3 new office buildings would be unique to Detroit, have more amenities, developers say

On weekdays in downtown Detroit, the office worker population is still under half what it was before the COVID-19 pandemic and rise of remote work.

Companies are subleasing space they no longer need, and when leases come up for renewal, some are choosing to downsize. And a few tenants have left downtown for cheaper office rent — and parking — in the suburbs.

This softening of what had been before COVID a resurgent demand for office space in Detroit hasn’t deterred the Ilitch organization’s Olympia Development of Michigan and developer Stephen Ross’ New York-based Related Cos. from their collaborative plan to construct several new downtown office buildings that would open later this decade.

The three proposed buildings would add about 1.2 million square feet of office space to the city, or roughly the equivalent of two more Renaissance Center towers.

They would arrive after the anticipated 2024 completion of Dan Gilbert’s 12-story midrise building under construction at the old Hudson’s department store site on Woodward, which would serve up an additional 400,000 square feet of office space to the market. (The neighboring 49-story Hudson’s site skyscraper would be residential condos and a luxury hotel.)

Whether there will be enough demand in Detroit to fill all the planned office buildings — or even to justify groundbreakings — are open questions.

Commercial real estate experts say that post-pandemic space needs and work arrangements are still in flux and it’s too soon to tell whether a less busy central business district is a “new normal,” especially as more employers such as General Motors are poised to call workers back to offices more days of the week in 2023.

Yet the new collaborators are confident Detroit will be ready for the office building boomlet.

In public meetings and interviews, executives with Olympia and Related Cos. have said their proposed office buildings would be unique and more amenity-filled than existing downtown buildings. As such, they could attract new companies to Detroit and lure existing ones out of less desirable buildings, a phenomenon that some in commercial real estate describe as “a flight to quality.”

The office buildings are a key component of the developers’ recently announced $1.5 billion buildout plan for District Detroit, which also calls for 865 new apartment units and two new hotels.

A successful completion of the buildout, which still needs various city and state-level approvals, could silence public criticism of the Ilitch organization related to disappointment over the pace and quantity of spinoff development around the publicly subsidized Little Caesars Arena, which opened in fall 2017.

The office buildings also could be crucial for the buildout gaining approval for state-level “Transformational Brownfield” tax-capture incentives, a program conceived to assist with big projects expected to result in lots of jobs and economic growth.

The developers have said that without those and additional local incentives, the buildout is not financially feasible.

Each office building is forecast to create hundreds of temporary construction jobs and hundreds more permanent jobs, according to publicity materials from the developers.

Those jobs estimates, plus forecasts for the residential and hotel components, give the District Detroit buildout a projection of $2.2 billion in net fiscal benefits over 35 years, the materials say.

Once Transformational Brownfield status has been awarded, there are no clawback provisions for the incentives should portions of a project not get built. Under such a scenario, the state wouldn’t lose money because the incentives come in the form of decades-long tax captures, and if a portion of a project does not happen, there is no revenue for a developer to capture.

Still, the higher the total authorized dollar amount for a Transformational Brownfield, the larger the potential tax capture for portions of a project that would not be canceled and do get built.

Details about development incentives being sought for the buildout could be shared at a Jan. 10 public meeting at 6 p.m. in Cass Technical High School, 2501 Second Ave., that will also broadcast on Zoom.

The developers’ application for Transformational Brownfield incentives is still subject to approval. The Michigan Economic Development Corp. declined a Free Press request for the application.

Related now a partner

A major difference between the early District Detroit plans and the new buildout proposal is the involvement of Related Cos., a nationally renowned development company started by Ross, a Detroit native and University of Michigan megadonor, that built the high-profile Hudson Yards project on the west side of Manhattan.

During the first public meeting Nov. 29 for the Detroit buildout plan, Olympia President Keith Bradford said Related Cos. has connections and a national reach beyond that of Olympia that would help to land tenants from across the country.

