Newmark Grubb Knight Frank (NGKF) released its first quarter 2016 office trends data for the Detroit region this week. According to the report, the Metro Detroit office market posted over 500,000 square feet of positive absorption during the first quarter of 2016, pushing the overall vacancy rate down 90 basis points to 18.7 percent, a rate not seen since 2002. Both the suburban and the Detroit CBD office markets are showing great gains. Suburban office vacancy fell 50 basis points to 19.3 percent during the first quarter and is now at pre-recession levels. Demand remains strong in the CBD, as positive absorption pushed vacancies to record lows. The CBD’s shrinking vacancy rate and persistent demand are spurring investors to refurbish and modernize some of Detroit’s vacant iconic office buildings.
“The consistent level of demand we are seeing from the Detroit CBD to Southfield and Farmington Hills is indicative of the overall health of the office market,” said Frederick Liesveld, managing director of NGKF’s Detroit office.
The Farmington Hills office market saw a rush of leasing activity during first quarter 2016. Vacancy fell 250 basis points to 14.5 percent, as 154,000 square feet was absorbed. The bulk of leasing activity in the submarket was in the Arboretum Office Park at Twelve Mile Road and Drake Road. Several large-block office leases at the five-building, 586,000-square-foot office complex brought its vacancy rate down to 35 percent, after hovering near 70 percent for two years. The largest deal was ZF TRW’s 171,000-square-foot lease at Arboretum III. Two other significant leases were AGC Flat Glass North America’s 28,000-square-foot lease at Arboretum II and Renesas Electronics Corporation’s 21,000-square-foot lease in Arboretum West. Net absorption was partially offset by Harman Automotive vacating 60,000 square feet at 39001 Twelve Mile Road. Harman relocated into a newly constructed 188,000-square-foot headquarters along M-5.
Southfield’s office vacancy rate fell 60 basis points to 22.4 percent during first quarter 2016, as just over 105,000 square feet was absorbed. Class A space has begun to trend positive again, as the market for high-end office space posted two straight quarters of positive absorption. One of the largest deals during the first quarter was accounting firm Baker Tilly’s 42,000-square-foot relocation to the 2000 Town Center building. Other Class A buildings saw an uptick in leasing activity during the first quarter as well. At the American Center, Autoliv Electronics America leased 20,000 square feet, and at One Town Square, consulting firm Mercer, LLC leased 12,000 square feet. Net absorption over the past two quarters for Class A space totaled over 157,000 square feet. Southfield’s Class B market posted its eighth strong quarter of positive net absorption, as over 25,000 square feet was absorbed during the first quarter. Despite a handful of vacancies under 5,000 square feet, Great Expressions Dental Centers’ 30,000-square-foot lease at the Onyx building kept the Class B market in positive territory. The Class B vacancy rate fell 20 basis points to 24.0 percent during the first quarter. When factoring out the three remaining vacant former Blue Cross Blue Shield buildings, Southfield’s true competitive multi-tenant vacancy rate is 17.0 percent.
The Detroit CBD’s office vacancy rate fell 270 basis points to 15.0 percent during the first quarter of 2016, as over 213,000 square feet was absorbed. Ally Financial Inc.’s completed its move from the Renaissance Center and into 321,000 square feet at One Detroit Center. The iconic 1.0 million-square-foot One Detroit Center is now fully leased; just five years ago, the building was 60.0 percent vacant. The building is now a metaphor for the CBD itself: Since 2011, over 2.4 million square feet of office space has been absorbed, leaving the CBD’s vacancy rate at levels not seen over the course of 20 years, when the industry began collecting statistics on the office market. With the lure of the city still strong, investors are investing money in renovations of iconic buildings to make them more functional. Three major office buildings are under renovation or in the planning stages: Bedrock Real Estate Services is investing $54.6 million to build out the 404,000-square-foot 615 West Lafayette Boulevard building. Upon completion, Rock Ventures LLC plans to move 1,100 new Quicken Loan employees into the building. Bedrock Real Estate Services is also in the planning stages of renovating the vacant David Stott Building at 1150 Griswold Street, which was built in 1929, and an entity of Carlos Slim Helú is in the planning stages of renovating the Marquette Building at 243 West Congress Street, which was built in 1899.
