With fewer people vaccinated than are required for herd immunity and new variants of the coronavirus emerging just as soon as things seem poised to return to normal, the office market in Detroit continues to struggle. Over 2 million SF of office space returned to market in 2020 and another 800,000 SF in 2021. The vacancy rate is now 11.8%, while availability sits at 15.5%. The difference between them represents space available through subleasing. The development of new office space is concentrated in the Central Business District, New Center, and Detroit West of Woodward submarkets, all of which already have high vacancy and availability rates. As many people continue to work from home and more companies make permanent plans for greater work location flexibility, it doesn’t appear that the city will be hurting for available office space any time in the near future.

Q2 Office Report

Leasing

While suburban areas around Detroit saw a modest uptick in leasing last year, the urban submarkets continue to struggle. The submarkets that have experienced the most growth the past year are Southfield, Auburn Hills, and Troy South with Volkswagen of America’s lease renewal for 338,276 SF in Auburn Hills being the largest lease of the year. As new deliveries outpace demand, vacancies will continue to increase. They are worst in the areas of Troy South, Detroit West of Woodward, Bloomfield, and Southfield.

Renting

As with leasing, the coronavirus pandemic definitely had a negative impact on rent growth; however, it seemed to be slowly turning around by the end of 2021. By Q42021, several different Detroit submarkets were experiencing positive growth, including some lower-cost submarkets, as well as a few with higher rents, such as the Central I-96 Corridor, Bloomfield West, and Rochester. It’s too early to tell how continued pandemic events will affect rent growth in the near future.

Construction

After a big year for new starts in 2020, development slowed significantly in 2021, with an 85% decline in new projects being started. However, only about 37% of the square footage under construction is available. While that total space delivered over the past year is just north of 1 million SF, over 90% of that space is composed of 4 & 5 Star properties.

Here are the top submarkets in Detroit for the fourth 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

As of Q42021, 2.5 million SF are under construction, and almost half of that is within the city of Detroit. The most significant ongoing construction is happening in the Central Business District, where two buildings totaling 788,000 SF are going up 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. 2001 15th St
3. 2025 Woodward Ave
4. Hudson’s, 1206 Woodward Ave
5. Royal Oak City Center, 111 E 3rd St
6. 120 Henry St
7. 39000 W Seven Mile Rd

Sales

While the pandemic practically ground investment activity to a halt in 2020, it started to pick back up in 2021. Driven largely by institution and private equity investors, sales increased in the Southern I-275 Corridor, Central Business District, Southfield, and Farmington Hills submarkets. Prices averaged $117/SF (with a cap rate of 9.33%), but the largest sale of the year was Harbor Group International’s $58 million ($322.22/SF) purchase of a 180,000SF 3 Star property in Novi that was fully leased at the time of purchase.

Economy

Like most of the developed world, Detroit experienced an economic downturn, including its worst unemployment rate in the last half century (22.7%), as a result of the coronavirus pandemic. Federal stimulus packages and Michigan’s stated economic reopening, the MI Safe Start Plan, have helped the city begin to recover.

As vaccination rates improved and restrictions were rescinded, more people were able to return to work and new jobs have been added. The year-over-year job growth rate for Detroit was 8.6%, which is well ahead of the national rate of 5.8%.

Nevertheless, office work may have been forever changed by the pandemic, particularly in terms of use of real estate. As more and more companies shift their policies, fewer people may return to offices even after the pandemic is over. For instance, General Electric, one of the largest employers in Detroit, has implemented a “work appropriately” policy that empowers workers to work from whatever location best supports their labor. In the long term, this may mean significantly fewer employees in rented office space and companies spending less money on rented space and more on home office equipment.

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/.