When experts expect Michigan office demand to return

Demand for office space in the Detroit metro area weakens as the coronavirus pandemic persists, but experts predict southeast Michigan could recover sooner than other parts of the country.

Metro Detroit’s office market was largely inactive during the third quarter amid the pandemic, according to real estate firm Savills, which has an office in Detroit. The region saw a slight improvement in transaction activity, up 2.8% from the previous quarter, but transactions were down more than 50% from last year and few large tenants were known to seek premises.

“It’s amazing the number of rental properties on the market each day,” said Ellen Mahoney, broker-owner of RE / MAX Commercial Connection in Ferndale. “So the volume goes up. “

The availability rate rose from 20% to 21.9%, reaching its highest level in almost two years. Although there has been a decrease in demand for office space locally and nationally as workers continue to work remotely, some experts say a recovery is expected. The real impact of the pandemic on the office market will not be revealed for 18 to 24 months, some say.

“The point is, if you work remotely and it works, the need for office space decreases,” said Russell Long, partner and managing director of Bloomfield Hills-based financial and strategic consulting firm O’Keefe. “The way this is resolved, I think, is in a year or two. “

Building occupancy across the country is expected to decline by around 145 million square feet in 2020 and 2021 due to job losses and remote work, according to a recent report by commercial real estate company Cushman & Wakefield. And the company warns that it could take years for office real estate to recover.

However, Greg Bockart, executive general manager of the Savills office in Detroit, said he expects market stability and normalcy in Detroit as early as next year. He expects a wave of companies to return to their offices in January, with larger organizations, such as the Detroit automakers, returning in June or July.

“I anticipate that more sublets are coming, but I think Detroit is a special situation,” Bockart said. “We’ve all been waiting to see the vibrancy that downtown Detroit now offers. Most of the business leaders I’ve spoken to who rent office space downtown don’t want to give up on what has been created over the past 10 years. Most of us want to come back to our offices and the Detroit we all love. “

Meanwhile, developers like Bedrock in Detroit are moving forward with renowned mixed-use developments that include office space, including the Book Tower on Washington Boulevard, the Hudson site on Woodward, and the Monroe Blocks. . They insist that the office space provided within the projects has not been affected by the pandemic.

“The dynamics have changed”

Earlier this year, Chicago-based auto insurance company Clearcover Inc. came to Detroit in search of office space.

The company halted its research as the pandemic closed offices across the country, sending employees home to work remotely. Instead, Clearcover announced in August that it would open a virtual office in Detroit, creating up to 300 jobs. Recruitment is underway for remote positions.

“We actually went to Detroit and met with city officials and Michigan officials just before the lockdown,” Clearcover’s customer experience manager Heidi Craun said at the time of the announcement. “We have looked at the spaces in Detroit with interest. However, given that the dynamics have changed since then, this is something we will pursue if and when we can. “

The pandemic has led to a downsizing of the office of Mara Topper, CEO of Senior Counseling Services. Topper occupied 2,250 square feet of office space in Farmington Hills, where she manages mental health counseling for the elderly and homebound people.

When the COVID-19 pandemic was first reported in Michigan earlier this year, Topper transferred staff to Zoom calls for meetings and training. Therapists have gone virtual with clients. And she decided she had more space than she needed, so she downsized to an almost 1,600 square foot office about two miles away.

“It was just in my head,” she said. “I waited a bit to see what was going to happen. I took the plunge. She doesn’t plan to bring staff into the office or have therapists visit clients at home, until there is a proven COVID-19 vaccine and treatment.

“Finally, we would like to get everyone together in person, but again, can we be safe?” she said. “People have underlying medical issues too, and all of that, we just want to make the staff as safe as possible and our customers as safe as possible. “

The owners wait and see

Overall, gross asking rents in the Detroit metro area edged up in the third quarter, rising 0.8% to $ 20.09 per square foot as landlords took a wait-and-see approach, according to Savills.

