Commercial Renting in Metro Detroit During COVID
COVID-19 has changed everybody’s work habits and business structure—temporarily, in some ways, but also quite permanently in others, especially for the commercial real estate industry.
Though the pandemic is slowly easing up, businesses might continue to incorporate work-from-home arrangements, relocate to the suburbs where rent is cheaper or cut down on headcount. Moody’s Analytics even forecasts that the nationwide office space rental vacancy rates will reach 20% in 2021!
That said, what is the future for commercial renting in Metro Detroit? How can landlords protect their commercial real estate portfolio?
Read on to find out more about the current state of commercial real estate in Metro Detroit, and what it means for commercial landlords.
What’s happening to commercial rentals in Metro Detroit?
Largely due to pandemic-inflicted changes in the service sector, Newmark’s latest reports showed that the office market vacancy rate in Metro Detroit went up 80 basis points to 16.2% in the last quarter of 2020. That’s nearly 780,000 square feet in net vacancies in 2020—the highest level we’ve seen in a decade!
Newly renovated spaces coming back on the market also contributed to the vacancies, including Mercedes-Benz, which vacated a large space in Farmington Hills while it builds its new headquarters facility.
Meanwhile, sublease spaces in core office markets trended up 7.0% from pre-lockdown measures (first quarter) to the end of the fourth quarter, to a total of 1,067,288 square feet. This growth in subleasing might be because the original tenants are no longer using the space, so more are trying to sublease to save on overhead costs.
Apart from vacancy rates, any lasting decline in the demand for commercial spaces will also affect the construction of future office buildings. In the City of Detroit, several expensive and high-profile building projects by billionaire Dan Gilbert’s Bedrock real estate firm have been greatly affected. These projects were announced in 2017-2018, when Gilbert planned to build quality “Class A” office spaces to attract big companies to the city. Now, the future of those projects is uncertain.
One is the Monroe Blocks, a $1 billion project with three towers and 847,000-square feet of total office space. It was meant to include a 27-story residential and a 10-story residential-and-retail building. The project’s completion date was originally set for 2022, but real estate insiders now believe the project will be indefinitely paused or even canceled.
Another project is the former J.L. Hudson department store on Woodward. The foundations for two structures—a block-long building for office and retail and a skyscraper taller than the 727-foot tower in the Renaissance Center—are complete, but largely vacant. The Free Press reported that Bedrock was having financial difficulties during construction, as they faced challenges pre-leasing space in the $900-million-plus buildings.
With higher vacancy rates and uncertain project completions, the commercial real estate market in Metro Detroit undoubtedly took a hit in 2020. Unfortunately, the market might continue to feel COVID-19’s lasting effects for the next few years.
What does this mean for commercial property landlords in Metro Detroit?
Although the short-term situation looks difficult, landlords need to look at the bigger picture and anticipate the long-term shifts in the commercial leasing and renting industry.
Across Metro Detroit, one immediate change was landlords offering tenants with expiring leases one-year extensions instead of the usual 5-, 7-, or 10- year leases that they prefer. The Farbman Group said it’s because many landlords are prioritizing occupancy at this point, knowing that turnovers are more detrimental now than ever.
Subleasing activities are showing an uptick due to the pandemic, as companies reassess how much space they’d still need in the future. Landlords should consider providing a subletting option for companies to have more flexibility in keeping their spaces, which can prevent corporate tenants from giving up their contracts.
Even if most companies keep their existing arrangements, they may choose to have fewer workers or increase the physical distance between employees. For landlords, this means open floor plans will not be a popular option anymore for the next few years. Instead, the spotlight will be on bigger cubes and individual offices that are more spread out.
Lastly, some sub-sectors of the commercial renting industry are actually still thriving. Properties, such as warehouses related to e-commerce, self-storage spaces, and retail spaces for groceries or pharmacies, remain strong because of the clientele they serve. Data centers, for example, even accelerated in need due to lockdowns and the new normal lifestyle putting an increased demand on internet service providers.
In light of these trends, commercial renting landlords should consider diversifying their portfolio to include spaces that are not dependent on foot traffic or the physical presence of people, like warehouses and data centers.
Conclusion
Since office spaces tend to have longer leases, landlords in the commercial real estate market will slowly but surely feel the effects of COVID as time passes. Instead of waiting for that time to come, prepare for the worst while hoping for the best.
Consider offering shorter leases, allowing subletting, and investing in properties that work for social distancing or sub-sectors with pandemic-resistant business models. Once the vaccine is widely distributed, used, and effective in keeping the pandemic under control, a sharp rebound is not too impossible for the commercial real estate industry.
After nearly a year of remote working and limited activity, there will no doubt be many people craving to have in-person meetings and be somewhere that isn’t their own home. In the meantime, landlords should do everything they can to cater to their tenants and protect their investments.
How else can landlords protect their commercial rentals during COVID?
Image courtesy of Tiff Ng