He described how the planned Detroit Center for Innovation, a $250 million academic research center for the University of Michigan that is to break ground sometime in 2023, also would function as a catalyst for more growth, jobs and business attraction. Related and Olympia are also partners in that project.

$200 a square foot

Related does know big-name companies that can pay big rents.

Related’s CEO Jeff Blau appeared on CNBC in October on the opening day of 50 Hudson Yards, its new 58-story, 3-million-square-foot office tower within the Hudson Yards development. The skyscraper was 84% preleased with tenants that include Blackrock and Facebook parent Meta. Blau said leasing rates on the top floors were exceeding $200 a square foot.

By comparison, average asking rent in downtown Detroit for “Class A” office space was about $29 a square foot in the third quarter, according to real estate firm Newmark. That is up from $26.75 a foot just before the pandemic. In Cleveland, a relatively comparable Midwest city, the average Class A rate was just under $24 a square foot.

Blau said on CNBC that about 70% of the workforce among Hudson Yards’ tenants was back in the office. Workers in general have more flexibility for in-person work than before, he said, with some coming in perhaps four days a week or maybe less, depending on the type of work.

“If you talk to the tech tenants, who are some of our tenants, they’ll say, ‘Does someone really need to be in the office to program, to code, to write an investment memo, when they’re going to sit at their desk with their headphones on, head down, and not talk to anybody? Probably not.’

“But they do need to be in the office for creativity, innovation, brainstorming, socializing,” he said. “And so when they think about planning offices, which they’re doing now, we’re seeing a totally different office space being created. It is percentage-wise much less private office, much more teaming spaces, gathering spaces, meeting, conference, food.”

Not all Detroit buildings are as bustling again as Related’s in New York.

The weekday population of downtown workers has been about 25% of its prepandemic level on Mondays and Fridays and about 45% on Tuesdays, Wednesdays and Thursdays, according to Eric Larson, chief executive officer of the Downtown Detroit Partnership.

“We are yet to be back to full strength,” Larson said.

Although asking rents are up and the downtown office space vacancy rate in the third quarter, 16% according to Newmark, was only slightly higher than the 13% before the pandemic, there has been recent weakening in the market.

Subleasing and departures

Meridian Health has shrunk its footprint and put over 300,000 square feet of office space up for subleasing. WeWork closed one of its three Detroit locations this fall, and Compuware, which built One Campus Martius as its headquarters in the early 2000s, recently made plans to leave Detroit, reportedly for cheaper rent and parking at Southfield Town Center.

Downtown parking rates also were considered in a 2021 decision by the Michigan Attorney Grievance Commission, the prosecutorial arm of the Michigan Supreme Court that investigates lawyer misconduct, to vacate a floor it leased in the 27-story Buhl Building and move to the PNC Center office tower in Troy.

“One of the biggest factors that I took into consideration is (the landlord) wanted to charge each of my employees between $250 and $300 a month for parking,” Grievance Administrator Michael Goetz said. “Where we are now, we do have free parking.”

On the plus side of the ledger, Huntington Bank in September opened its new 20-story tower on Woodward, where bank employees generally come in to work two or three times a week. And business-to-business services firm Majorel this year opened a 50,000-square-foot downtown office inside 211 West Fort St. after selecting Detroit from 50 potential locations.

Renewing less space

Since the pandemic, some Detroit office tenants have been reducing their space by 35% to 40%, on average, when it comes time to renew leases, according to Steve Morris, a partner at Axis Advisors, a tenant advisory firm.

Tenants are now signing shorter five-year leases instead of 10 years, he said, and some requre less conference room space because so many meetings are happening over Zoom.

In the years before the pandemic, Detroit saw an influx of new office tenants, such as Microsoft, Fifth Third Bank and WeWork. Most notably, Gilbert’s mortgage business, then known as Quicken Loans, relocated to downtown from Livonia in 2010 and today its publicly traded parent, Rocket Companies, is the city’s largest employer.