“The prices, in my opinion, don’t change much,” Mahoney said. “Depending on how long you stay at home, there will be a question mark. At some point, you expect prices to drop if there is a lack of demand. “

According to commercial real estate research firm Trepp LLC, office buildings in the Detroit, Warren and Dearborn market have a total of $ 1.48 billion in commercial mortgage-backed security loans, of which 12.46% are secured by leases expiring until 2022. The question is whether these tenants renew.

Long-term leases don’t necessarily protect building owners, Mahoney said: “At some point if a tenant insists they will seek a buyout. So you could see this kind of settlement. If they save millions of dollars a year without putting people in an office, they won’t spend the money on the long-term lease. They are going to want to fix this.

Jason Stough, a senior partner in Signature Associates’ Southfield office division, said some landlords and tenants are negotiating short-term deals.

“People who had expired leases who were thinking of moving out, maybe did short-term renewals with landlords for a year or two,” he said. “We wouldn’t have seen a short-term one-year renewal in the market last year. An owner wouldn’t even have accepted it as an option.

“You were looking at a minimum of three years for a renewal, and now with the uncertainty, the owners are saying ‘yes, we’re going to do the one-year extension.” Everyone kicks the road up. maybe next summer, next fall, and we can figure it out from there. ”

Bedrock’s outlook is stable

Still, there is some activity in the market despite the downturn. The Savills report notes that Sachse Construction is moving its offices to 33,000 square feet in the Orchestra Place building in Midtown Detroit, and STMircroelectronics has renewed its lease for 21,000 square feet of space in Livonia.

Sam Hamburger, Bedrock’s vice president of acquisitions and leasing, said the company’s long-term outlook for office demand has not changed significantly. Bedrock, the real estate arm of Detroit-based mortgage mogul Dan Gilbert’s family of businesses, owns and / or manages 6 million square feet of office space in the city.

“A lot of the deals we’ve negotiated over the years have terms of five, seven or ten years,” Hamburger said. “Large tenant companies are very typical for them. What hopefully is just a mistake on the radar won’t impact their long-term outlook either. And that’s what we anticipate.

Hamburger said small business owners with short-term leases have concerns: “They are in a difficult position when we look at the future of their rental in our buildings in terms of the types of commitments they can make. . “

The company is in contact with potential tenants who are taking a wait-and-see approach due to the pandemic, he added. As for future development, plans will continue for office space in its planned mixed-use projects: Book Tower expected to be completed by the end of 2022, Hudson site construction impacted by quarantine and is expected to last at least late 2023, and development for Monroe Blocks is in its design period, and no estimated date was available.

Looking for offers

Rachel Pharis-Pannell, director of leasing and tenant success for commercial real estate company Thomas Duke Co., said business has been a roller coaster since the pandemic, with some companies expanding their space, reducing or terminating leases. Needs vary by sector.

“Everyone has been affected differently,” she said. “It was important for us to understand who is in pain and who is doing well and who is going to need something in terms of office space and how we are going to be able to respond to it.”

The portfolio maintained an occupancy rate of 85-93%, but foot traffic for workers returning to their desks is around 40%, Pharis-Pannell said. His company kept its rental rates stable, but businesses in competitive apartment buildings called in hopes of getting a good deal on the move. There is a lot of competition among landowners along the Big Beaver Corridor in Troy.

“I think with the pandemic, I think it not only caused people to downsize, but it also caused tenants to take advantage of the market there and start looking around and seeing which one. one of these owners is really keen to make a deal right now, “she said.” Which of these owners is really trying to lock in space even though it is a very cheap deal . “

O’Keefe’s Long said he believes businesses will use office spaces differently in the future, such as having more employees work remotely and heading to the office for meetings. He said he sees downtown Detroit on the verge of recovery.

“If this moves forward and a vaccine is developed, I think in the long run the city will continue to come back as before,” Long said. “With all the new construction and remodeling, the rehabilitation of downtown buildings, I think Detroit will still do well after this is over.”


Twitter: @CWilliams_DN

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