Newmark Knight Frank, a full-service real estate firm with offices in Farmington Hills, has released its fourth quarter 2018 office and industrial trends data reports for metro Detroit. According to the report, the region’s office market vacancy rate fell 20 basis points to 15.3 percent during the fourth quarter of 2018, as just over 353,000 square feet was absorbed.
The metro office market posted just over 1.7 million square feet of absorption in 2018, compared with 1 million square feet for all of 2017. Large office users such as United Shore Financial Center, Henry Ford Health Systems, Mortgage Center, LC, MSX International Inc., and General Motors Co. accounted for the bulk of absorption in the Southfield, Troy, Auburn Hills, and Pontiac submarkets in 2018.
By contrast, the western office submarkets of Livonia and Novi continued to see slow market activity in 2018, similar to levels in 2017. The Detroit central business district posted negative absorption for the first time since 2012. Despite having an off fourth quarter, the city of Detroit could post more historic absorption levels in 2019, as more firms are set to establish a greater presence in the CBD.
“Despite posting negative absorption for the first time since 2012, the Detroit Central Business District remains alive with activity. Over $1 billion in new developments are underway as firms continue to look to establish a presence in the city.” says Fred Liesveld, managing director of NKF’s Detroit office.
The office market report shows:
The fourth quarter of 2018 marked the first uptick in the Detroit CBD’s vacancy in nearly seven years. The vacancy rate increased 180 basis points to 12.3 percent, as new vacancies totaled just over 33,000 square feet. Molina Healthcare accounted for the largest vacancy, as the company moved out of 41,000 square feet at 615 West Lafayette and consolidated its employees into its Troy location.
This was the city’s second significant loss of the year: During the second quarter, automotive seating supplier Adient withdrew plans to relocate from Plymouth and spend $100 million to renovate the Marquette Building. Despite these losses, the city still has significant investments coming in 2019. Chemical Bank announced plans to build a 20-story, 250,000-square-foot high-rise at Woodward Avenue and Elizabeth Street.
The company plans to begin construction on the building in mid-2019 and move 500 employees there within the next two years. Meanwhile, Universal McCann announced plans to relocate 40 employees to 1001 Woodward Avenue and eventually expand by 150 employees. This follows announcements by two other companies looking to increase their presence within the CBD: LinkedIn, which has grown to 40 employees in Detroit, plans to expand in the Sanders Building on Woodward Avenue, and RSM US LLP, which plans to expand by 120 employees in the Chrysler House on Griswold Street over the next three years.
On the new development front, Little Caesars is expected to complete its $150-million, nine-story, 234,000-square-foot world headquarters at the corner of Woodward Avenue and Columbia Street in early 2019. In addition, construction started on Detroit’s tallest skyscraper at the former Hudson’s Department Store site.
The nearly $1 billion construction project, which is being developed by Bedrock, will feature residential units and retail space along with an estimated 263,000 square feet of office space. Meanwhile, Ford continues to hammer out plans to renovate the iconic Michigan Central Station the company purchased during the second quarter. In addition to renovating and reusing the 18-story, 500,000-square-foot building, Ford is planning to redevelop the area into a 1.2 million-square-foot campus.
Southfield’s office vacancy rate fell 100 basis points to 20.3 percent during the fourth quarter, as just over 181,000 square feet was absorbed. Credit Acceptance’s move into the 297,000-square-foot Raleigh Officentre, which the company purchased during the previous quarter, accounted for a significant share of overall absorption. The 339,000-square-foot Travelers Tower II on Evergreen Road saw a strong uptick in leasing activity during the quarter that has left the building nearly 100 percent occupied. American Axle & Manufacturing, Inc. and XPO Logistics each leased 33,000 square feet, while IHS Markit expanded its presence in the building by 9,000 square feet.
The fourth quarter accounted for 85 percent of the overall absorption for the year, as the first three quarters combined produced just 32,000 square feet of absorption. Although occupancy increased in the Raleigh Officentre and Travelers Tower II buildings, downsizing companies are creating vacancies in others. Consulting firm Concentrix announced 209 layoffs and is cutting employees from its 100 Galleria Officentre location. The move will add to the overall growing amount of sublease space on the market, particularly large-block sublease that has also seen a rise in the Troy submarket. As of the fourth quarter, there was 235,000 square feet of sublease space on the market in Southfield, up from 180,000 square during the same time last year.
