Report: 2023 Metro Detroit Office Vacancy Rate Rises, Industrial and Retail are Stable

Colliers, a global diversified professional services and investment management company with an office in downtown Royal Oak, has released its market reports for 2023 and fourth quarter real estate activity in metro Detroit.
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Detroit skyline
Overall office space vacancy increased to 12.6 percent in metro Detroit, according to Colliers. // Stock photo

Colliers, a global diversified professional services and investment management company with an office in downtown Royal Oak, has released its market reports for 2023 and fourth quarter real estate activity in metro Detroit.

At the start of the year, office sublease space of 2.8 million square feet remained near its highest peak, while overall vacancy increased to 12.6 percent. Asking lease rates remain steady at $21.10 per square foot.

For industrial, net absorption was at 4.2 million square feet at the start of the year, average asking rates were at $7.54 per square foot, and there is 6.7 million square feet of construction underway.

On the retail front, net absorption in 2023 was a negative 370,000 square feet, leasing activity   was strongest in the Ann Arbor/Washtenaw, Macomb, and North Oakland submarkets, and the average asking rate decreased to $0.30 to $14.73.

More details of the office, industrial, and retail market reports, led by Paul Choukourian, executive managing director and market leader of Colliers in Royal Oak, and prepared and overseen by Katie Rizzo, senior research analyst in Michigan, are cited below:

Office

Absorption and Leasing

Metro Detroit’s office market posted a total net absorption of negative 247,076 square feet in the fourth quarter, bringing the year-to-date total net absorption to negative 1,036,072 square feet. During the fourth quarter, Class C assets in the suburban market absorbed the most space totaling 72,237 square feet. Overall, during 2023, Class B was the only asset class to post a

positive net absorption of 523,802 square feet. A total of 1,045,204 square feet was leased through 248 transactions, mostly in Suburban Class B properties. The Detroit/Pointes, Southfield, and Troy submarkets accounted for approximately 63 percent of the total square footage leased during the quarter, amounting to 66,283 square feet.

Vacancy and Market Rates

The overall vacancy rate ended the fourth quarter at 12.4 precent, representing an increase of 20 basis points from the previous quarter. The Southfield and Troy submarkets have the highest level of vacancy at 23.4 percent and 19.3 percent, respectively. Just under 2.8 million square feet of space is currently available for sublease, reduced from the previous quarter but still sitting a near-record high. Among the submarkets, Lapeer/St. Clair County and Detroit/The Pointes command the highest rent of $28.21 and $24.36, respectively, while the lowest rent of $16.76 can be found Downriver. The average direct asking rate continues to remain stable, ending the quarter at $21.10.

Sales Activity

Sales volume totaled just under $85 million in the fourth quarter, bringing the year-to-date sales volume to roughly $420 million, a substantial decline from $792 million during 2022. Significant sales during the quarter include 500 & 600 Renaissance Center, a two-tower portfolio in the Detroit CBD consisting of 808,709 square feet. The portfolio, sold by LMC Phase II, traded for $15 million. Additionally, a 210,000 square foot office building at 1072 W Entrance Drive in Auburn Hills traded at $7.08 million.

Construction

At the end of the fourth quarter, roughly 1.5 million square feet was under construction, down 52 percent from this cycle’s peak of 3.0 million square feet in Q2 2020. Much of the construction is taking place in the Detroit/Pointes submarket with more than 1.2 million square feet underway, representing 84 percent of construction and redevelopment activity. Notable construction projects in the submarket include the redevelopment of Michigan Central Station, a mixed-use office, retail, and public space, expected to be delivered in Q1 2024 and the former site of the iconic J.L. Hudson flagship, expected to deliver in Summer 2024. The next leading submarket is Livingston / West Oakland where Trinity Health-Michigan is scheduled to build a new 174,000-square-foot hospital addition in Brighton.

Market Commentary and Forecast

The metro Detroit office market currently faces a period of adjustment, characterized by a tenant-favored environment and a slight uptick in vacancies due to the ongoing trend of businesses downsizing their office space. Rental rates lack clear direction, reflecting a market grappling with uncertainty. While there is no significant constraint for Class A tenants in finding space, this abundance indicates a surplus in premium office areas, potentially leading to a softened market. Over the next 12 months, landlords may increase concessions to attract tenants amidst these changing conditions. Additionally, economic factors, new construction, and policy changes are unlikely to significantly impact the market, though some effect from major renovations or adaptive reuse is anticipated. This scenario paints a picture of a market that is slowly adapting to the new realities of post-pandemic office use.

On a national scale, numerous major companies have declared stricter in-person work mandates, concurrently maintaining hybrid schedules to foster flexibility and employee well-being. According to Kastle Systems, a prominent security company overseeing access-card swipes in major U.S. cities, there has been a gradual rise in the occupancy rate of office buildings. The weekly average now hovers around 48 percent, signaling an increase in workplace presence.

Industrial

Absorption and Leasing

During the fourth quarter, metro Detroit experienced a total net absorption of 68,592 square feet, bringing the annual net absorption to just over 4.2 million square feet. Among the submarkets, the Airport/I-275 area had the highest absorption total of 606,936 square feet, followed by the I-96 corridor with 242,376 square feet. In terms of leasing activity, 142 leases were executed totaling just over three million square feet. The I-96 Corridor and Airport/I-275 submarkets were the most active accounting for 61 executed leases totaling 1,670,938 square feet. Notable transactions during the quarter include Thai Summit America Corp. in Harper Woods (297,000 square feetK) and OCC Systems in Auburn Hills (100,000 square feet).

