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Detroit CBD Posts First Vacancy Uptick in Nearly Seven Years

Detroit, MI (01/10/2019)

11:00 AM

Newmark Knight Frank (NKF) released its fourth quarter 2018 office trends data for the Detroit region this week. According to the reports, Metro Detroit's office market vacancy rate fell 20 basis points to 15.3 percent during the fourth quarter of 2018, as just over 353,000 square feet was absorbed.

The metro office market posted just over 1.7 million square feet of absorption in 2018, compared with 1.0 million square feet for all of 2017. Large office users such as United Shore Financial Center, Henry Ford Health Systems, Mortgage Center, LC, MSX International, Inc. and General Motors accounted for the bulk of absorption in the Southfield, Troy, Auburn Hills and Pontiac submarkets in 2018. By contrast, the western office submarkets of Livonia and Novi continued to see slow market activity in 2018, similar to levels in 2017. The Detroit Central Business District posted negative absorption for the first time since 2012. Despite having an off fourth quarter, the city of Detroit could post more historic absorption levels in 2019, as more firms are set to establish a greater presence in the CBD.

"Despite posting negative absorption for the first time since 2012, the Detroit Central Business District remains alive with activity. Over $1 billion in new developments are underway as firms continue to look to establish a presence in the city." said Fred Liesveld, managing director of NKF's Detroit office.

Detroit CBD

The fourth quarter of 2018 marked the first uptick in the Detroit CBD's vacancy in nearly seven years. The vacancy rate increased 180 basis points to 12.3 percent, as new vacancies totaled just over 33,000 square feet. Molina Healthcare accounted for the largest vacancy, as the company moved out of 41,000 square feet at 615 West Lafayette and consolidated its employees into its Troy location. This was the city's second significant loss of the year: During the second quarter, automotive seating supplier Adient withdrew plans to relocate from Plymouth and spend $100.0 million to renovate the Marquette Building. Despite these losses, the city still has significant investments coming in 2019. Chemical Bank announced plans to build a 20-story, 250,000-square-foot high-rise at Woodward Avenue and Elizabeth Street. The company plans to begin construction on the building in mid-2019 and move 500 employees there within the next two years. Meanwhile, Universal McCann announced plans to relocate 40 employees to 1001 Woodward Avenue and eventually expand by 150 employees. This follows announcements by two other companies looking to increase their presence within the CBD: LinkedIn, which has grown to 40 employees in Detroit, plans to expand in the Sanders Building on Woodward Avenue, and RSM US LLP, which plans to expand by 120 employees in the Chrysler House on Griswold Street over the next three years. On the new development front, Little Caesars is expected to complete its $150.0 million, nine-story, 234,000-square-foot world headquarters at the corner of Woodward Avenue and Columbia Street in early 2019. In addition, construction started on Detroit's tallest skyscraper at the former Hudson's Department Store site. The nearly $1.0 billion construction project, which is being developed by Bedrock, will feature residential units and retail space along with an estimated 263,000 square feet of office space. Meanwhile, Ford continues to hammer out plans to renovate the iconic Michigan Central Station the company purchased during the second quarter. In addition to renovating and reusing the 18-story, 500,000-square-foot building, Ford is planning to redevelop the area into a 1.2 million-square-foot campus.

Southfield's office vacancy rate fell 100 basis points to 20.3 percent during the fourth quarter, as just over 181,000 square feet was absorbed. Credit Acceptance's move into the 297,000-square-foot Raleigh Officentre, which the company purchased during the previous quarter, accounted for a significant share of overall absorption. The 339,000-square-foot Travelers Tower II on Evergreen Road saw a strong uptick in leasing activity during the quarter that has left the building nearly 100 percent occupied. American Axle & Manufacturing, Inc. and XPO Logistics, LLC each leased 33,000 square feet, while R.L. Polk & Company expanded its presence in the building by 9,000 square feet. The fourth quarter accounted for 85 percent of the overall absorption for the year, as the first three quarters combined produced just 32,000 square feet of absorption. Although occupancy increased in the Raleigh Officentre and Travelers Tower II buildings, downsizing companies are creating vacancies in others. Consulting firm Concentrix announced 209 layoffs and is cutting employees from its 100 Galleria Officentre location. The move will add to the overall growing amount of sublease space on the market, particularly large-block sublease that has also seen a rise in the Troy submarket. As of the fourth quarter, there was 235,000 square feet of sublease space on the market in Southfield, up from 180,000 square during the same time last year.

