June 13, 2018
This article originally appeared in the May 2018 issue of Heartland Real Estate Business magazine.
Metro Detroit’s office recovery continues to steadily march forward. Local and national commercial real estate investors are showing a renewed appetite for buying and renovating existing buildings, and even developing new product.
The City of Detroit has experienced the quickest recovery, going from near stagnant activity with a vacancy rate of 21.5 percent to a single-digit vacancy of 8 percent with multiple new developments in the past eight years, according to CoStar Group.
Dan Gilbert, founder of Quicken Loans and Rock Ventures, invested in about 90 Detroit properties, totaling 15 million square feet, which kicked off Detroit’s rehabilitation. This prompted several other companies to stake an interest in Detroit’s Central Business District. The resurgence continues, and today numerous projects are in development that appeal to millennials and empty nesters alike.
Most of these projects are situated on Woodward Avenue, which has been the center of the area’s rebirth. Within a few blocks of this avenue reside most of the renovated office buildings, the stadium district, new shops, restaurants, entertainment venues and cultural institutions like the Detroit Institute of Arts, Charles H. Wright Museum and The Detroit Opera House.
Currently, there are several multifamily projects in downtown Detroit such as Midtown West, 28 Grand Apartments and The Selden. But multifamily isn’t the only new product going up.
Ford Land, a subsidiary of Ford Motor Co., is negotiating to buy the vacant Michigan Central Station, an historic Detroit rail station depot. Bedrock, Gilbert’s full-service commercial real estate firm, has broken ground on a new 1.2 million-square-foot, mixed-use tower on the site of the former J.L. Hudson department store.
In addition, a couple of lifestyle developments that are in the mix include the Dequindre Cut: Outdoor Experience, and a reimagining of Detroit Riverfront Park.
All in all, the outlook for downtown Detroit is the best it’s been in decades.
The suburban Detroit office market continues to experience increasing occupancy rates, leading to new development in select submarkets and significant renovations of existing buildings in others. Buoyed by a strong and diversified economy and a falling unemployment rate, metro Detroit is seeing greater real estate investment than it has in years.
The suburban market has experienced positive absorption during the last eight years with a healthy decrease in vacancy from 18.9 percent to 11 percent, according to CoStar. In this market, the older office buildings that have been recently repositioned by renovations are more appealing to the vast majority and secure more leasing activity than unrenovated buildings.
Successful repositioning examples in the suburban Detroit market include Laurel Park in Livonia and Arboretum in Farmington Hills.
Ashley Capital, a commercial real estate company specializing in renovating distressed industrial and office buildings, completed renovations of both properties that were essentially vacant. The company successfully leased up and sold Laurel Park, while Arboretum is leasing well and is expected to stabilize by year’s end.
There are many office building revivals being accomplished in suburban Detroit. The Onyx Plaza’s completion in Southfield has had remarkable success in leasing space since its renovation, and The Galleria in Southfield is undergoing common area renovations in hopes of the same outcome.
A more prominent example is The Southfield Town Center, a 2.2 million-square-foot office complex in Southfield. Since 601W Cos. purchased the complex in 2014, it has made dramatic renovations to the common areas, lobbies and entrances that have resulted in new and expanded leasing in over 500,000 square feet of the complex.
It is also worth noting that JFK Investment Co. has finalized renovations on Bloomfield Hills Office Center, including all common areas and a parking deck to accommodate plans for a 75,000-square-foot second phase. This will be the first Class A, speculative building in decades for Bloomfield Hills.
The 888 W. Big Beaver building will be one of the more notable evolutions in Troy and is underway via Orlando, Florida-based Unicorp. This redevelopment will include roughly five new retail outlets, an expanded parking deck and plans for future upscale apartments. Final completion is slated for 2019.
The renovation and repositioning of these properties isn’t simply a perfunctory effort. These projects are all taking into consideration common area amenities necessary to attract companies that need to appeal to new workforce expectations driven by millennials entering the workplace.
Several significant office property sales have taken place over the past few years in suburban Detroit, where capitalization rates are between 75 to 200 basis points higher than most major markets in the country.
A prominent property sale by Northwestern Mutual Life holdings consisted of Wilshire Plaza Wilshire West in Troy and Crystal Glen in Novi. The assets traded at an average cap rate of approximately 10 percent.
The Troy Office Center sold at an approximate 9.5 percent cap rate with close to 36 percent vacancy. A more remarkable sale within the past 12 months in Troy was the sale of 2600 W. Big Beaver. The cap rate on this property was below 9 percent for $175 per square foot.
Metro Detroit will continue to thrive. In a global economy, the automotive sector and associated technology industries working toward the future of transportation will contribute to providing stability and growth in the market.
— By Bill Harvey, Executive Vice President, Transwestern.