The Troy office vacancy rate fell 110 basis points to 17.4 percent during the fourth quarter, as just over 160,000 square feet was absorbed. One of the largest deals of the quarter was Road to One Hundred, LLC’s purchase of the 79,000-square-foot 1850 Research Drive. Molina Healthcare of Michigan is relocating its Detroit CBD space and consolidating employees into shadow space in the company’s 197,000-square-foot 880 West Long Lake Road location. Other notable leasing activity in the Troy submarket includes S&P Data’s 30,000-square-foot lease at 300 East Big Beaver Road and Power Home Solar & Roofing’s 17,000-square-foot lease at 500 Stephenson Highway. For the year, the Troy office market absorbed just over 406,000 square feet. In addition to a strong fourth-quarter absorption, the submarket’s strong year was buoyed by Henry Ford Health Systems’ 275,000-square-foot move into United Shore Financial Center’s former space at 1414 East Maple Road. The rise of sublease space in the market is one underlying weakness for the submarket. During the fourth quarter, sublease space totaled 273,000 square feet, compared with 77,000 square feet during the same period last year. The bulk of sublease on the market is the result of large users such as Beaumont Hospital’s relocation from Troy to First Center Office Plaza in Southfield. Just over 70.0 percent of the submarkets’ sublease space resides in just three buildings: 755 West Big Beaver Road, which has 78,000 square feet; 750 Stephenson Highway, which has 70,000 square feet; and 2600 West Big Beaver Road, which has 37,000 square feet.
Farmington Hills’ office vacancy rate fell 10 basis points to 11.0 percent during the fourth quarter, as just over 6,000 square feet was absorbed. For the year, the vacancy rate fell 140 basis points on just over 86,000 square feet of absorption. Notable deals during the year were Flextronics America, LLC’s 60,000-square-foot lease and Wells Fargo’s 10,000-square-foot lease at Orchards Corporate Center II.
Livonia’s office market vacancy rate fell 20 basis points to 12.1 percent during the fourth quarter, as just over 4,500 square feet was absorbed. 2018 proved to be a slow year for the Livonia office market, as the submarket absorbed just over 12,000 square feet. In addition to slow leasing activity, Eastern Michigan University’s move out of the Cambridge Center on Six Mile Road during the second quarter added a 20,000-square-foot block of space to the market. Looking ahead, another large vacancy will be added to the market as Cardinal Health vacates is office space at Laurel Park II.
Although the city of Novi has seen more than 1.0 million square feet in industrial construction over the past two years, its office market cooled in 2018. Office users absorbed a net 16,000 square feet of space during the year. By comparison, the office market absorbed more than 130,000 square feet in 2017. Yanfeng Automotive Interiors’ 93,000-square-foot lease at the former Twelve Oaks Professional Center at 41935 Twelve Mile Road accounted for the bulk of 2018 absorption. Despite an overall slowdown, the Novi office market ended the fourth quarter of 2018 with a healthy vacancy rate of just 6.8 percent.
The Bloomfield Hills office vacancy rate edged up 20 basis points to 7.2 percent during the fourth quarter, as small vacancies in Bloomfield Office Park and Franklin Office Centre came on the market. The submarket absorbed slightly more than 23,000 square feet during 2018, as companies such as Latitude Subrogation Services, SGF North America, Inc., NuTechs LLC and L. Weis Associates Inc. leased new space. For the year, the submarket’s vacancy rate fell 70 basis points.
On the industrial side, the report shows a shift in the automotive industry’s investments will likely lead to a higher demand for more modern industrial facilities in the region.
General Motors and Ford Motor Co. are shifting investments from traditional passenger cars to more profitable trucks and SUVs while also increasing investments in electric and autonomous vehicles. This reallocation of investments has led to the planned closing of five plants, including two in metro Detroit: Detroit-Hamtramck Assembly and Warren Transmission.
According to market researchers at J.D. Power and Associates, sales of traditional passenger cars have fallen to just one-third of light vehicle sales, compared with nearly half in 2014. Declining demand has left the Big Three (General Motors, Ford, and Fiat Chrysler) operating at overcapacity in many plants. According to Reuters and LMC Automotive, after GM ends production next year at factories in Michigan, Ohio, and Ontario, it will still have four U.S. car plants, all operating at less than 50 percent of rated capacity.
By comparison, Ford and Fiat Chrysler Automobiles NV will have one car plant each in North America after 2019. As demand for heavy vehicles surges, companies like Ford are shifting hundreds of automotive workers to plants producing SUVs. Although these cuts will likely lead to new industrial vacancies from suppliers close to the sedan market, investments elsewhere are likely to pick up much of those losses.
