If demand for Detroit office space remains cool, some new office construction projects might be endangered.


Downtown Detroit wasn’t entirely back to its ghost town days on a recent weekday, although sidewalks that bustled a year ago with office workers and fleets of electric scooters were much, much quieter at midday.

Local real estate experts anticipate the return of many of those missing workers at some time in the future, once the coronavirus pandemic eases and more businesses call staff back for in-person work and stop them working entirely from home.

The Hudson’s construction site along Woodward on Aug. 20, 2020. (Photo: Rodney Coleman-Robinson, Detroit Free Press)

Yet a post-pandemic downtown Detroit could well be one with fewer office workers in fewer office spaces, should businesses decide to permanently incorporate more remote work than before COVID-19 or even opt to relocate to the suburbs, where leases can be cheaper and parking is often free.

Businesses also could simply reduce their headcount and space needs if the pandemic-caused recession lingers.

“The impact of what we’re grappling with now will certainly be more felt early next year,” said A.J. Weiner, a managing director with commercial real estate firm JLL.

If businesses do decide to slim down, it may take time before they shrink their physical footprints because many are likely locked into longer-term leases. Office leases generally run anywhere from three to five to seven or 10 years.

“There’s no one fleeing the city today because these companies have a lease and they cannot leave the city until they see the lease coming up for renewal,” said Steve Morris, managing partner of Farmington Hills real estate firm Axis Advisors and an adjunct professor at the University of Michigan’s Ross School of Business. 

Any future, lasting drop in demand and pricing for office space could also imperil the business case for constructing new office buildings. 

That includes the big, expensive and high-profile building construction projects that are underway or planned by businessman Dan Gilbert’s Bedrock real estate firm.

One of those projects is widely considered to be in danger of cancellation or at least being shelved for years.

The projects originated in 2017-2018, when Gilbert, the billionaire founder of mortgage giant Quicken Loans, worried that downtown was running out of high-quality “Class A” office space and needed to build more to continue to grow and attract hot companies such as Amazon to open more offices here.

“There’s no other way to grow, but to build,” he said at the time. “We’re at full.”

Speaking generally about new office construction, Andy Gutman, president of Southfield-based Farbman Group, said the COVID situation and uncertainty about future office needs will likely put some building projects in a holding pattern.

“I think you are going to see, at least over the next year, a lot of these larger projects be put on hold or deferred until everyone knows the direction we’re going,” Gutman said.

Two non-Gilbert office projects in or near downtown Detroit that remain on track are:

  • The 20-story headquarters for TCF Bank at 2025 Woodward.
  • A new five-story Ilitch-owned building, 2715 Woodward next to Little Caesars Arena, that will house Boston Consulting Group, law firm Warner Norcross and Judd and a DMC sports medicine center. Construction is to finish in 2021.

Additionally, the planned $300 million University of Michigan “Innovation Center” along Gratiot, at the former site of the “failed” Wayne County jail project, remains on pace for construction start in 2021, according to a spokesman for its lead developer The Related Cos.

Office sector to take a hit

A report released Monday by Moody’s Analytics forecasts that office space rents nationwide will fall more than 10{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} this year and vacancy rates could rise to nearly 20{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} in 2021.

“The office property sector was already experiencing downward pressure on the usage intensity of office space even before the COVID-19 crisis,” the report said. “Now, burdened with a wide-scale shift toward remote working as offices remain closed, it is expected to be particularly hard hit in the coming years.”

However, according to Dennis Bernard, president of Southfield-based commercial mortgage firm Bernard Financial Group, the office market in bigger cities such as Chicago and San Francisco will likely feel more pain than Detroit because they saw a lot of new construction before the pandemic. 

In Detroit, “Our office in our Class A and B+ properties was 95{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} occupied. So we had a tight market, so if we slip a little bit, we’ll be fine,” he said. “With those other cities, they were constantly building new towers.”

Gilbert’s new towers

One of the two Gilbert projects, known as the Monroe Blocks, would be built on surface parking lots near Campus Martius. The roughly $1 billion project was designed to have three towers, including a 35-story glass and terra cotta office complex, and 847,000 square-feet of total office space.

Also planned was a 27-story residential tower and a 10-story building with residential and retail space.

The project’s originally announced completion date was in 2022.

Now, real estate insiders believe the project has been indefinitely shelved or even canceled.