Troy’s office market vacancy rate fell 40 basis points to 23.7 percent during the first quarter, as just over 54,000 square feet was absorbed. Notable deals were Midland Credit Management Inc.’s 62,000-square-foot lease in the Troy Officentre, Tyler Technologies 40,000-square-foot lease at Troy Corporate Center and Populus Group, LLC’s 20,000-square-foot lease in Troy Place. Although the submarket did see several sizable vacancies on Research Drive and Coolidge Highway that significantly offset new leasing activity, vacancies are trending downward and are at levels not seen since 2007.
Livonia’s office market vacancy rate increased 100 basis points to 16.1 percent during the first quarter, as a net 31,000 square feet became vacant. Exel Logistics’ 15,000-square-foot expansion in Seven Mile Crossing was the submarket’s only major source of absorption. Livonia’s office market hasn’t seen the level of improvement over time compared with other submarkets. Over the past three years, Livonia’s vacancy rate has only fallen 2.5 percentage points, while the Novi, Farmington Hills and Southfield submarkets vacancies have fallen by at least five percentage points.
Novi’s office market vacancy fell 60 basis points, to 11.1 percent, during the first quarter, as nearly 10,000 square feet was absorbed. The bulk of absorption came from KPIT Technologies’ 9,500-square-foot lease at the Haggerty Corporate Office Centre. The city of Novi is a hotbed of business activity and the center of Metro Detroit’s industrial construction boom. Since 2015, seven major construction projects began, ranging from 20,000 to 188,000 square feet for companies such as Harman Becker Automotive, ATI Technologies and American Tire Distributors, Inc. By the end of 2016, well over 600,000 square feet of new construction will have been built.
Birmingham CBD’s office market posted 55,000 square feet of positive absorption. The Balmoral, a newly constructed 85,000-square-foot office building on Woodward Avenue, accounted for the bulk of positive absorption. Morgan Stanley leased 40,000 square feet and Private Bank & Trust took 15,000 square feet in the new facility.
Ann Arbor’s overall vacancy spiked 3.6 percentage points to 10.5 percent during first quarter 2016, as Truven Health Analytics vacated approximately 185,000 square feet at 777 East Eisenhower Parkway and relocated to the Wickfield Center at 100 Phoenix Drive. Despite the vacancy spike, Ann Arbor’s office market is set to become very active in 2016, in terms of new construction and relocations. Google, Inc. is expected to move into its new 140,000-square-foot campus, currently under construction, by the third or fourth quarter. Google’s existing office space in the McKinley Towne Centre won’t be vacant for very long after the company relocates: LLamasoft, Inc. and Ameritrade leased 58,000 square feet and 23,000 square feet, respectively, at the McKinley Towne Centre, which they are expected to occupy in mid-2016.
Auburn Hills’s office market vacancy fell from 17.0 percent to 11.7 percent during the first quarter, as the submarket was home to the largest office deal of the quarter. Molex Automotive leased 127,000 square feet in the Class A 3499 West Hamlin Road building. Auburn Hills’ inventory of Class A office space now has a vacancy rate of just 6.7 percent. The submarket’s Class B vacancy rate stood at 16.0 percent during the quarter.
The Metro unemployment rate stood at 5.7 percent in January 2016, down from 7.2 percent during the same time one year ago. Meanwhile, core Metro Detroit industries are showing growth compared with the same period last year; the manufacturing sector grew 2.4 percent, professional services grew 2.7 percent and financial activities grew 7.1 percent. The forecast for the Metro Detroit economy looks good. After a slight dip in January, U.S auto sales surged in February. Many analysts are predicting annual sales to reach a record 17.7 million units in 2016. Over the past 20 years, U.S auto sales have averaged 15.3 million units.
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