HEARTLAND SNAPSHOT, OCTOBER 2007

Detroit Office Market

The Detroit office market has been quiet lately, with much of the activity consisting of companies trading buildings back and forth, says Dennis Dilworth, vice president of business development with Colliers. New construction is also slow, confined to the outlying suburbs and consisting mostly of smaller buildings. According to CoStar’s mid-year Detroit office report, 152,059 square feet of new office product was delivered during the second quarter, with an additional 916,508 square feet under construction in the market.

The lack of new construction has much to do with above-average vacancy rates. According to CoStar, the overall vacancy rate is at 17 percent for the year, up from a rate of 16.8 percent at the end of 2006. The surprising thing is that out of all the office product in Detroit, Class C office posted the lowest vacancy rate, at 12.5 percent. Class A product posted more toward the average at 16 percent, and Class B was the highest of the three at 19 percent.

The biggest recent office acquisition was Wayne County’s purchase of the historic Guardian Building for $14.5 million. It was part of a $33.5 million purchase that also included an adjacent 30,000-square-foot building, as well as a 1,450-space parking deck.

Net absorption for the second quarter is in the black at 198,593 square feet. Most of this absorption, though, is in Class B and C properties — Class A absorption for the quarter made up only 17,633 square feet of the total.

CoStar lists the average rental rate for all office product in Detroit at $20.22. Class A office space is currently going for $23.93, an increase from the first-quarter rate of $20.70. But according to Dilworth, rental rates in Detroit as of late are depending less on the sector of the market and more on the specific building within the sector. He says actual rates can vary anywhere from the low-$20s to the low-$30s within a given sector.

Even with the downturn in the office market, some sectors are seeing growth. Some western markets, such as the Interstate 275 corridor, Livonia and the area immediately south of Livonia are seeing office development. In the outer suburbs, the M-14 corridor from Plymouth to Ann Arbor is also seeing growth. Dilworth notes that the Jefferson corridor is seeing a revitalization, but this is coming mostly in the form of retail and multifamily development. It remains to be seen whether any of this growth will translate into new office development.

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