Q3 Office Market Report

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Q3 Office Market Report

The third quarter of 2020 has been a difficult time for the office market. The number of vacant offices is expected to increase throughout 2020 and 2021. This is due to the decreasing demand for traditional office space, as well as the high unemployment rate in this sector. After COVID- 19, more than 70,000 people who went to an office each day lost their jobs. So, during the second quarter of 2020, Detroit recorded over 300,000 SF of negative absorption. However, Detroit’s submarkets did not experience this trend equally in the third quarter, nor will they in the future. The downtown submarkets such as the Central Business District and Midtown appear most at risk, as these areas have many projects under construction. With commercial real estate brokers and construction contractors being able to work again after having to pause for many months due to COVID-19, the market is expected to pick back up again.

Leasing

Despite a vacancy rate of just under 11%, there were some big leases signed in the third quarter of 2020. Just like with other parts of the country, Detroit has a promising e-commerce market after COVID-19. Amazon recently leased 25,000 SF at the 150 W Jefferson tower in the Financial District. This will be one of their six tech hubs across the nation and will bring 500 jobs to the area. Most employees are expected to make $150,000 per year. In addition to the e-commerce sector, the manufacturing sector is also doing well, as the Ford Motor Company is developing about 500,000 SF of mixed-use space.

Vacancy Rate Office Market

Office Market Rent

The rental market is doing fairly well. The cost of rent has decreased by two dollars per SF in the third quarter compared to the first quarter. These costs may regress in the future. However, there are submarkets that have seen great growth over the third quarter. Oakland County, Auburn Hills, Pontiac, and Rochester are experiencing the highest rates of annual rent growth at above two percent. Additionally, the Downriver submarkets, the Southern I-275 Corridor, and the St. Clair and Lapeer counties are experiencing annual growth rates of just below one percent.

Market Rent Office Market

Office Market Construction

There are major concerns within the construction industry after the third quarter. With over 3.2 million SF under construction in the Detroit market, there will need to be an increase in demand for the sector to see success. But, there is currently a lack of demand for new construction. Since the start of 2020, over 226,000 SF has been delivered. The largest building in this group was 110,000 SF for the Cooper-Standard Automotive’s headquarters in Northville.

Under Construction

There are some large properties under construction in the third quarter, which are medical office buildings in Wayne and Romulus, and an office building in Redford on Plymouth Road. All deliveries in 2020 have been in suburban markets, which is evidence of a shift in demand between suburban versus urban.

Office Market Under Construction

Office Market Sales

Investments in properties have diminished because of the coronavirus pandemic. Just $12 million dollars in transactions occurred in the second quarter, with just a slight increase in the third quarter. Compared to the first quarter, which was before the pandemic, individual sale transactions have fallen by 80%.

Office Market Sales Volume

Economy

Since the outbreak of the coronavirus, 22% of the Michigan labor force has been let go from their jobs. Many companies are struggling to stay open after being forced to shut down to prevent the spread of the virus. This level of unemployment in Michigan is depression-level and will only get worse if business closures remain. Luckily, it seems these restrictions are gradually relaxing, and many businesses are opening. However, the retail sector seems to be slow to pick back up, and it is the most affected sector.

Detroit Economy

Rent & Vacancy

Thankfully, the third quarter was excellent for a positive change in annualized market rent. Every submarket saw a growth, some as high as 30% in the third quarter. The Detroit Office report from Costar shows an average of 10.7% vacancy for its office space while the USA has a 10.8% vacancy rate. Before our city was rebuilt Detroit had 30% vacancy rate. The city has been rebuilt and is vibrant.
Dan Gilbert the Owner of Quicken Loans the largest real estate holder in Detroit, forgave his tenants rent for the first few months of COVID-19. He later moved to percentage rent based upon income for his tenants. Will this be enough to keep the city the restaurants and stores open? I hope so! The question I’m wondering is if Dan Gilberts attempt to subsidize its tenants’ rents will allow Detroit to come out of this health-related recession quicker?
For vacancy rates, some submarkets are doing well, and some are not. The Auburn Hills market has a vacancy rate of just 2.9%, which is excellent for the economy. However, the South Troy area has a vacancy rate of 22.5%, which is devastating for many investors. Hopefully, as restrictions decrease in Michigan, we can see submarkets improve their vacancy rates.

Detroit Office Market Rent & Vacancy

Q3 Office Market Results

We hope this report helps you make decisions in Q4 and beyond. If you would like more reports from Compass Commercial and receive our newsletter, please sign up!

About the Author

Lynn Drake’s status is well known in the industry: She’s the commercial realtor focused on maintaining “true north” for her corporate clients. It’s a reputation built on 35 years of commercial real estate experience. Lynn became a commercial realtor in 2001 after 15 years in corporate real estate. Thus far in her career, Lynn has successfully completed over 1,500 real estate transactions ranging from small business tenant leases to the sale and purchase of industrial complexes.