By 2017, Gilbert worried aloud that downtown was running out of Class A office space to attract more companies. His real estate company, Bedrock, went on to break ground for three new office developments: the Hudson’s site, an expansion to the One Campus Martius office building where Rocket is headquartered, and the Monroe Blocks project.

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

The degree to which remote and “flexible” work arrangements will affect demand for office space in the long run is unclear. Many companies have already brought employees back to the office for at least part of the week, including Rocket Companies, and GM will start requiring a minimum three days in the office in late January.

“I do not believe we have yet to reach any permanent arrangement or new normal,” Daniel Canvasser, executive managing director for Newmark, said in an email, noting how some tenants have actually expanded their office space to give employees more room.

Andy Gutman, president of Southfield-based real estate firm Farbman Group, said some companies that have cut back on the number of days people are in the office have asked their employees to all be there on specific days. So those companies still need enough space to fit everyone.

“We are hearing from a lot of clients that they’re setting days where the employees have to be there so they can get true collaboration,” he said. “People are saying it doesn’t help us create that culture if everyone’s in on different days.”

Dennis Bernard, president of Southfield-based commercial mortgage banking firm Bernard Financial Group, said they have lately seen a lot of office lease renewals across metro Detroit. Although some tenants are downsizing, such as law firms, others, such as engineering firms, are more or less back to the office.

“We are clearly doing better than a year ago,” he said. “A year ago today, everybody was saying office is dead. Office is dead — ghost town. That is not the case (anymore). Will it come all the way back? And in what segment? We don’t know. But office is not dead.”

Bernard emphasized that a lot could change by the time the planned District Detroit office buildings would open.

“Keep in mind that Ross and Olympia are not delivering that product for at least three years. And it will be after Hudson’s is delivered,” he said. “If Hudson’s hits a home run with a Class A tenant and a big number, which I do think they will do, that will give them more fuel for their fire.”

Still room available

Some new office developments in and around downtown that opened since the pandemic have yet to fill up.

There is unleased space in a slender four-story building at 511 Woodward that opened last year, although the owner, Zaid Elia of The Elia Group, said there are ongoing talks with prospective office tenants and a two-floor restaurant could open in the building next summer.

Olympia’s new five-story building at 2715 Woodward, next to LCA, landed a law firm and Boston Consulting Group, but still has vacancy after the Detroit Medical Center dropped plans to open a sports clinic inside. And a flexible office and coworking space that was planned for inside Olympia’s rehabbed Women’s City Club building, 2110 Park Ave. in downtown, hasn’t opened.

Olympia spokesman Ed Saenz said there has been good interest in their new Woodward office building since the pandemic began to subside.

“We are optimistic that we will have a tenant for that space in the near future,” he said.

Another question mark for downtown is Bedrock’s long-delayed Monroe Blocks development near Campus Martius.

That project had a ceremonial groundbreaking in 2018 and was envisioned to be done in 2022, but construction hasn’t started. The original plans called for a new 35-story tower with 800,000 square feet of office space — plus a separate large residential complex.

The site instead has operated at various times as a roller-skating rink, a drive-in theater and lately the “Monroe Street Midway” with kiddie games.

Detroit’s Downtown Development Authority has given Bedrock a Feb. 24 deadline to release an updated development plan for Monroe Blocks and until February 2024 to start construction. Bedrock didn’t respond to a Free Press inquiry about the project’s status.

Office buildings in the proposed $1.5 billion District Detroit buildout:

• 2200 Woodward: Would go in front of Comerica Park, 493,000 square feet of office space, construction could start third quarter 2023.
• 2300 Woodward: Would go next to St. John’s Episcopal Church, 131,000 square feet of office space, construction could start first quarter 2025.
• 2305 Woodward or 2300 Cass: Two locations under consideration for a single office building, 546,000 square feet of office, construction could start fourth quarter 2026.
• 2115 Cass: Adaptive reuse of the former Moose Lodge building as a business incubator for the Detroit Center for Innovation, 83,000 square feet of office space, construction could start first quarter 2025.