Metro Detroit’s Office Market Outlook Varies for Different Submarkets
By Steve Eisenshtadt, Friedman Real Estate
2020 was a challenging year for the office market. The pandemic caused record-high unemployment earlier in the year. Offices were forced to close, and employees quickly learned to work remotely since March.
The office market in metropolitan Detroit ended 2020 with an 18.4 percent direct vacancy rate and 19.5 percent when adding in available sublease spaces, which increased to over 1 million square feet throughout the metropolitan area.
In 2021, we expect to see a continued increase in direct and sublease availability, as the pandemic will keep offices closed for at least the first half of this year. Post-pandemic, many office users will integrate remote work practices, better social distancing and healthy building environments into their office plans.
On a positive note, office tenants that have shelved their plans for relocations or expansions are now finally in the market forging ahead with some of their decisions. While their ultimate office space configuration may look different than what was planned pre-pandemic, it’s encouraging to see more tenants active in the market taking steps to figuring out their game plans.
Let’s take a closer look at four major office submarkets in metropolitan Detroit.
Downtown Detroit (CBD and Midtown): Despite the challenges of the pandemic and economic conditions, the Detroit central business district (CBD) and Midtown submarkets saw positive absorption for the year of 125,000 square feet.
Larger-size tenant activity in new construction helped this rate, including Little Caesar’s recent move into its 243,000-square-foot headquarters on Woodward Avenue; Boston Consulting Group and the Warner, Norcross + Judd law firm that are expected to move into 50,000 and 30,000 square feet respectively later this year at 2715 Woodward Ave.; and WPP is expected to move into its new 165,000-square-foot space at 243 Congress St. this quarter. Other tenants looking to move into the CBD pushed back their plans for later in 2021.
For the year, the CBD and Midtown recorded a 13.4 percent overall vacancy rate — below the metropolitan average vacancy rate. There are 640,000 square feet of new office construction underway, including 400,000 square feet of office space at the former Hudson’s site on Woodward Avenue. The Ilitch organization is planning to start development of two office buildings within The District Detroit in 2021: 111 Henry will be seven stories totaling 73,500 square feet and 120 Henry will rise five stories with 132,500 square feet.
The average quoted rental rate for new construction is $40.00 per square foot; existing Class A office is $27.41 per square foot, while the overall average rate is $22.14 per square foot. Class A office recorded positive absorption of 242,000 square feet for the year, while Class B office recorded negative absorption of (127,000) square feet for the year.
Troy submarket: The Troy submarket experienced (66,000 square feet) absorption for the year. Tenants contributing to the vacancy included Kelly Services giving back 130,000 square feet at 2690 Crooks Road and Beaumont Health Systems moved out of 100,000 square feet at 750 Stephenson Highway.
Notable new leases in Troy included Amerisave Mortgage signing for 14,717 square feet at 700 Tower Drive; Marsh McClellan for 36,000 square feet at PNC Center; Billhighway for 32,000 square feet at Timberland on Corporate Drive; and Ipsos Group’s 24,000-square-foot lease at City Center.
The Troy submarket ended 2020 with 18.5 percent vacancy, which is the metropolitan average. Class A office rates average $22.55 per square foot and overall rates average $20.25 per square foot.
Southfield submarket: Economic office space absorption in Southfield was positive 245,000 square feet in 2020, lowering the average vacancy rate in Southfield to 20.3 percent. Marelli signed for 329,000 square feet at 26555 Northwestern; Plante & Moran expanded into 147,000 square feet at 3000 Town Center; and Secure 24 moved into 100,000 square feet at 4000 Town Center. Doner Advertising and Comcast signed leases in the fourth quarter of 2020 for 60,000 square feet and 40,000 square feet, respectfully, at the Galleria Office Centre.
Class A average office rent in Southfield was $21.52 per square foot and the overall average rate was $18.46 per square foot.
Ann Arbor submarket: Ann Arbor, historically one of the strongest office markets in metropolitan Detroit, recorded (30,000 square feet) of negative absorption in 2020, bringing the overall Ann Arbor office vacancy rate to 6.7 percent. This is the lowest vacancy in the metropolitan area.
The bulk of vacancies are located on the south side of the city — Eisenhower and State Street with a 9.7 percent vacancy rate. The Ann Arbor CBD is at 2.8 percent vacancy and the Northeast side is at 6.2 percent vacancy. Class A office rent in Ann Arbor averaged $27.40 per square foot on the Northeast side to $33.30 per square foot in the CBD.
Ann Arbor is poised to see new activity in 2021 as KLA is expected to move into its new 220,000-square-foot building, Google plans to expand and Wacker Chemical is building a new research and development facility at 4950 South State St.
In 2020, the Michigan Office of Future Mobility and Electrification was launched and will focus on increased mobility tech investment, expanded smart infrastructure and more engagement with mobility startups. This initiative is expected to further enable Michigan’s mobility workforce and help to accelerate electric vehicle adoption, all boosting Michigan’s mobility manufacturing core. This is expected to contribute to new office employment and new companies growing in the region, particularly in the Ann Arbor submarket.
Despite the challenges in the office market, the transformation of the automobile industry into an advanced mobility technology industry is a bright spot that should pay long-term dividends for the metropolitan Detroit market.
Steve Eisenshtadt serves as senior vice president of brokerage services with Friedman Real Estate. This article originally appeared in the February 2021 issue of Heartland Real Estate Business magazine.