Detroit gains on the suburbs in filling office space

Once awash in vacancies, the downtown Detroit office space market is experiencing a reversal of fortune that is steadily filling old empty buildings and luring corporate tenants out of nearby suburbs.

This shift has already upended some long-standing dynamics of city versus suburban leasing prices and building occupancy rates. For certain companies, an inner-ring suburb like Southfield is now the place to go for a deal on rent.

Fifth Third Bank was the latest big-name company last fall to announce a relocation from a suburb to downtown Detroit, following moves by ad agency Lowe Campbell Ewald from Warren in late 2013, Blue Cross and Blue Shield of Michigan from Southfield in 2011 and recent decisions by accounting and law firms to open (or reopen) Detroit branch offices.

Fifth Third will move its regional headquarters and 150 employees out of the five-building Southfield Town Center — a prized jewel of Southfield office space — and into the One Woodward Building in Detroit, one of the many downtown properties recently acquired by the real estate arm of Quicken Loans founder and chairman Dan Gilbert.

The bank is making the move without any tax breaks or deal sweeteners from the local government. Real estate insiders say that enticing such a big corporate move to Detroit likely would have required generous incentives five years ago, before downtown's resurgence.

"Being downtown definitely raises our profile and it places us in a more noticeable center of influence," said Fifth Third spokesman Eric Younan. "The Town Center has been a wonderful facility and it still is; we just thought we would get things by moving to Detroit that we just couldn't get in the suburbs."

This turnaround in Detroit has undoubtedly benefited from the rise in popularity of downtown-style walkable urbanism over the car-dependent office parks that corporations often favored in the 1970s and 1980s.

"We deal with a lot of national clients and half of them will say, 'We want to be in Birmingham or Royal Oak or the CBD,' " or central business district. "It goes to that concept," said Dave MacDonald, a vice president at real estate firm JLL, formerly known as Jones Lang LaSalle.

There is also one distinct factor to the leasing and occupancy rebound — Dan Gilbert.

Gilbert has bought dozens of downtown Detroit buildings since relocating his headquarters (and thousands of employees) from Livonia in 2010. His real estate arm, Bedrock Real Estate Services, renovated many of these buildings into Class A office space and is leasing them at higher price points.

Since October, the Detroit Free Press and Detroit News have been tenants in a Bedrock-owned and renovated building: the old Federal Reserve Building.

The picture changed

For years, the Southfield office space market had higher occupancy and higher rents than Detroit's. Tenants and their employees also enjoyed much lower parking costs and freedom from Detroit's 1.2% income tax on nonresidents and 2% on corporations.

The city had the moniker "The Office Capital of the Midwest."

Now the occupancy and rents picture has flipped.

Detroit's vacancy rate in the fourth quarter was at 20.9% and its asking rent was $19.95 per square foot, according to data from real estate firm Newmark Grubb Knight Frank. Those numbers outpaced Southfield's 25.7% and $17.98, respectively.

"Where (Southfield) was the destination market maybe in the 1980s, downtown now is more of a destination market today," said AJ Weiner, also a vice president at JLL.

Not all of the movement has been one way to Detroit. Cloud-computing company Covisint has announced plans to move from Detroit to Southfield this spring and anticipates a big savings in rent.

Once a part of Detroit-based Compuware, Covisint and its roughly 250 employees will be vacating the seventh floor of the Compuware building, for which the company pays nearly $32 per square foot of space. At its future digs in Southfield's Travelers Tower II, the company will pay a little more than $16.50 per square foot, according to SEC filings.

Covisint reported that its yearly rent costs will drop from $2 million to $565,000 while it also reduces the amount of space it leases.

Additionally, the company will get a free year of rent with its new 11-year lease, tax breaks from the city of Southfield worth an estimated $271,161, plus a $1.5-million performance-based grant from the Michigan Economic Development Corp.

"Covisint kind of told the story," said real estate expert Steve Morris, managing partner at Axis Advisors in Farmington Hills. "You certainly can save money by going to the suburbs in most cases, and you have more choices for large blocks of space."

Marsh & Mercer, a consulting firm and insurance brokerage, left Detroit's Renaissance Center last year for Southfield's One Towne Center building. While both Class A buildings have similar asking rents — the low $20s per square foot — the firm could have still saved on parking costs and avoided city income taxes by moving. The City of Southfield also threw in a tax break worth a reported $75,000.

A Marsh & Mercer spokesman would not discuss reasons for the company's move to Southfield.

One 17-story Southfield office tower and its 340,000 square feet of empty space are now permanently off the market. Built in 1972, North Park Plaza was imploded last month by its owner, Oakland Community College, which couldn't find a use for it.

What's on the market

Walking the streets of downtown Detroit, one can feel puzzled by the number of vacant or mostly vacant buildings in sight despite the officially shrinking vacancy rate.

That is because office market reports generally don't count space that is off the leasing market.

As a result, empty offices within massive early 20th Century high rises such as the 36-story Book Tower and Book Building, the 38-story David Stott skyscraper and the old Detroit Free Press building are not included in the calculations.

Among the available options, the 47-story Penobscot Building near Campus Martius is widely considered the best located downtown building that still has considerable space for lease. Of the total 1 million square feet, roughly 40% is not yet taken, according to a leasing official there.

Downtown Detroit may eventually need new office buildings if its vacancy rate keeps falling.

Last year, Meridian Health Plan canceled plans to construct a 16-story headquarters tower near Campus Martius with developer Schostak Brothers & Co. Instead, the company partnered with Gilbert's Bedrock late last year to buy the Compuware Building for $142 million.

Andy Gutman, president of the Farbman Group, said vacancy would probably need to dip into the single digits before we see new construction.

Nevertheless, downtown could suddenly face an office space crunch should another large corporation opt to move in.

"If somebody wanted to bring 1,000 employees to downtown, that could be a problem," said Weiner of JLL. "But Southfield could probably do it."

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

Who's coming and going

A few of the recent Detroit arrivals and/or new branch offices:

Molina Healthcare

Accounting firm UHY LLP

Lowe Campbell Ewald

Neumann/Smith Architecture

Plante Moran accounting

Forthcoming moves to Detroit:

Financial media company Benzinga leaving Southfield

Fifth Third Bank Eastern Michigan leaving Southfield

Recent or forthcoming moves out of Detroit

Marsh & Mercer left Renaissance Center for Southfield

Covisint is leaving Compuware Building for Southfield