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With Office Leasing Activity Accelerating in Detroit, New Construction is Imminent

Cadillac Tower, a 350,000-square-foot office building in downtown Detroit, recently underwent more than $3.5 million in extensive renovations. The 40-story asset is located at 65 Cadillac Square on Campus Martius Park. The renovation project began in May 2015 and was completed in January 2016. The Farbman Group leases the property to tenants and manages the building.

It is a fascinating time for the Detroit office market. Downtown neighborhoods and suburban markets alike are being transformed thanks to years of positive economic trends marked by healthy job growth and the desire of several companies to locate in the city. Landlords, tenants and investors are looking to consolidate gains and position themselves for success in an evolving marketplace.

On the leasing front, we are still seeing activity in Detroit proper with small to mid-sized firms, punctuated by a handful of larger deals that have taken place. The higher profile moves include Detroit-based auto lender and bank holding company Ally Financial taking approximately 320,0000 square feet on 13 floors at One Detroit Center, now known as the Ally Detroit Center.

Al Ellis, Farbman Group

Al Ellis, Farbman Group

Paul DeBono, Farbman Group

Paul DeBono, Farbman Group

A number of law firms have inked leasing deals. For example, longtime Detroit tenant Miller, Canfield, Paddock and Stone PLC renewed its lease at 150 W. Jefferson, a 25-story skyscraper formerly known as the Madden Building, where the law firm occupies approximately 97,000 square feet. Southfield, Mich.-based Redico LLC recently acquired the 500,000-square-foot tower, built in 1989, from Piedmont Office Realty Trust for $81.5 million.

While leasing activity is strong in the central business district (CBD) — driven in part by existing tenants taking additional space or former suburban office tenants relocating downtown — it is worth noting that there really isn’t a great deal of large, contiguous blocks of space available. Needless to say, that’s one of the major obstacles for any large tenant looking to lease 60,000 to 100,000 square feet downtown.

The buildings that do have space — the Penobscot Building, the Marquette Building and Cadillac Tower — are in the midst of modest renovation work.

Other buildings that have space are being prepped for a residential conversion, including the Gabriel Richard Building, the former Archdiocese of Detroit property that is being converted to 10 floors of upscale apartments.

More groundbreakings likely

With available space somewhat limited today for larger tenants, the next step for Detroit is new construction, which is certainly a natural and positive step forward in the evolution of the downtown Detroit office landscape.

A number of the city’s buildings have been purchased and renovated by Dan Gilbert’s Bedrock Real Estate Services. Gilbert is the founder of Rock Ventures and Quicken Loans Inc.

While Bedrock has been successful in attracting office tenants downtown, the dearth of large, contiguous blocks of space is also limiting its ability to bring the next signature tenant into the city.

It will be interesting to watch what happens with Bedrock’s planned ground-up development on the old Hudson’s site on Woodward Avenue. The mixed-use project is slated to include office, retail and residential. Final plans haven’t been released, however.

Midtown, like other Detroit markets outside of the CBD, is primarily home to small-to-mid-sized office tenants or medical/university tenants. We expect to hear more about ground-up developments there too, as available space is becoming scarce. Brokers are working closely with tenants and landlords to help them address these space constraint issues, but market pressure is such that the majority of quality product on the market is getting filled. Office tenants will need to look at new construction options in order to relocate.

The sales market has slowed slightly after years of heavy activity, primarily because many of the available buildings have already changed hands.

One notable recent transaction was the sale of 44 Michigan Avenue, which was owned and occupied by First Independent Bank. The bank vacated after the sale and the new owner plans to begin renovating the building this fall.

While Gilbert remains the most significant downtown investor, other investors, including some international players, have been active and looking downtown as well.

One large infrastructure project to keep an eye on is the M-1 Rail system. The prospect of its completion in 2017 has been a strong driver not only for retailers, but also for other businesses looking to locate near the M-1 line and its stops.

Parking has been a big challenge for downtown Detroit, and the CBD has seen those rates skyrocket in recent years. We have been involved in working to relocate a handful of smaller tenants to the suburbs primarily because the rates have escalated enough to become a deterrent for them to remain in the city. That issue won’t abate until more solutions to the parking problem come on line. The hope is that M-1 will be a big step toward alleviating some of that pressure.

Suburban strengths

Outside of what’s happening in the City of Detroit, we are still seeing the automotive suppliers driving the larger deals in suburban communities such as Southfield, Novi, Troy and Farmington Hills. There is some healthy, but cautious, expansion continuing among automotive suppliers, and they have clearly been the primary driver in the suburban office market over the past couple of years.

While some companies have explored space options downtown, the higher rents and the potential loss of the free parking they currently enjoy in the suburbs have kept them from making any big moves. While the consensus is that 2017 and beyond could see an overall slowdown for the automotive industry, the Big Three and their suppliers have been more cautious and strategic with their expansions and future planning, and the impact on future tenancy should be modest.

The Detroit office market mirrors some of the national trends by focusing on Millennials and their preference for exciting office environments with more open and collaborative office concepts.
We are seeing an explosion of truly creative and inspired office designs. Consequently, we are finding that landlords are being more proactive with their architects and space planning for those collaborative environments.

Because those spaces place a strong emphasis on furniture, we are seeing more landlords including furniture into their calculations for tenant improvements and offering a more comprehensive leasing package for prospective tenants.

There is also more focus than ever before on the surrounding environment as Millennials tend to be attracted to places that provide them with more live-work-play options. Whether in the city or the suburbs, locations in the midst of high-quality dining and entertainment options have become highly prized.

Google’s surprise move

Full-service suburban towns like Ferndale, Royal Oak and Berkley have become more attractive destinations. That is why it was somewhat surprising to see Internet giant Google Inc. take such a big footprint in Farmington Hills when it seemed as if it would have been a better fit for a different suburb, a more active downtown neighborhood, or perhaps even a space in Detroit’s CBD. Google leased 90,000 square feet in the 696 Centre building on Farmington Road in Farmington Hills beginning in the fourth quarter of 2015.

Whether Google was an outlier or the beginning of a fundamental shift will be one of the fascinating developments to watch as the Detroit office market continues to evolve in the months and years ahead.

— By Paul DeBono, vice president, and Al Ellis, senior associate, Farbman Group. This article first appeared in the October 2016 issue of Heartland Real Estate Business magazine.

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