Suburbs strain to compete with pricier Detroit office space market

JC Reindl | Detroit Free Press

If the recent rebound in Detroit's office space market has put some suburban landlords on the defensive, then the golden towers of Southfield Town Center could be the front line in this regional battle for office tenants.

The property's New York-based owner has been pumping $56 million into adding amenities and sprucing up the lobbies, corridors, meeting spaces and the greenery-filled atrium inside the string of four towers and a low-rise building that make up the second largest office and hotel complex in Michigan after the Renaissance Center.

Those upgrades, which also added food trucks, installed Zagster bicycle-share stations and tore out carpeting and generic drop ceilings for tenants wanting a more "unfinished" look, have been helping the gargantuan 2.2 million-square-foot complex compete with the newly hot downtown Detroit office market, as well as perennially popular Birmingham and Ann Arbor.

Landlords for Southfield Town Center and other standalone office complexes in the suburbs concede that they can't provide a real downtown environment for their tenants' employees to stroll and explore during lunch hour.

But they can offer cheaper rent, renovated offices, up-to-date amenities, freedom from city income taxes — and plentiful parking.

Big suburban buildings typically come with acres of free and convenient parking. In downtown Detroit, parking spots can sometimes be blocks away from a workplace and rates have hit $225 or more per month per space in some garages.

What's more, employees in suburban offices don't lose a portion of their paycheck to Detroit's highest-in-the-state city income tax.

Owners of other large office complexes have also recently undertaken renovations to stay competitive, including at Sheffield Office Park and the PentaCentre building, both on Big Beaver in Troy. The PentaCentre, formerly known as Troy Officentre, is in the middle of a $10 million makeover that will add a fitness center.

Suburban landlords "have not been standing still. They are working to keep and attract tenants," said Andy Gutman, president of the Farbman Group real estate firm.

"Buildings are being upgraded, from their exteriors, interiors and common areas ... properties are upgrading food choices, providing amenities like bikes and games you can check out, or amenity rooms with games like shuffleboard or pop-up hockey, and are bringing in food trucks for that cool factor."

The upgrades may already be paying off.

Occupancy at Southfield Town Center is now 74 percent and edging up. It was 67 percent fours years ago, down from a high of 95 percent in the early 2000s. The center's towers were built in phases between the mid-1970s and late 1980s.

“As the workforce shows an interest in being in more of a walkable community or urban environment, that is what’s going on here at Town Center to address that," said Clarence Gleeson II, a senior vice president for Transwestern, the firm that manages Southfield Town Center for owner 601W Companies.

The center's newest arrivals include 550 workers with Blue Cross Blue Shield of Michigan and 130 workers with the Society of Manufacturing Engineers, which moved its headquarters there from Dearborn in May.

About 400 of the Blue Cross workers had been located at the insurer's Detroit offices. Most of those departures from downtown have since been offset by transfers or new hires, a Blue Cross spokeswoman said.

Asking rents at Southfield Town Center now range from $21.50 to $24.50 per square foot, which is slightly cheaper than the early 2000s.

That compares with nearly $25 per square foot in Detroit, $32-$43 in Birmingham and $33 in downtown Ann Arbor for comparable "Class A" office space, according to the latest market survey by real estate firm Newmark Knight Frank.

Once at rock bottom

Suburban landlords didn't always have to worry about Detroit when trying to attract and retain tenants. For a long time, companies were leaving the city — not flocking to it.

“Historically, up until the last several years, if someone was downtown they were downtown because they literally were doing business downtown and they had to be downtown," Gleeson said.

The vacancy rate for downtown Detroit office space was about 36 percent seven years ago, according to Newmark Knight Frank data.

Vacancy would have been even higher, but some buildings were in such disrepair that they weren't counted. A prime example would be Michigan Central Station just outside downtown in the Corktown neighborhood, which sat empty and abandoned since Amtrak left in 1988.

But the station and its 18-story office tower are now set to spring back to life in 2022, when Ford Motor Co. reopens the building as the hub of its new Detroit campus for advanced automotive technology. Plans also call for adding residential housing to some floors of the tower.

The Detroit location is expected to help Ford recruit a new generation of employees who prefer urban environments over traditional suburban campuses.

The turnaround

Downtown Detroit's recent turnaround was driven in large part by the building purchase-and-renovation spree of businessman Dan Gilbert and his Bedrock real estate firm.

