburban submarkets of Southfield, Auburn Hills, and Troy South saw the largest office leasing gains this year, including Volkswagen’s renewal of their 338,276 SF in Auburn Hills, US Ecology’s new 60,991 SF lease in the Southern I-275 Corridor, and NYX Inc’s 35,227 SF lease also in the Southern I-275 submarket.

Renting

In comparison to other Midwest markets, Detroit falls squarely in the middle when it comes to rentals, with an average asking rent of $21/SF. The rental market began to look slightly better during Q3 2021, as rentals in lower cost submarkets increased. Nevertheless, growth in most of the higher-rent submarkets remained negative, except for that of a few suburban markets, including the Central I-96 Corridor, Bloomfield West, and Rochester. It remains difficult to predict when we’ll see an uptick in rents across the board, as the increase in sublease properties and the lack of demand continue to influence the overall trends.

Construction

The third quarter of 2021 has seen a rapid and large (94%) deceleration in new projects, breaking ground on only 137,000 SF. Net deliveries for the past year totaled approximately 1 million SF, 90% of which were 4- and 5-Star properties. Notably, Olympia Development Group, largely known for their work in downtown Detroit, expanded their reach to complete a 200,000 SF space for Mercedes-Benz in Farmington Hills.

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

1. CBD
2. St Clair & Lapeer Counties
3. Detroit W of Woodward
4. Detroit-New Center
5. Southern I-275 Corridor

Under Construction Properties

After breaking ground on over 1.58 million SF last year, this year’s slowdown has resulted in 2.5 million SF currently under construction, 37% of which is available. Half of the under construction properties are within the city of Detroit, with the Central Business District representing the largest share of ongoing development, including two buildings on Woodward totaling 788,00 SF.

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

1. 2001 15th St
2. M-24 & Silverball
3. 2025 Woodward Ave
4. Hudson’s at 1206 Woodward Ave
5. 120 Henry St
6. 39000 W Seven Mile Rd
7. Wellington Professional, Wellington Blvd

Sales

After a 23% decline last year, investment activity began to pick back up this year. As of late September, $321 million in assets had been traded, driven largely by institutional and private equity investors in suburban submarkets. The third quarter saw $77 million in total sales, with prices remaining stable at $117/SF (and a cap rate of 9.33%.). The most noteworthy sale of Q3 was LCN Capital Partners of New York, New York sale of two adjoining office/industrial properties to the Quebec, Canada-based Group Quint for $52.5 million ($49.67/SF).

Economy

Like the rest of the country (and most of the world), Detroit’s economy was impacted negatively by the Covid-19 pandemic. At its peak, unemployment reached 22.7%, which was 6.5% higher than previously record-breaking number of 16.2% following the Great Recession in 1982. This devastatingly high unemployment snow-balled into a lack of demand because without jobs people had no purchasing power.

Federal stimulus money helped keep the bottom from falling out by enabling people to pay their rent, maintain their health insurance, and buy groceries, and now things are starting to look up. In spring 2021, Michigan implemented a scaffolded economic reopening plan called the MI Safe Start Plan, and it has been moving forward as intended.

The year-over-year job growth rate for the Detroit area reached 8.6% when 152,400 jobs were added in June. Office workers comprise the largest workforce in Detroit at 29%, and they, along with industrial (19%) and healthcare (13%) have seen the greatest recovery since the low points of employment last year. The hospitality industry might have been the hardest hit by the pandemic, and restaurants and lodging continue to struggle. Finally, while the greatest growth has been in suburban areas, strong foreign direct investment (FDI) in manufacturing continues to support the metro Detroit area.

This is a summarized version of an office market report that was originally created by CoStar. The full report can be found here https://www.compass-commercial.com/office-real-estate-report-2020/.