New development in the suburban Detroit office market has markedly slowed down from last year. This area covers the submarkets of Farmington Hills, Southfield, Bloomfield, Detroit, Lavonia, Novi and Troy. “What drives our market is the auto industry, which has been slumping, and a lot of the suppliers have been hurt in a trickle effect,” says Todd Hawley, senior vice president of The Friedman Real Estate Group. Although the market has minimal technology, what it did have has basically dissipated. There have been a number of bankruptcies and companies closing non-headquarters office branches in an attempt to cut costs and consolidate their businesses.

In the last 18 months a lot of new product has come on the market and remains vacant now. These buildings range between 60,000 square feet upwards to 120,000 square feet. Since the properties are vacant or only 20 to 30 percent leased, other speculative development is at a standstill. Build-to-suit construction is also down 50 to 80 percent from where it was 2 years ago.

In the Southfield market, Electronic Data Systems has vacated around 100,000 square feet. In the last 8 to 10 months, the American Center has lost Chrysler Financial, which was occupying a 275,000-square-foot space. Chrysler Financial relocated to the former Michigan National Bank headquarters. There has been a slight amount of moving that has created some large holes.

Next year Compuware, the largest tenant in the Farmington Hills market occupying 350,000 square feet in various buildings, will be moving into its new headquarters in downtown Detroit. This will have a major effect as the market becomes flooded with space. Whether Compuware’s current 200,000-square-foot headquarters gets bought or leased in its entirety will not lessen the impact because so much insular space in other buildings will be open. “Some of their space is already hitting the market slowly but the majority is going to come on line, bringing our vacancy rates down,” Hawley says. The exit of a large company like that can impact a small market like Farmington Hills. In this market, the vacancy rates are between the low 90s and high 80s as opposed to a year and a half ago when they were at 98 percent.

Until a year ago, most of the development was taking place in the Farmington Hills and Lavonia/Novi markets. A high amount of vacancies in those markets exists because that is where the speculative development has taken place. Those are good markets because they are close to major arteries, land is available and residents are migrating there.

Some of the large real estate investment trusts that were speculating in the markets over the last few years are no longer shopping and are looking for ways out.

Class A rental rents gross between $24 to $26 per square foot, which is 10 to 15 percent lower then they were 18 months ago. An average of the entire submarket is between 15 to 19 percent. Troy is on the high end with 22 to 25 percent vacancy. Lavonia/Novi is faring best with a rate between 10 and 12 percent.

The Troy market should be interesting to watch because it was hardest hit. The market usually leases up last and loses tenants first. “It will be interesting to see how bad the market becomes and what steps must be taken to restore it,” Hawley says. Farmington Hills and Lavonia/Novi will bounce back first because there is some activity in those markets.

Overall, the market is slow and lagging. Tenants are hesitant to make relocation decisions. Landlords have realized that the market is soft and are offering rental concessions. For large transactions up to 50,000 square feet, tenants are seeing up to 1 year of free rent. Tenants that want to avoid moving costs are having success in negotiating lower rents while re-leasing in their current spaces.

Todd Hawley is Senior Vice President of The Friedman Real Estate Group.


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