Bedrock has been filling buildings with office tenants that relocated from nearby suburbs, including Fifth Third Bank, Microsoft and Broder & Sachse Real Estate Services.

The firm has also attracted businesses that are new to Michigan, such as the New York-based WeWork coworking space company, which continues to expand its downtown footprint along Woodward Avenue.

Overall, downtown's vacancy rate was down to 10 percent this spring, according to Newmark Knight Frank. The average asking rent was $21 per square foot, the highest in decades. Rates for the most desirable "Class A" office space in downtown now start around $25 per square foot.

In Detroit, “it’s been six-plus years of quarter by quarter by quarter growth," said John DeGroot, vice president of research at Newmark Knight Frank.

Some of the last remaining floors of contiguous Class A space still available are inside the Renaissance Center, according to real estate insiders.

Bedrock is now turning its focus from renovating old downtown buildings to constructing new ones. The firm is starting construction on two new mixed-use projects that will contain office space — the Monroe Block project and Hudson's site tower — as well as an addition to the One Campus Martius office complex, formerly known as the Compuware Building.

“The demand is really what’s driving our new projects because we are near capacity," said Jen Skiba, Bedrock's vice president of leasing. "That is a good problem to have."

Real estate experts say those new buildings, expected to open between 2019 and 2022, could command record-breaking rents for Detroit.

"That’s the place that all these people are going to want to be, in that brand new building that is the new shining symbol of downtown," said Harrison West, senior research analyst at real estate firm JLL in Royal Oak.

Rent too high?

Yet office rising rents have prompted some smaller tenants to consider relocating out of downtown Detroit for cheaper deals elsewhere in the city or in the suburbs, even as bigger firms such as LinkedIn and Google continue to open new downtown offices.

“The transformation is wonderful, but (Detroit) has gotten more expensive," said Steve Morris, managing partner of the Axis Advisors real estate firm.

A nonprofit organization called Local Initiatives Support Corp. recently left downtown's First National Building for cheaper office space in the city's New Center area because its rent was reportedly set to jump to $26 per square foot from $17 per square foot, and its parking costs to around $250 per month per space from $110 per space.

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Although rent wasn't a deciding factor in health care firm ConcertoHealth's move in January of its regional office from New Center to Southfield, ConcertoHealth is nevertheless saving money on rent and parking at its new location in the Southfield Centre office building on 9 Mile, a spokeswoman said.

Real estate experts say that as downtown rent and parking costs rise, more small businesses and nonprofits could bid farewell and seek better deals elsewhere.

"What we’re starting to see is a small exodus of companies starting to leave," Morris said. "As leases come up, they are looking at the suburbs and they’re saying 'I can be in Southfield where there are a good handful of buildings in good shape, where one can lease space at about $18 a foot — and the parking is free.”

Income tax bite

Another cost factor is Detroit's city income tax, which is 2.4 percent for residents and 1.2 percent for nonresidents who work in Detroit. Most suburbs have no income tax.

To make up for that hit to their employees' paychecks, some companies will bump up wages once they relocate to Detroit.

For example, Fifth Third Bank gave 1.2 percent wage increases in 2015 after it moved regional headquarters out of Southfield Town Center and into downtown's One Woodward building.

Engineering firm Tata Technologies intends to do the same in 2019 for the 120 employees of its North American headquarters, which will move from Novi to a newly redeveloped building at 6001 Cass in Midtown Detroit.

Tata also plans to cover the full cost of Detroit parking for its employees, said Chief Operating Officer Sonal Ramrakhiani. Parking is currently free for Tata in Novi.

Even with those added costs, the Detroit move is still worth it for the engineering firm, she said.

A Detroit location is expected to help Tata attract talented young employees who prefer urban settings, Ramrakhiani said, and help the firm collaborate with automotive partners and suppliers.

“We were interested in the entire resurgence of Detroit and being a part of it," she said, "but it also made tremendous business sense."

Contact JC Reindl: 313-222-6631 or jcreindl@freepress.com. Follow him on Twitter @JCReindl.

Asking rents per square foot in popular office markets (Combination of "A," "B" and "C Class" space)

Downtown Ann Arbor, $29.74

Downtown Birmingham, $32.39

Bloomfield Hills, $23.97

Dearborn, $17.34

Downtown Detroit, $21

Farmington Hills, $19.17

Pontiac, $15.88

Southfield, $18.29

Troy, $19.66

Source: Newmark Knight Frank