The Big Three and their suppliers are increasing investments in electric and autonomous vehicles. In turn, these investments are spurring new construction and expansion in the metro Detroit industrial market. This is particularly evident in Auburn Hills with Samsung SDI America, Inc.’s new vehicle battery pack factory and WABCO’s new autonomous and electric (ACE) commercial vehicles technologies facility. Additionally, Ford plans to invest hundreds of millions of dollars in a new autonomous campus in Detroit.
With vacancies at record lows, new construction from both the automotive and e-commerce industries continues to drive the metro Detroit industrial market. During the fourth quarter of 2018, eight new facilities were completed for a total of 3.4 million square feet for Amazon, Inc., Flex-N-Gate Corp, Hino Motors, Esys Corporation, Orotex Corp., and Penske Logistics.
“The shifting dynamic in the automotive industry will likely lead to new industrial vacancies from suppliers close to the sedan market,” says Liesveld. “At the same time, increased investments in profitable trucks and SUVs as well as development of electric and autonomous vehicles will foster demand for more modern industrial facilities.”
The industrial report includes:
Southeast Oakland County
The Southeast Oakland County industrial vacancy rate fell 10 basis points to 3.3 percent during the fourth quarter, as just over 259,000 square feet was absorbed. Investments in electric and autonomous vehicles continue to spur construction and expansions in the submarket. In Auburn Hills, WABCO completed construction of its 102,000-square-foot build-to-suit facility at 1220 Pacific Drive, where the company will develop its autonomous, connected and electric (ACE) commercial vehicle technologies. Samsung SDI America, Inc. will complete the build-out of its new, 137,000-square-foot, $62.0 million electric vehicle battery pack factory at 50 Continental Drive in Auburn Hills. Meanwhile, Esys Corporation moved into its newly completed 124,000-square-foot building on Brown Road. In addition to building new space, many companies are expanding at their existing facilities. Rand Construction recently completed a 24,000-square-foot expansion to the MiDAS Foods International building in Oak Park. Kirco Manix is building a 50,000-square-foot addition to Kay Graphics’ facility in Orion Township, while Alpine Electronics is expanding by 11,000 square feet on Atlantic Boulevard in Auburn Hills. New construction does not appear to be abating, either. German auto supplier KOSTAL Kontakt Systems Inc. plans to begin building in 2019 a 250,000-square-foot manufacturing facility in the Avon Industrial Park in Rochester. On the speculative construction front, Ashley Capital is clearing the way for a new development at Hazel Park’s former horse racing track. This development follows the highly successful 575,000-square-foot Tri-County Commerce Center, which was completed in 2017 and nearly fully occupied by Amazon.com, LG Electronics and Bridgewater Interiors. Ashley Capital is planning two additional buildings for the former race track, one comprising 650,000 square feet and the other 840,000 square feet, which will accommodate manufacturing or bulk warehouse users. Southeast Oakland has been a hotbed for new construction with 24 new industrial facilities completed since 2014, totaling just over 3.1 million square feet. During the fourth quarter, the only active construction project underway was FANUC America Corporation’s 461,000-square-foot build-to-suit on Entrance Drive in Rochester Hills. Notable deals during the quarter included GST Auto Leather’s 65,000-square-foot lease on Waterview Drive in Rochester Hills; Superior Electric Great Lakes Company’s purchase of a 52,000-square-foot building at 1740 East Maple Rd. in Troy; and P3 North America, Inc.’s 35,000-square-foot lease on Spartan Street in Madison Heights.
Southwestern Oakland County
Southwest Oakland has the highest number of active construction projects with 13 buildings under construction, despite an influx of existing vacant space coming on the market. During the previous quarter, the submarket saw a 203,000-square-foot new vacancy at 30240 Oak Creek Dr. in Wixom. This was followed by a 130,000-square-foot vacancy on Eight Mile in Southfield and a 101,000-square-foot vacancy on Martin Drive in Wixom during the fourth quarter. For the year, submarket’s vacancy rate has climbed 70 basis points to 6.7 percent during the fourth quarter. The latest construction completion was Hino Motors’ 124,000-square-foot facility on Taft Road and Orotex Corporation’s 60,000-square-foot expansion on Venture Drive in Novi. The submarket has more build-to-suits and speculative developments in the pipeline. In Novi, build-to-suit projects for Berkshire E-Supply (211,610 square feet) and A-123 (128,936 square feet) are scheduled for completion in early 2019. In addition, Autoliv ASP is expected to complete construction of an 180,000-square-foot build-to-suit on Bridge Street in Southfield by mid-2019. On the speculative front, the submarket has nine developments. Burton-Katzman Development Company has the largest with an 110,000-square-foot facility on Beck Road in Wixom. Meanwhile, Quadrants Inc. is developing a 95,000 and a 61,000-square-foot speculative development on Automation Court. The balance of the speculative developments are geared toward mid-market-size users requiring 20,000 to 40,000 square feet.
