By Garrett Keais
In my 25 years in commercial real estate, I’ve never seen the economy — and our industry — come to a standstill the way it did this spring after the coronavirus hit. With so much uncertainty in the market, Detroit’s office sales and leasing activity slowed considerably. But as the last decade has shown us, if ever there was a city that could take a punch and get back up swinging, it’s Detroit.
Comeback before the virus
Fueled by a strong economy and low unemployment, America’s “Comeback City” was posting first-quarter 2020 office vacancy rates as low as 7 percent in one central submarket, according to Cushman & Wakefield research, and seeing rising property values and rents before the coronavirus hit.
It was a striking change from a decade earlier, when the Detroit area was struggling after the Great Recession. Unemployment was 3.7 percent in February 2020, compared with 17.2 percent in June 2010, according to the U.S. Bureau of Labor Statistics. The city’s GDP had climbed steadily over those years.
Tech giants like Quicken, Google, Twitter, Microsoft and Amazon moved to the city’s central business district, boosting downtown office occupancy and helping to diversify the local economy — although the automotive industry still dominates. Ford, General Motors, Fiat Chrysler Automobile (FCA) and Lear, which manufactures automotive seating and electrical components, are still among the state’s largest employers.
The improved economy and employment were reflected in Detroit’s office occupancy. Central business district (CBD) office vacancy dropped from 26.2 percent in 2010, the highest in the nation at that time, to 11.9 percent in fourth-quarter 2019, per Cushman & Wakefield. The vacancy rate for first-quarter 2020 was 11.5 percent, with the Detroit New Center/Midtown submarket at around 7 percent. Net absorption for the first quarter was more than 1 million square feet, and rates per square foot were $21.94, up from $19.74 just a year earlier. In 2019, asking rates were up around 30 percent.
Several recent office deals reflected local and national investors’ growing optimism. Auto parts supplier Marelli announced in March it would take 300,000 square feet of flexible office space in Southfield at 26555 Northwestern Highway, which had been vacant for almost five years. The American Center, a Class A office tower also located in Southfield (and home to Cushman & Wakefield’s Detroit office), continued its resurgence and reached 85 percent occupancy. In the suburb of Troy, Kelly Services sold a portfolio of three office buildings totaling nearly 400,000 square feet plus land, much of which will be redeveloped as a new mixed-use center including retail and multifamily.
Beyond office, there was other investment or planned investment in the city. FCA announced in February 2019 it would invest $4.5 billion in existing and new auto plants, including Detroit’s first new assembly plant in over 30 years. In January 2019, Waymo, an autonomous technology manufacturer, said it would retrofit a 200,000-square-foot manufacturing space to build driverless cars by the end of 2021. And AKASOL, a German battery maker, said in June 2019 it would open a $40 million plant in Hazel Park.
Impact of the virus
Seemingly overnight, COVID-19 put Detroit’s future progress in question. Michigan reported some of the highest numbers of COVID-19 cases and deaths in the country, according to the Centers for Disease Control and Prevention (CDC). Auto sales were down about 50 percent in April 2020 versus April 2019, according to J.D. Power.
This decline dealt a significant blow to the Motor City, where unemployment soared to 22 percent in April, according to the Michigan Department of Technology, Management and Budget. Auto and truck sales began to rebound in May but were still almost 30 percent below original forecasts for the week that ended May 10, according to J.D. Power. However, by June, demand was up, particularly for trucks.
Commercial real estate transactions slowed to a trickle. Plans for new office leases were delayed. And construction came to a halt on March 24, with sites shut down until early May, when they were allowed to reopen with new health and safety protocols in place.
What lies ahead
As of this writing, we can’t say with certainty what will happen next — there are too many unknowns. How long will it be until a vaccine is developed? Will high unemployment levels linger? What impact will that have on consumer spending, including for autos?
Despite the challenges ahead, there is reason for optimism, both in Detroit and across the country. Banks are stronger today thanks to lessons learned during the last downturn. The underlying fundamentals that were in place before the crisis are still there. The question is how fast the economy and employment can recover.
In Detroit, generational owners who are passionate about the city will redouble their efforts to see the crisis through. Companies like Bedrock, REDICO, Olympia Development, The Platform and Sterling Group, all located downtown, will be major difference-makers. Bedrock, for example, is offering a program called Bedrock Relaunch that will provide eligible restaurant and retail tenants with the option of enhanced rent relief.
Right now, we are just starting to see what it will look like when companies return to the office, and more data is needed before we can make assumptions about them using more space, less space or a mix of work-from-home and office space. Anecdotally, I can say we have fielded calls from companies that had been interested in downtown office space but now are also asking about space in suburbs like Troy, Southfield and Birmingham, with cost and density among the driving factors.
Early signs of recovery
Meanwhile, early signs of recovery are accumulating. The government stimulus supported many businesses and workers. Construction in Michigan started up again in May, and auto parts suppliers and manufacturers also reopened. The state opened fully in June, and consumer confidence began to inch up. Many people were anxious to get back to the office after working from home for weeks.
Key for Detroit’s economic health will be U.S. consumers buying cars and trucks again. Automakers believe there will be enough pent-up demand. Lingering unemployment may depress new car sales, although more people may choose to commute by car versus public transportation for the foreseeable future. As of this writing, sales are rebounding well.
With a stronger economy and eventual return to full employment, demand for office space and other commercial property will rise again. We believe the Comeback Kid will get up for another round — it will just take time to recover from the sucker punch of the coronavirus.
Garrett Keais is a managing principal with Cushman & Wakefield. This article originally appeared in the July 2020 issue of Heartland Real Estate Business magazine.