For Detroit’s Office Market, Motown Is Growth Town
With 2018 in the rearview mirror, it’s clear that the Detroit commercial office space market looks dramatically different today than it did just a few years ago. By far the biggest story is the continuing (and perhaps even accelerating) level of leasing activity across the metro area.
In the context of Detroit’s ongoing civic renaissance and sustained level of economic growth both regionally and nationally, the strength of the office market isn’t necessarily a shock, but it’s still fascinating to watch things unfold.
With both demand and rental rates on the rise, and a central business district (CBD) that is close to full capacity (currently there is less than 5 percent vacancy in Detroit’s CBD), we are starting to see office tenants moving up into Midtown, New Center and other neighborhoods.
The growth in these areas has been not just noteworthy, but significant, with buildings like New Center One on West Grand Boulevard in excess of 90 percent occupancy. The Fisher Building in New Center boasts more than 100,000 square feet of new leasing activity in the last year.
More than a few office tenants now find themselves priced out of the CBD, a situation that is exacerbated not just by rate increases, but by growing parking challenges and additional costs. Consequently, it isn’t just other downtown areas that are seeing a surge of activity.
Office tenants that don’t have a specific requirement to be in the city proper are starting to push their way back out into nearby suburban markets like Southfield and on up to Troy. Occupancy increases and positive absorption have really started to impact areas like Bingham Farms, which is particularly hot right now and where we have seen a flurry of activity in recent months.
This commercial office expansion has helped highlight a couple of notable trends that have been percolating for some time now. One of those is the growing propensity of tenants prioritizing (and landlords providing) spaces with comparable amenities to those that downtown offices enjoy.
Suburban tenants are especially interested in access to a broader and more appealing range of retail and dining options. Familiar national names or cool local or regional brands are most desirable.
Suburban locations also offer the space to provide outdoor areas like parks and trails, and landlords are becoming more creative in their efforts to introduce in-house or on-site options like coffee shops, cafés and fitness facilities.
Some owners and developers are investing in more shared co-working and conference spaces, upgrading infrastructure and offering things like free Wi-Fi throughout the building common areas. Activation and animation is also on the rise, with special events and building or parking lot activities such as corn hole, Jenga, luncheons and other fun tenant “extras.”
Landlords aren’t the only ones experimenting with different layouts and formats. More office tenants are strategically evaluating their space and square footage needs, and looking at ways to provide more work/life flexibility. From “hoteling” to sometimes not even assigning desks, operational models that offer greater flexibility are getting more attention. Hoteling refers to the short-term letting of surplus office space to a temporary worker.
While tenants are being more thoughtful about how much square footage they take on (and are looking at that expense line on their books much more closely), how they allocate that space is evolving. In many cases, square footage savings might be reconfigured to provide additional amenities for employees.
It’s been encouraging to recognize that Detroit is definitely a location that’s on the radar for a growing number of international companies. More overseas brands and businesses are coming to Detroit, using the market as a jumping off point for larger Midwest or U.S. expansion plans.
The city is turning heads as a place that is increasingly seen as a market on the rise and a strong place to do business, while remaining much more cost-effective relative to places like Chicago or New York.
Getting ahead of the curve
As rental rates continue to rise, some office tenants are trying to get out in front of the trend by seeing if they can renew a year or two in advance and lock in their rate before things escalate further. In general, tenants have also been more willing to sign longer-term leases lately. With rents on the rise and the shortage of construction workers making build-outs more expensive, office tenants are taking the long view and being more willing to take the time they need to be able to build out their spaces the way they want.
The next big thing?
While the general lack of downtown office inventory and subsequent expansion of the overall Detroit office market is the big story, the coming influx of new development product will be the storyline to monitor going forward. That’s something that hasn’t happened in many years in Detroit, and it’s a strong sign of the market’s strength and maturity at this stage in the city’s reemergence.
The big question is at what point in the economic cycle will that new product come on board? We are still a couple of years away from some of the most notable projects hitting the market, and how that new block of space gets absorbed will likely dictate what comes next.
By that point, will we have pushed up rental rates enough to justify additional new construction? Will the national economy remain strong? The answers to those questions will have important implications for the future of Detroit’s commercial office market well beyond 2019 and into the next decade.
— By Shelia Fogarty, Lesley Gutman and Jeanne Gross, Farbman Group. This article originally appeared in the February 2019 issue of Heartland Real Estate Business magazine.