Vacancy and Market Rents

The overall market vacancy rate of 3.8 percent increased 10 basis points from the previous quarter and still remains near an all-time low. With the exception of the Detroit area, all submarkets have vacancy levels below 4.8 percent, indicating that vacancies are expected to remain tight into 2024. The average direct asking rental rate of $7.54 NNN has seen a year-over-year increase of 6.3 percent and a significant 19.3 percent increase since the start of the pandemic in 2020. Among the submarkets, the Washtenaw submarket commands the highest rent at $10.02 NNN, while the lowest rent of $5.49 NNN can be found in the Detroit area.

Sales Activity

Sales volume amounted to $83 million in the fourth quarter, bringing the 2023 total to $632 million, representing a drastic decline from $1.1 billion in 2022. The largest confirmed sale was The Riley Broadcast Center, a telecom/data center, measuring 93,540 square feet situated at 1 Clover Court, Wixom. The property, plus five acres of vacant land, sold by Detroit Public Television, traded at $11 million in October and was purchased by Genera Corp. Other significant sales include a 63,670-square-foot warehouse at 2330-2400 Gainsboro St., Ferndale ($4.0M/$63 per square foot) and a 51,439-square-foot warehouse at 31465-31505 Stephenson Highway in Madison Heights ($2.8M/$54 per square foot).

Construction

In the fourth quarter, a total of 1,168,098 square feet was added through the completion of five new buildings. Among these, the Airport/I-275 submarket was the most active, having delivered buildings 1 and 3 at the Romulus Trade Center, a total of 699,098 square feet of warehouse space at 1 Vining Road in Romulus. Additionally, a 450,000 square foot distribution facility at 17991 Wahrman Road in New Boston was completed during the quarter. Presently, there are 52 ongoing projects totaling 6.75 million square feet of industrial product, primarily situated in the northwest Oakland County, Monroe, and Detroit area submarkets.

Retail

Absorption and Leasing

The metro Detroit retail market experienced positive net absorption in the fourth quarter totaling 222,454 square feet, bringing the year-to-date total to negative 369,610 square feet. The Macomb submarket had the strongest absorption, gaining 377,550 square feet. For 2023, total leasing activity reached 4.3 million square feet. The fourth quarter activity was strong, totaling 713,134 square feet from 218 executed leases. Notable leases signed during the quarter include PGA Tour Superstore in Northville (42,178 square feet), Watsons in Novi (32,000 square feet), Pharmacy Solutions in Ann Arbor (20,136 square feet), and Walgreens in Troy (13,905 square feet).

Vacancy and Market Rents

The overall vacancy rate for the retail market ended the fourth quarter at 5.2 percent, representing a slight decrease of 10 basis points over the previous quarter. Among the various submarkets, the Troy and Monroe submarkets had the lowest vacancy rates of 3 percent, while the Southfield submarket had the highest vacancy rate at 8.5 percent. The average asking rate decreased by $1.34 year-over-year, ending the quarter at $14.73 NNN. The Southfield submarket had the highest average asking rents at $22.05 NNN, while the Lapeer and St. Clair County submarket had the lowest average asking rate of $10.42 NNN.

Sales Activity

Sales volume of $95 million decreased during the fourth quarter, bringing the 2023 volume total to $453 million. The largest sale during the final quarter was the Goddard Square Shopping Center, a two-property portfolio consisting of a 77,340-square-foot shopping center and a 6,624-square-foot out lot at 11400-11500 Telegraph Road in Taylor. The portfolio traded at $10.8 million ($129 per square foot). Other notable sales include a 3,434-square-foot gas station/convenience store in Brownstown ($4.5 million), and a Triple Net Investment sale of a 3,100-square-foot general retail property in Sterling Heights ($2.67 million). The average cap rate was 7.1 percent and the sale price per square foot was $129.

Construction

During the fourth quarter of 2023, 10 new buildings totaling 83,981 square feet were delivered to the market. The North Oakland submarket accounted for the most space delivered, with 33,440 square feet. Notable deliveries in the metro market include The Gateway II, a 28,940-square-foot Retail/Office Strip Center in Rochester Hills and Panera Bread, a 4,500-square-foot

freestanding restaurant in Bloomfield Hills. Currently, there are 36 ongoing projects totaling 1.7 million square feet of retail product, primarily situated in the Southfield, Flint, and Ann Arbor/Washtenaw submarkets.

Market Commentary and Forecast

In 2023, the metro Detroit retail market faced challenges, reflected in a negative net absorption of 369,610 square feet. Nevertheless, signs of growth persist, evidenced by the delivery of 546,938 square feet of new supply during the same period. Despite a recent leasing softening,

ongoing limited development has fostered stability, with availability rates currently at 6.9 percent, nearing the lowest levels in the past decade. Looking ahead, retail rents in the Detroit market are anticipated to gradually rise in the coming year. This projection is influenced by the current fundamental market balance and a notable reduction in retail construction starts in recent quarters.

For more information, visit colliers.com.