The Troy office vacancy rate fell 110 basis points to 17.4 percent during the fourth quarter, as just over 160,000 square feet was absorbed. One of the largest deals of the quarter was Road to One Hundred, LLC's purchase of the 79,000-square-foot 1850 Research Drive. Molina Healthcare of Michigan is relocating its Detroit CBD space and consolidating employees into shadow space in the company's 197,000-square-foot 880 West Long Lake Road location. Other notable leasing activity in the Troy submarket includes S&P Data's 30,000-square-foot lease at 300 East Big Beaver Road and Power Home Solar & Roofing's 17,000-square-foot lease at 500 Stephenson Highway. For the year, the Troy office market absorbed just over 406,000 square feet. In addition to a strong fourth-quarter absorption, the submarket's strong year was buoyed by Henry Ford Health Systems' 275,000-square-foot move into United Shore Financial Center's former space at 1414 East Maple Road. The rise of sublease space in the market is one underlying weakness for the submarket. During the fourth quarter, sublease space totaled 273,000 square feet, compared with 77,000 square feet during the same period last year. The bulk of sublease on the market is the result of large users such as Beaumont Hospital's relocation from Troy to First Center Office Plaza in Southfield. Just over 70.0 percent of the submarkets' sublease space resides in just three buildings: 755 West Big Beaver Road, which has 78,000 square feet; 750 Stephenson Highway, which has 70,000 square feet; and 2600 West Big Beaver Road, which has 37,000 square feet.

Farmington Hills
Farmington Hills' office vacancy rate fell 10 basis points to 11.0 percent during the fourth quarter, as just over 6,000 square feet was absorbed. For the year, the vacancy rate fell 140 basis points on just over 86,000 square feet of absorption. Notable deals during the year were Flextronics America, LLC's 60,000-square-foot lease and Wells Fargo's 10,000-square-foot lease at Orchards Corporate Center II.

Livonia's office market vacancy rate fell 20 basis points to 12.1 percent during the fourth quarter, as just over 4,500 square feet was absorbed. 2018 proved to be a slow year for the Livonia office market, as the submarket absorbed just over 12,000 square feet. In addition to slow leasing activity, Eastern Michigan University's move out of the Cambridge Center on Six Mile Road during the second quarter added a 20,000-square-foot block of space to the market. Looking ahead, another large vacancy will be added to the market as Cardinal Health vacates is office space at Laurel Park II.

Although the city of Novi has seen more than 1.0 million square feet in industrial construction over the past two years, its office market cooled in 2018. Office users absorbed a net 16,000 square feet of space during the year. By comparison, the office market absorbed more than 130,000 square feet in 2017. Yanfeng Automotive Interiors' 93,000-square-foot lease at the former Twelve Oaks Professional Center at 41935 Twelve Mile Road accounted for the bulk of 2018 absorption. Despite an overall slowdown, the Novi office market ended the fourth quarter of 2018 with a healthy vacancy rate of just 6.8 percent.

Bloomfield Hills
The Bloomfield Hills office vacancy rate edged up 20 basis points to 7.2 percent during the fourth quarter, as small vacancies in Bloomfield Office Park and Franklin Office Centre came on the market. The submarket absorbed slightly more than 23,000 square feet during 2018, as companies such as Latitude Subrogation Services, SGF North America, Inc., NuTechs LLC and L. Weis Associates, Inc. leased new space. For the year, the submarket's vacancy rate fell 70 basis points.

About Newmark Knight Frank
Newmark Knight Frank ("NKF"), operated by Newmark Group, Inc. ("Newmark Group") (NASDAQ: NMRK), is one of the world's leading and most trusted commercial real estate advisory firms, offering a complete suite of services and products for both owners and occupiers. Together with London-based partner Knight Frank and independently-owned offices, NKF's 16,000 professionals operate from approximately 430 offices on six continents. NKF's investor/owner services and products include investment sales, agency leasing, property management, valuation and advisory, diligence, underwriting, government-sponsored enterprise lending, loan servicing, debt and structured finance and loan sales. Occupier services and products include tenant representation, real estate management technology systems, workplace and occupancy strategy, global corporate services consulting, project management, lease administration and facilities management. For further information, visit www.ngkf.com.

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