Rising rents in Detroit force nonprofit agencies to move from downtown

Nonprofit agencies long headquartered in downtown Detroit are facing sticker shock over the rising cost of office space and parking as their leases come up for renewal.

The United Way for Southeast Michigan, the Southeast Michigan Council of Governments and several more nonprofits are facing the likelihood of moving out of downtown to cheaper parts of the city because of the rising cost of space.

Downtown Detroit remains relatively affordable by national standards, with office rental rates much lower here than in hot markets like Chicago and New York. But longtime tenants used to bargain prices here are stunned by how quickly costs have risen.

LISC, the Local Initiatives Support Corp., a nonprofit that supports neighborhood redevelopment, until recently was paying about $17 per square foot for office space in the First National Building near Campus Martius Park. But it faced an increase to about $26 per foot in its new lease, LISC director Tahirih Ziegler told the Free Press. That's a 50% jump in cost.

Instead of renewing in the First National, LISC relocated recently to the New Center One building adjacent to the Fisher Building, where it pays close to its old downtown rate.

Parking rates also have risen dramatically. LISC was paying $110 per month for an unreserved parking space in the First National's garage. Bedrock, the Dan Gilbert-owned real estate firm that owns the building, is now quoting $250 to $300 per parking space per month — and told LISC its employees would have to park remotely and shuttle into downtown.

"We're in and out of our offices all day long going to neighborhoods for meetings," Ziegler said. Parking remotely and shuttling into the office just wouldn't work for them. That, combined with the steep rent increases, tipped the balance toward moving.

"Our lease ended in 2017 and the rate went up quite a bit," Ziegler said. "They wanted between $25 and $27 per square foot. We couldn't afford it anymore."

Jim Ketai, CEO of Bedrock, acknowledged that prices have risen dramatically as new employers and thousands more workers enter downtown. But he said Bedrock tries to soften the impact by working with its tenants.

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"We try to be very cognizant of that especially with our nonprofits," he said, "and try to work very closely and carefully with them to help them either to find another location that is within their budget or work with them to give them a lower-than-market rate to help them stay in one of our buildings."

He added, "I would say the vast majority of all tenants who have been in our buildings have renewed. That’s actually a great sign. I think they appreciate the improvements that they are getting and they realize that they’re getting the right value for what we’re charging."

There is no one fixed price for real estate downtown. Rates for office space and parking, as well as for retail and residential space, can vary from block to block, building to building, even floor to floor.

But two things seem obvious: Rates have risen dramatically, certainly since before Gilbert moved Quicken downtown. Prior to that move, office space downtown could rent for the mid-to-high teens per foot. And, second, rates are still affordable compared with cities like Chicago, San Francisco and New York. Most leases run five to 10 years and are renewable.

The national real estate advisory firm JLL said office market asking rents in the U.S. averaged $33.78 in the first quarter of 2018. Asking rents in San Francisco were $74.64 per square foot, $72.48 per foot in New York City, $59.99 per foot in Washington, D.C., and $41.50 per foot in Chicago.

Indeed, of 53 cities and suburban markets surveyed by JLL, metro Detroit's office market rents ranked third lowest. But it was clear the JLL report hadn't yet captured the recent increase in metro Detroit's office rents since it still listed the metro Detroit rate at $19.16 per foot with a downtown rate of $21.92.

On parking, Ketai said Bedrock tries to offer tenants options to keep the rates down, including parking remotely and shuttling in.

"Our (rates) have gone up but we try to do it gradually so that it’s not a complete shock for people," he said. "But as the demand is there and the supply is limited there’s no question that those parking rates have gone up."

Major law firms with hundreds of employees and large corporate firms like Microsoft can better afford the higher rates. But for a small 14-person nonprofit like LISC, which relies on philanthropy and corporate donations for its revenue, the increases proved too steep.

Decisions needed fast, for some

The United Way for Southeast Michigan, the Southeast Michigan Council of Governments (SEMCOG) and other nonprofits are facing the same sort of challenges as their leases come due.

The United Way faces a decision almost immediately. Like LISC, it has been headquartered in Bedrock's First National Building for several years, paying less than $20 per square foot for space. But the agency would face a sharply higher rate if it renewed this year. United Way hasn't announced a decision yet.

At the 1001 Woodward building, also owned by Bedrock, SEMCOG has been paying $18.25 per square foot for space it moved into in 2013, plus $160 per month for a parking space. Bedrock is now quoting rates of $27 to $30 per square foot for office space and $250 to $300 per parking space.

Sue Stetler, a spokeswoman for SEMCOG, said the agency is looking at options and hasn't made a decision yet on whether to move.

Nonprofits may be the first to be priced out of the downtown office market, but they probably aren't the last. A host of traditional downtown tenants — CPAs, small law firms, small businesses — may be next.

There's no secret about why rates have risen so sharply. After decades of decline, the downtown market has turned around in recent years.

The key event came in 2010 when Gilbert moved his Quicken Loans headquarters downtown. He started with about 1,500 staffers but now employs about 17,000 downtown, spread over many of the roughly 100 properties Bedrock owns or controls through leases. Several thousand more new employees work for Microsoft and other newcomers to downtown.

Changes since pre-bankruptcy days

LISC's experience in the First National Building captures how dramatically the downtown scene has changed in a short time. When LISC first moved in there around 2005, during Detroit's pre-bankruptcy days, there was a different owner and a much different atmosphere in the building.

"We were able to get in before there were very many tenants there," Ziegler said. "Some floors were empty. There was no security. There were questions about your safety if you got off on the wrong floor. It makes you feel a certain way, right?"

Then Gilbert's Bedrock bought the building in 2011 and gradually began to bring in new tenants. The First National is now virtually full.

Ziegler admitted that she's not that upset about being priced out of downtown. LISC's new office in New Center One is closer to LISC clients in the North End district anyway. Downtown was getting less convenient. And she's happy for all the new interest in Detroit.

"We definitely want to see Detroit come back," she said. "So maybe we were inconvenienced by having to move. But it had gotten a little crowded with traffic, so we weren't feeling poorly about this."

The rising rates, then, are a good-news, bad-news story. Steve Morris, managing partner of the Axis Advisors real estate firm and an adjunct professor at the Ross School of Business at the University of Michigan, said it's great to have more people downtown, but that higher costs come with them.

“As a result of the strong occupancy with 24,000 new employees and growing companies (downtown), rental rates have gone up from the high teens to the high 20s (per square foot), primarily in the many Bedrock-controlled office buildings,” Morris said. “Parking also has gone up, double what it was before.

“It’s going to continue,” he added. Gilbert’s Hudson’s site and Monroe Block projects, just now getting underway, are expected to command prices of $45 per square foot for office space when opened in a few years. And other developers beyond Bedrock are moving their rates in the same direction.

“It’s become closer to a Chicago-type environment,” Morris said, “where only the regional offices of national companies and the many tech firms such as Microsoft and LinkedIn and WeWork can afford to pay these type of rates.”

But Ketai said Bedrock aims for a more expansive vision.

"Absolutely everyone is part of the mix," he said. "While it’s certainly great for the tech companies to be coming down here because that spurs a lot of activity, I think the ideal thing is to continue to have the proper mix of both national and local as well as the startups. You’ve got to work with all these together to make the whole thing work."

Contact John Gallagher: 313-222-5173 or gallagher@freepress.com. Follow him on Twitter @jgallagherfreep.