Downtown Detroit office vacancy lowest in years

Detroit — Office vacancy in downtown Detroit has dipped to a low not seen in at least a decade and signals the possibility that the next company needing significant office space would have to look to New Center, Corktown or the Eastern Market area, according to a report released Thursday.

The office vacancy rate for downtown — basically the 48226 ZIP code — fell to 13.3 percent for the last three months of 2016, according to a quarterly office outlook report by Jones Lang LaSalle, an international real estate firm with an office in Royal Oak.

That’s not much lower than the 13.7 percent rate at the start of 2016 but it’s a major change from just five years ago when one out of every four office spaces in downtown sat idle. That’s around the time The Detroit News counted 48 big empty buildings downtown, and some analysts worried many historical buildings had outlived their usefulness.

Ten years ago, one out of every three office spaces was vacant. Data from Jones Lang LaSalle and other real estate databases show downtown’s office vacancy rate has not been lower than the current 13.3 percent for at least a decade. Several veterans in the local development scene could not recall when downtown Detroit’s office vacancy rate was ever this low.

“This is a good problem to have. That’s the sign of the times,” said Rod Miller, president and CEO of the Detroit Economic Growth Corp., the city’s quasi-public agency that promotes development. He said the market is strong and the perception of downtown continues to improve.

The current vacancy rate is a clear example of just how downtown has rebounded in the past five years, Miller said. For most of 2016 and the past two years, downtown’s office vacancy rate has been lower or on par with that of local suburban markets, such as Troy and Southfield, various data shows. That, too, is a recent trend that reverses years of the downtown having a much higher rate of office vacancy compared to the suburbs. The current office vacancy rate for all of Metro Detroit is 20.2 percent, significantly higher than downtown’s Detroit rate, according to the Jones Lang LaSalle report.

For a broader comparison, the third-quarter office vacancy rate for downtown Cleveland was 22 percent; for downtown Indianapolis the rate was 17.5 percent.

In recent months, Detroit Mayor Mike Duggan and downtown real estate magnate Dan Gilbert have been boasting that downtown is out of office space. That’s a bit too optimistic of an outlook but not far from reality.

Even at the current vacancy rate, there is 13.3 million square feet of available office space, according to the report.

The vacancy rate shrinks to 9.6 percent when counting just “Class A” space — basically, state-of-the-art facilities. And big blocks – at least 100,000 square feet or more – of that prime space are getting rare.

“Large contiguous blocks of Class A space are becoming increasingly difficult to identify (downtown),” said Harrison West, a Jones Lang LaSalle research analyst in Detroit.

Even a deal like the one announced in November that brought 500 jobs to downtown’s Marquette Building would be tough to do right now, said West. That’s the deal in which automotive seat maker Adient decided to set up its headquarters here. Adient is a recent spinoff from Milwaukee-based Johnson Controls.

“It would be tough to find a way to make a deal like that work with the current inventory — slim to none,” West said.

West is among many in the local commercial real estate business to forecast that businesses are looking beyond downtown.

“The heavy investment in New Center indicates that,” he said.

The new owners of the Fisher and Albert Kahn buildings, two of Detroit’s architectural icons in New Center, are modernizing the building’s office space and adding residential and retail as part of a $100 million-plus investment.

New Center housing development banking on QLine

“One of things we are counting on is the success of downtown to continue to grow and follow the QLine,” said Peter Cummings, one of the owners of the Fisher and Kahn buildings. The QLine is the streetcar that debuts next year and will run from downtown to New Center.

Startups and young businesses have been moving into collaborative working spaces. A firm called WeWork signed a lease for 80,000 square feet between two downtown buildings. Bamboo Detroit, a company that provides space for entrepreneurs, is opening its second downtown location in early 2017.

West said that as space gets more competitive and downtown rents continue to rise, he expects to see collaborative spaces open in Corktown and the Eastern Market area.

laguilar@detroitnews.com

Twitter@LouisAguilar_DN