Office space in Detroit has never been cheaper — and it’s not just because of the pandemic

Office space in Detroit has never been cheaper — and it's not just because of the pandemic

Credit: Kirk Pinho/Crain’s Detroit Business
A sign advertising the Raliegh Officentre in Southfield for lease for a lower-than-normal rate compared to other buildings in the market.

Head up Telegraph Road in Southfield.

North of 10 Mile, you may think your eyes are playing tricks on you.

Look to the right, and the sign at Raleigh Officentre reads: “$8 PSF Class A Office.” That’s broker shorthand for $8 “per square foot” for lease rates in the 300,000-square-foot complex that just a few years ago was part of a large headquarters office for $5.7 billion subprime auto lender Credit Acceptance Corp.

No, a “1” isn’t missing in front of the “8,” and certainly not a “2.”

It’s part of an aggressive leasing strategy by the building’s new Maryland-based owner as it grapples with a dire reality.

The metro Detroit office market is wildly overbuilt and in radical need of a course correction, including repurposing and demolishing untold millions of square feet of antiquated and unneeded space.

That’s not necessarily a new problem, however. The COVID-19 pandemic may have peeled off bandages masking some of its wounds, but they have been festering for decades.

Adjusted for inflation, rental rates outside of city limits have plunged by 58% in the last 25 years and show no signs of rebounding, making this the cheapest office market for suburban tenants this century.

In the downtown core, inflation-adjusted rents are off 42% from where they were in 2000, close to giving it that same dubious distinction as the suburbs.

That can be attributed to several factors. For example, some of our region’s largest employers, such as automotive suppliers and mortgage companies, changed their real estate strategies, shifting to owning and occupying their own spaces rather than leasing. With fewer tenants in the market vying for space in a market that continues to grow in size, inflation-adjusted rents have plunged.

“The jobs stayed here, but the occupancy strategies changed,” said AJ Weiner, managing director in the Royal Oak office of Chicago-based brokerage house JLL. “We weren’t able to backfill with new industries or right-size the market in a tangible way to get those statistical indicators more favorable. We’re still sitting on double-digit vacancy throughout the region, and so much of that is static vacancy that we’re not going to fill. Some of that vacancy will never see another tenant.”

Even though a smattering of new-build office spaces — primarily as part of mixed-use projects in walkable downtown cores like Detroit, Birmingham, Royal Oak and others — continue to be added, their impact on the broader overall market isn’t enough to outweigh the vast supply of dated buildings in the region.

“Rents typically rise in cities where you’ve got high-quality buildings which would command premium prices,” said Sam Munaco, a broker focusing on tenant representation as president of the Southfield office of Advocate Commercial Real Estate Advisors LLC.

The region has 201 million square feet today, primarily in the tri-county region, according to data from CoStar Group Inc., a Washington, D.C.-based real estate information service. That’s up 11.6% from the turn of the century, when the market had 180 million square feet.

In the early part of the 2000s, for 14 consecutive quarters, the region had more than 3 million square feet or more of office space under construction, even creeping above 5 million square feet in the second quarter of 2000, CoStar data shows. The region has only had more than 2 million square feet under construction in a quarter four times in the last two decades, however.

That’s nothing compared to the mid-1980s.

In 1986 and 1987 alone, some 11.7 million square feet of new office product was added to the market, fueled by an economy improving from a recession, general federal tax benefits for developers and companies being willing to build larger offices for their employees. Also, fold into the mix that Ross Perot’s Electronic Data Systems Corp., bought by General Motors in 1984 for $2.55 billion, was believed to need some 2 million square feet in the region, and you had developers building office spaces large and small, primarily on spec.

This saddled the region’s major employment hubs and other communities with untold millions of square feet that, experts said, will likely never be filled up again, particularly when it comes to lower-quality spaces.

It’s not just having an overbuilt office market that’s driving down rents, although that’s part of the equation, said Bill Vogel, managing principal and market leader in the Royal Oak office of Chicago-based tenant brokerage house Cresa.

“It’s really fundamentally about how we work as people. The days of wood-lined private offices slowly began to wane away in the mid- to late-1990s, just like ashtrays on every desk began to wane away,” Vogel said. “This reaches beyond office space. It’s what you wear going into the office. Everything about the office experience has become more casual, more social, more close-knit, more collaborative. It’s a wholesale transformation that has occurred over the last 30 years and that fundamentally shows in the rent numbers. People want to point to one thing and say, ‘That’s what did it. There’s the Boogeyman.’ There is no Boogeyman.”

The rent drops, evidenced in data provided by the local offices of New York City-based brokerage house Newmark, illustrate the trapeze artistry landlords have to engage in to make it through perhaps one of the most difficult office markets in at least a generation — if not longer.

“Not only did declining demand due to remote work lead to reduced rates, but remote work also necessitated reconfiguring office space, increasing tenant improvement costs,” said Dale Watchowski, who is president, CEO, COO and board member for Southfield-based developer and landlord Redico LLC. “The decline in inflation-adjusted rents also reflects the rise in costs for landlords due to tenant improvements.”

Credit: CoStar Group Inc.
The Raleigh Officentre in Southfield.

Fishing for tenants

Amir Patel is confident his unconventional approach to filling up the vacant Raleigh Officentre will turn a profit for him and his investors.

After all, the eye-popping low offering is a first-come, first-served deal that expires after an initial tenant signs a lease, according to his brokers at Farmington Hills-based Farbman Group. That rate, Brad Margolis said, is the teaser.

“The hardest deal to get done for a building this size, when it’s vacant, is the first one,” said Margolis, who is senior vice president with Farbman.

Margolis and Associate Broker Rick Ax represent Patel.

“People don’t want to be the only tenant in the building. It seems like a ghost town. You got to get bodies in there. So we understood we were pricing ourselves way below market from the beginning, but it was really just an incentive for the first tenant because, once they’re in there, it’s going to be much easier for us to fill up the rest,” Margolis said.

The Raleigh Officentre rate is also an anomaly because it’s structured as a triple-net lease.

Office leases are typically gross, rather than triple-net, wherein the tenant pays property taxes, insurance and other expenses in the building. So while you may be paying just $8 per square foot per year in rent, the other costs the tenant has to cover may bump that up to the equivalent of $12 or $13 per square foot per year, Margolis said.

Tenants coming into the Raleigh property after the first user — there is currently a letter of intent for an unnamed user to take 27,000 square feet, Margolis said — can expect to pay $16 or so per square foot, not including utility costs.

Credit: Forum Flats
A former Kelly Services office building in Troy has been converted into the Forum Flats apartments.

New life for old offices

Some owners have attempted to turn their lemons into lemonade, with varying degrees of success so far.

For example, Emeryville, Calif.-based Devon Self Storage bought a former Plante Moran building in Southfield called the Victor Center with plans to turn it into self-storage space, a unique conversion in the market. Staff in the city’s Building Department said the project has not yet started, however.

But more broadly, owners and developers have been eying old office properties as potential multifamily residential plays. That’s been the case in Troy and Dearborn, Livonia and Southgate, among plenty of others.

In Troy, a former Kelly Services Inc. building at 295 Kirts Blvd. just east of the Somerset Collection shopping mall was turned into 90 rental units by a joint venture of Birmingham-based Cypress Partners and Douglas Capital Partners in Southfield, Crain’s reported last year. In addition to the office-to-residential conversion, two other 55-unit ground-up apartment buildings are envisioned for the site, as well.

Dearborn real estate developer Mike Shehadi started razing the massive, 660,000-square-foot Regent Court office building he bought from Ford Motor Co. in 2022. He had planned to convert it into some 420 units of housing, but that vision proved to be too costly, with a price tag of north of $100 million and rents not high enough to support such a development.

Downriver, a development team is closing in on completion of a $43 million conversion of the 14-story former Southgate Tower — the tallest building in downriver — into 216 apartments, WXYZ-TV (Channel 7) reported in March. The project is expected to be completed in August, the TV station reported.

In Livonia, Birmingham-based Markus Management Group, following a September 2023 purchase of a large old Comerica Inc. office building for $21.1 million, is planning a large mixed-use development that would remove its 382,000 square feet from the region’s office roster. Doraid Markus, who runs the development firm, said demolition has not yet started, although he anticipates construction on a series of new retail and other buildings on the 22.3-acre site to begin in the next four to six weeks.

The project has been referred to as The Shoppes at College Park and includes plans for a new Whole Foods Inc. grocery store, a five-story, 170-unit apartment building and a four-story, 101-room extended-stay hotel.

Credit: Dean Storm/Crain Communications
The downtown Detroit skyline, as seen in fall 2024.

Avoiding zombie buildings

It’s not all doom and gloom for metro Detroit office, however, experts said.

Landlords and companies that have invested in modernizing their spaces in the last three years have been outpacing offices that have not been improved in the last six-plus years, according to a new survey from Gensler, which has a large Detroit office in the Capitol Park neighborhood. Employees in those offices give their spaces higher ratings on things like lighting, air quality, temperature control and cleanliness, making them more desirable workspaces — and better able to attract workers back.

That’s translating into a greater desire to spend more time in the office, said LIly Diego, design director in Gensler’s Detroit office. That’s beneficial to landlords as well as the companies they lease space to.

“Organizations are actively trying to look at providing a built space that allows that magnet (back to the office) to happen,” Diego said. “That way people come to the office because they have everything they need there. When you invest in the office space to provide for that, then it becomes an attraction.”

In addition, Watchowski said his company’s buildings in metro Detroit have performed well with high occupancies and that the first quarter was “one of our most robust leasing cycles as workers returned to the office.”

That’s not the case for everyone, he said.

“I believe we’ll witness another shift as some landlords struggle to maintain or retain their buildings,” Watchowski said. “Office users will move to quality spaces and avoid … ‘zombie buildings.’”

The recent demolition of the former Kmart Corp. headquarters in Troy removed a 1.1 million-square-foot block of long-empty space, giving the Forbes and Frankel families an opportunity to redevelop the 40-acre site with a proposed University of Michigan medical facility and other uses — if the deal can get beyond the Troy Planning Commission.

In addition, a proposed redevelopment of the Renaissance Center by General Motors Co., which owns the primary five-building complex, and Dan Gilbert’s Bedrock LLC real estate company includes tearing down two of the 39-story office towers closest to the Detroit River. That constitutes another 1 million-plus square feet of highly underutilized office space that would be scraped from the market — if a deal can get done.

Some pointed to major office deals in downtown Birmingham and downtown Detroit for decked-out space in new mixed-use buildings as signs of life in the market — and key indicators of where it may be trending.

JPMorgan Chase & Co. is becoming the anchor tenant in a new downtown Birmingham mixed-use building — structural steel is rising on the site — next to the under-construction RH flagship store and on the other side of Brown Street from the former Daxton Hotel (now the Daxton Hotel Birmingham, Curio Collection by Hilton). Dykema Gossett LP, the Detroit-based law firm, is moving its Bloomfield Hills office to downtown Birmingham in a new building under construction on the site of the former Mountain King Chinese restaurant and a Talmer Bank branch. An elevator core has started rising on the South Old Woodward site.

In downtown Detroit, General Motors is vacating its longtime Renaissance Center headquarters and moving into Dan Gilbert’s new Hudson’s Detroit development on Woodward Avenue. Sources have said the Hudson’s office space — where GM’s footprint is going to be at least 200,000 square feet or so — is asking $60 per square foot, more than double the current going rate for existing space in the downtown core.

“Obviously, that’s a small percentage of the overall market, but there are companies paying historically unheard of rental rates for office space in metro Detroit at a time when the general market is struggling,” Weiner said. “There is an ember burning there. We have to find a way to foster those flames, and the best path will be by dramatically restricting the market.”

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