There were only a handful of workers at the site this week during a Free Press visit, and few building materials and visible construction activity.

Matt Cullen, then the CEO of Bedrock, told reporters in January — before the pandemic — that Monroe Blocks was still happening in the near future but the timing had been pushed back. Previously, Bedrock had said the project’s design was being modified.

Bedrock representatives did not respond to repeated messages seeking the status of its construction projects.

Hudson’s site

Another Gilbert project is underway at the location of the former J.L. Hudson department store on Woodward, although its completion date has reportedly slipped two years to 2024.

Crews have dug a foundation and installed caissons to support two planned structures: a nearly block-long building with office and retail space, and a neighboring skyscraper with hotel rooms and residences. There are two giant cranes in the hole and, during a midday visit, the  construction site appeared active but not teeming with workers.

The Hudson’s construction site along Woodward on Aug. 20, 2020. (Photo: Rodney Coleman-Robinson, Detroit Free Press)

When it was announced, the skyscraper was to be the tallest in Detroit and stretch higher than the tallest 727-foot tower in the Renaissance Center; Bedrock later lowered the planned height to 680 feet, according to Crain’s Detroit.

The Free Press reported last September that Bedrock was having challenges pre-leasing significant amounts of space in the planned $900-million-plus buildings, a situation that can make it difficult to obtain financing from lenders for construction.

Since then, any COVID-related drop in anticipated demand for office space would be an added challenge.

Morris, the Axis Partners real estate executive and U-M instructor, said it could take office rents in the high $30s per square-foot to low $40s per square-foot to make a project such as the Hudson’s site financially viable.

The average asking rents for Class A office space in Detroit’s central business district was $26.82 gross per square-foot in the second quarter, according to a market report by Newmark Knight Frank.

Morris said there are only so many potential office tenants in Detroit willing to pay $40 per square-foot. Such tenants could be big tech companies. For instance, Google is paying over the $40 mark for its lease next to Little Caesars Arena.

But Microsoft, Amazon and LinkedIn already have offices in downtown, and aside from Google, they are likely paying rents well below $40, according to a past Cushman & Wakefield office market study.

Separately, the recent completion of Gilbert’s expansion project at One Campus Martius, formerly known as the Compuware Building, which added 310,000 square-feet of office space to the building, could add slack to the market.

No tax capture unless built 

Morris said the rent levels needed for the Hudson’s project might have been closer to $50 per square-foot if not for assistance from the state’s “transformational” brownfield credits for constructing the buildings.

Those tax breaks would come largely from capturing property taxes, state income taxes and withholding taxes from the businesses, workers and residents who would occupy the new buildings. That means Bedrock doesn’t get the captured taxes until the buildings are built. 

The construction site for the University of Michigan Innovation Center along Gratiot on Aug. 20, 2020. (Photo: Rodney Coleman-Robinson, Detroit Free Press)

Detroit-based Quicken Loans recently completed an initial public offering. It’s an open question whether Gilbert’s potential proceeds from the IPO could boost financing for the Hudson’s project and reduce its lending needs.

Matt Schiffman, a senior associate at Southfield-based P.A. Commercial, said Bedrock could be building what is essentially a “shell” at the Hudson’s site that, as construction proceeds, could be configured to best fit anticipated market demand for types of space.

Shorter leases

Across metro Detroit, landlords have been offering office tenants with expiring leases one-year extensions because of the pandemic and related uncertainties, said Gutman of the Farbman Group. Normally, landlords seek longer-term leases.

“I think that’s simply because they don’t want to lose their tenancy,” he said. “We’re still in the phase where everyone is trying to work together.”

There also has been an uptick in office subleasing activity, according to Schiffman. Businesses may look to sublease space when they no longer need as much of it.

Overall, experts say there is still a lot of uncertainty about whether businesses will look to shrink their office footprints in the months ahead. 

Some may decide to keep their existing arrangements — even if they have fewer workers in the office — and decide to increase the physical distance between employees. And many will likely ditch the once-popular open floor plan office.

“The net effect may be a wash, but we don’t know,” said Bernard, the commercial mortgage firm president. “What we do know is those open floor plans for the next five to 10 years are gone. It’s going to go to bigger cubes again, it’s going to go to individual offices, it’s going to be spread out.”

Contact JC Reindlat 313-222-6631 or [email protected]. Follow him on Twitter@jcreindl. Read more on business and sign up for our business newsletter.

Read or Share this story: