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Detroit Office Market Development Quickly Accelerates

Ford Motor Co. has purchased Michigan Central Station in Detroit. Ford plans to transform the former train station into a 1.2 million-square-foot campus.

The most exciting story in Michigan’s overall recovery from the Great Recession has been the revitalization of downtown Detroit. For locals and out-of-towners, Detroit’s development boom is surprising, exciting, refreshing, and at times, hard to believe. This real estate cycle may go down as the most important and consequential in 50 years.

Indeed, the numbers and the anecdotal evidence demonstrate that we are not just witnessing a hot market — we are witnessing a once-in-a-generation shift in Detroit’s office market.

Pete McGrath, Colliers International

Where we were

What makes Detroit’s renaissance so amazing is how far the city has come in just eight years. For decades, downtown Detroit’s office market was effectively in the Detroit River. The central business district (CBD) continuously bled tenants to suburban markets, and heavy concessions along with incentives were required to lure office users to the city. Office tenants tended to be law firms, city, county and federal government agencies, non-profits, and city contractors — generally users that had to be downtown for proximity to the courts and City Hall.

While the real estate statistics were not strong, the larger issue was the overall look and feel of the setting. Many buildings sat ominously vacant, the restaurant scene was sleepy and street life was almost non-existent. The market didn’t pass the eye test, let alone any market metrics.

Gilbert buys 90 buildings

The current comeback began to take shape in 2010, when serial entrepreneur Dan Gilbert’s Quicken Loans family of companies started relocating from the suburbs to downtown Detroit. Over a period of eight years, his companies have brought over 13,000 new employees to downtown, and have purchased over 90 buildings.

Bedrock, his real estate arm, has gained a reputation for top-of-market rents as a landlord, but also for spending significant amounts of money on sorely needed repairs, top-notch tenant improvement packages and common area updates. So far, Bedrock’s strategy has proven successful at luring tenants.

On the corporate side, ad agency Campbell Ewald, Fifth Third Bank, Ally Bank, Accenture, LinkedIn and Microsoft have made substantial moves the city, even though significantly cheaper space was available in the suburbs. Across the board, each organization cited the need to attract and retain top talent and a desire to be where the action is as the reason for the move. The price per square foot was a secondary consideration.

The move of tenants large and small to downtown Detroit has certainly impacted the numbers. Since 2010, over 2.3 million square feet of office space has been absorbed in the CBD, with more likely to come off the market. Much to the chagrin of tenants, rents have grown as well, from a strike price of $22 per square foot for Class A space in 2012 to $28 per square foot in top tier buildings in 2018.

The map expands

The latest sign of Detroit’s recovery is Ford Motor Co.’s purchase of the long-abandoned Michigan Central Station in the Corktown neighborhood. For decades, the train station represented all that was wrong with Detroit. The massive complex hovered over the low-rise Corktown neighborhood as a sort of abandoned-building Frankenstein, scaring residents and investors away.

Since 2008, Corktown has experienced a small but visible revival of its own, with new restaurants, coffee shops and other stores moving into the area’s vintage buildings from the 1880s. With Ford slated to move over 2,500 employees of its autonomous cars division to the new campus, the area is expected to evolve into a boutique, tech-oriented alternative to the CBD’s more traditional office environment.

Other neighborhoods have gotten in on the recovery act as well. Detroit’s New Center area is experiencing a mini-boom of its own. The area has attracted tenants such as Tata Motors from the suburbs with its competitive rates, one-of-a-kind historic architecture and excellent commuter access.

Closer to downtown Detroit, an area centered around the brand new Little Caesar’s Arena has been able to attract a new 175,000-square-foot training center for the Detroit Pistons, a new 127,000-square-foot sports medicine facility for the Detroit Medical Center and the king of all tech tenants, a 29,000-square-foot office for Google.

This expansion of the map is a welcome development for tenants and landlords alike. First and foremost, it gives tenants a variety of options in terms of building stock, neighborhood feel and price. From the commuter access of New Center to the classic office environment of the CBD and the more alternative Corktown, the market can now attract a diverse and growing group of office tenants that want to be a part of Detroit’s revival.

The positive feedback loop

The office development has spun off in a positive way in these nearby areas, pushing new development in retail and residential space, and creating a more dynamic overall environment for all stakeholders. Closely related to the new office development is the  addition of new multifamily product, along with new restaurants and retail.

In the multifamily sector, a mix of new construction and historic rehabs has changed the city for the better, bringing a younger, dynamic resident to the city and filling in gaps in the city’s urban fabric. On the retail front, national retailers such as Nike, Shake Shack and Under Armor have moved in, along with a list of locally owned restaurants and bars.

Overall, the new development in each sector has created a positive feedback loop of amenities that has paid dividends in a large way. The greater downtown area is more walkable, more active and more vibrant than ever before, and it will continue to attract metro Detroit’s top office tenants. Not bad for a market that was written off for dead in 2009.

— By Pete McGrath, Senior Associate, Colliers International. This article originally appeared in the July 2018 issue of Heartland Real Estate Business magazine. 

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