Occupancy, Rental Rates Are on the Rise in Detroit’s CBD Office Market
Given the pace at which the Detroit commercial office space market is evolving, updates and projections are changing with extraordinary speed. The market can look very different in just a few short months, and it’s worth checking in to see where things stand relative to the beginning of the year.
CBD occupancy is high
While growth remains the headline story, the focus has changed somewhat from a high level of leasing activity across the metro area to more of adaptation and evolution as landlords, tenants and brokers all adapt to a downtown market that is reaching capacity. The vacancy rate in Detroit proper is the lowest it has ever been, and office space in Midtown and downtown is getting harder and harder to come by.
Deals are still being executed across metro Detroit, but with rents continuing to rise and space at a premium, the incentives landscape looks nothing like it has in recent years. Parking rates have increased dramatically with a major shortage in parking in the central business district (CBD). The monthly cost of parking has increased to approximately $250 per space downtown.
Incentives continue and have produced new opportunity for creativity, as owners and operators have been more aggressive and strategic when it comes to shuffling tenants around and finding new ways to facilitate tenant expansions. With such limited office space, sometimes the best (and only) way to get a deal done is to maneuver tenants around to “create” viable spaces.
In some cases, hallways and other spaces have been creatively reconfigured and modified to provide additional square footage. While space limitations clearly present some challenges, it is an indicator of a booming market, which is exciting for everyone who lives and works in or around Detroit.
Downtown Detroit isn’t the only place where quality office space is in high demand. We are starting to see some similar dynamics emerging in places like Troy and other suburban submarkets. Downtown remains the epicenter, but the same market dynamics are filtering out into the suburbs. There’s still room to grow in many Detroit suburbs, but the trend line seems clear.
For some office tenants, the downtown market has reached a kind of tipping point, where the combination of rising costs, commuting demands and parking challenges have made suburban options seem like more than just an alternative — but a clear preference. Convenient and cost-effective suburban market options like Bingham Farms and Sheffield are particularly active, even more so than higher-priced suburbs like Royal Oak or Birmingham.
The influx of new retail into the city of Detroit continues to pick up steam. This has been a story for at least two to three years now, and retail momentum just keeps growing. Getting a national chain to come and look at space in New Center, for example, was almost impossible even as recently as a year ago. Today, however, iconic national brands, including familiar restaurant chains and coffee shops, are seeing Detroit with newly appreciative eyes.
Not coincidentally, the perception of neighborhoods like Midtown have elevated, as well. It wasn’t long ago that Midtown was a popular destination for tenants displaced from the city’s CBD by fast-rising rents. Today it’s a truly desirable location, a place that’s “cool” once again. There is an abundance of new and emerging residential product in the area, which is contributing to that momentum and helping to make Midtown not just a viable destination, but a chic and popular place to live, work and play.
Public space activation
Another clear civic trend is the preservation and utilization of public spaces for recreation and public gathering areas. The CBD has been particularly proactive in that regard, with everything from large-scale public artwork on buildings, to shutting down streets to create pedestrian avenues. Across the city, activating common areas is an increasingly common and popular phenomenon. Anecdotally, it seems like more restaurants are embracing and contributing to the city’s invigorated atmospherics with more outdoor seating space.
There is significant civic momentum behind the movement to extend the Dequindre Cut Greenway, a two-mile urban recreational pathway that first opened in 2009, from its current length to a full 26-mile loop cutting across Detroit and connecting more neighborhoods with bike and pedestrian trails. In a city that is already seeing more bicycle and scooter activity downtown — and a corresponding uptick in office and residential buildings with green space, bike rentals and other quality of life amenities — that would be a thrilling development.
Newcomers flooding in
Another trend it’s impossible to ignore is the influx of out-of-state companies moving into the market. LinkedIn just officially moved into its new 75,000-square-foot space in the Sanders and Grinnell buildings at 1523 Woodward Ave. This is the company’s first new U.S. office space in the last 10 years. Other technology firms, including Waymo, Google, Twitter, Microsoft and StockX, have also opened office space in Detroit.
Detroit’s recent passed auto insurance law, which is expected to reduce auto insurance rates for Michigan drivers (and have a particularly noteworthy impact on Detroiters, who currently pay the state’s highest rates), will potentially attract even more talent to Southeast Michigan. Detroit is one of the hottest Midwest markets right now.
The horizon line
The strength of the Detroit office market continues to reflect the city’s larger resurgence. And while you can never discount larger national and international recessionary forces, the prospects for Detroit’s long-term economic future look brighter than they have in a very long time. Diversification of industry, a dramatically upgraded downtown office product, an influx of brands and businesses (including a robust and fast-growing tech sector), and a built-in market of urban residents is a recipe for sustained success. It’s fair to say that Detroit is still hot, and the city’s suburbs are heating up as well.
— By Shelia Fogarty, Lesley Gutman and Jeanne Gross, Farbman Group. This article originally appeared in the July 2019 issue of Heartland Real Estate Business magazine.