The Macomb County industrial submarket vacancy rate fell 10 basis points to 2.0 percent during the fourth quarter, as just over 1 million square feet was absorbed. Amazon completed construction of its new, 1.0 million-square-foot fulfillment center in Shelby Township. This is Amazon’s third million-square-foot distribution facility in Metro Detroit. Notable deals included the sale of 65,000 square feet at 23751-23801 Hoover Road in Warren to Verdant Realty Group; Daiek Woodworks’ purchase of a 33,000-square-foot building at 14981 Thirty-Two Mile Road in Romeo; and Great Lakes Trucking MI, Inc.’s purchase of a 25,000-square-foot facility at 2700 East Nine Mile Road in Warren. On the construction front, HTI Cybernetics Inc. announced plans to finish-to-suit a former 189,000-square-foot speculative manufacturing facility on the former Sunnybrook golf course in Sterling Heights. Other ongoing build-to-suits include Lanzen Fabricating Inc.’s 92,000-square-foot facility in Romeo and Mor-Tech Design’s 43,000-square-foot facility in Sterling Heights. Meanwhile, four ongoing speculation construction projects will add just over 671,000 square feet of space to the market in 2019, the largest being Ashley Capital’s 569,000-square-foot Liberty Park development on Mound Road in Sterling Heights. The project is expected to fill up fast, as the county’s 2.0 percent vacancy leaves very few options for companies looking for large-block/high dock density space. The four other speculative developments in Macomb Township, Romeo and Shelby Township are targeting smaller users, in the 20,000 to 40,000-square-foot range. These projects are expected to be completed in early 2019.
Southern Wayne County
The Southern Wayne County industrial market saw the completion of two major construction projects during the fourth quarter, Amazon’s 856,000-square-foot fulfillment center at 32801 Ecorse Road and Penske Logistics’ new, 606,000-square-foot distribution center in Romulus. The submarket also saw a few sizable leases in existing space, notably General Transit and Warehouse’s 85,000-square-foot lease at 18700 Meginnity Street in Melvindale and Daehan Solution’s 26,000-square-foot lease at Aeroplex Two in Romulus. Southern Wayne County’s vacancy rate remains critically low at just 2.5 percent. The submarket’s only construction project is a 150,000-square-foot build-to-suit for ProTrans in Romulus. The submarket’s 13 million-square-foot Class A bulk warehouse inventory has a vacancy rate of just 1.5 percent, while the Class B bulk warehouse inventory of 13.5 million square feet has a vacancy rate of just 2.3 percent. The lack of speculative construction in the submarket will continue to put a strain on bulk warehouse users in the market while keeping upward pressure on lease rates. Over the past three years, asking rates for bulk warehouse space have climbed 35 percent. With the high likelihood that vacancy will remain below 3.0 percent, developers are prepping new sites for development. Development firm Wildamere is planning a 311,000-square-foot bulk warehouse development known as the Airport Logistics Center on Cogswell Road in Romulus. Ashley Capital is planning an addition to its Crossroads Distribution Center in Van Buren Township that could total up to 660,000 square feet, while Spartan Real Estate Group LLC is planning a 416,000-square-foot development on Ecorse Road in Romulus.
Western Wayne County
The Western Wayne Industrial market vacancy rate fell 20 basis to 2.7 percent during the fourth quarter, as just over 146,000 square feet was absorbed. Notable deals included Anderson Process’ 35,000-square-foot lease on Concept Drive in Plymouth and Best Supply Company, Inc.’s 31,000-square-foot lease on Sears Drive in Livonia. On the construction front, two build-to-suit projects will near completion going into 2019: Republic National Distributing Company’s 500,000-square-foot bulk warehouse facility on Eckles Road in Livonia and Tenneco Inc.’s 100,000-square-foot facility on Technology Drive in Northville. In speculative development, Frankel Associates is building two facilities called the Haggerty II Corporate Park in Canton that will accommodate either a 67,000 or a 46,000-square-foot user.
The city of Detroit’s industrial vacancy fell 20 basis points to 12.1 percent during the fourth quarter, as just over 518,000 square feet was absorbed. The bulk of the absorption came from Flex-N-Gate Corporation completing its 480,000-square-foot manufacturing facility on the city’s northeast side. Meanwhile, Ford Motor Company began redeveloping Michigan Central Station. By 2022, Ford plans to create a 1.2 million-square-foot campus that will be a new hub for autonomous and electric vehicle research.