The Hudson’s tower and its massive, window-clad facade are nearing completion. The largest new construction in the city in decades, the building will stand in the footprint of the city’s most iconic department store.
The biggest question looming over what is arguably the city’s marquee project is, who is going to rent all its office space?
Detroit’s office market has shown no signs of recovery since the pandemic reshaped where people work. Employees who only come into the office occasionally or work entirely from home is likely the “new normal.”
Yet some of Detroit’s newest developments like the Hudson’s project and the District Detroit are still hanging on to the idea that the office space they are building will be in demand and bring in the millions of dollars in revenue they need to make these projects work. All the economic indicators point in the other direction, with many companies downsizing and few looking to expand the amount of office space they use.
Bedrock Detroit is expected to finish construction on its $1.4 billion Hudson’s development next year, which includes 400,000 square feet of office space. The $1.5 billion project to expand District Detroit, being developed by Olympia Development of Michigan and Related Companies, is slated to include 1.2 million square feet of office space and could break ground this year. Both of these projects are being heavily subsidized by Michigan taxpayers.
Office vacancy in Detroit increased by more than 300,000 square feet in the first quarter of the year, according to a market study by the commercial real estate company Avison Young. Overall leasing activity — a tally of new leases or relocations — was 50% of the average of the last three years.
“Vacancies are going up,” said Vincent Mazzola, a senior associate with Detroit-based O’Connor Real Estate. “Users that had 12,000 square feet previously are now looking for 4,000 square feet because not everyone is in the office at the same time.”
There isn’t much data yet on how the slumping office market is affecting the city’s economy or its property owners. The Downtown Detroit Partnership estimates the number of daily downtown workers is still less than half what it was in March 2020. That loss of foot traffic could have ramifications for business owners that rely on regular lunch crowds.
It’s certainly had an effect in other cities. The value of office buildings in New York City could drop by almost $50 billion in the next few years, and economists fear some large commercial landlords will default on their loans. San Francisco’s office vacancy rate is nearly 30% and its economy has suffered.
The elephant in the room
Metro Detroit may not be faring as badly as New York or San Francisco, but it’s hardly been immune from the downturn. Another office market study from the real estate company Newmark estimated Detroit’s office vacancy rate steadily rising to 16.4% in the first quarter this year. That’s better than Troy and Southfield, which had vacancy rates above 25%.
James Becker, managing director of Avison Young’s Michigan office, said there has been some activity in the region with a few tenants shopping around for space. But there’s also been some “significant downsizings” in recent months, including Meridian Health vacating its more than 300,000 square feet of office space downtown.
Some property owners, including Bedrock, are converting their office buildings to apartments or hotels. But this is costly and usually only works with older buildings that have a narrower floor plate allowing windows in every room.
Becker called the Hudson’s project “the elephant in the room” because of the difficult office environment it’s being built in. Bedrock has hired outside firms to handle leasing for all 15 of its office buildings, something the company has never done before.
Bedrock did not respond to questions about its plans to attract tenants.
Becker said that Bedrock and the District Detroit developers will probably have to give incentives to potential tenants, like construction allowances. Even so, he expects it will be “a long time” before the offices are fully occupied.
A quieter downtown
Many of the city’s biggest employers had hybrid work policies as of earlier this year, including Rocket Companies, General Motors, Blue Cross Blue Shield and DTE Energy.
Downtown business owners that rely on the daily lunch crowd have felt the effects. Tony Redman, owner of the Belly It! food truck, pays $125 a day to park his truck on Cadillac Square a few days a week.
“It’s good exposure. But as far as traffic, it can be hit or miss,” he said.
He started the business last year. Some of his employees and other food truck owners who worked before the pandemic say business was much better then. He’s not sure he’s going to pay for the spot next summer.
“If I bring in $2,000 during lunch service, I feel like I could have gone somewhere else, made more and not needed to pay,” he said.
It can get pretty quiet downtown during the week, says one downtown employee, Jake, who’s worked out of the same office since 2018. (Jake requested we only use his first name, saying his employer doesn’t want workers speaking to the media.)
His office has a capacity for around 60 people, but some days he’ll be the only one there.
“It’s a bit of a bummer to see the city so quiet, especially in the winter,” he said. “People really don’t like coming down here if they don’t have to. That’s when it seems most sad to me.”
Jake lives in the city and said his coworkers who live in the suburbs are more reluctant to come into the office. Around two-thirds of people who have jobs in the city lived in the suburbs as of 2019, according to Data Driven Detroit.
“Today, I’m in a polo shirt, some Lululemon dress pants, tennis shoes, and I could leave around 3:30 to 4, if I wanted to,” he said. “It’s definitely way more relaxed than it was before.”
It may be hard to unwind the current office environment. Workers have gotten comfortable with more work flexibility and the low unemployment rate — just 4.2% as of April — gives them some leverage over employers at the moment.
General Motors employees bristled when the automaker tried to enforce working from the office three days a week in January.
“The days of companies needing 12,000 square feet for every single employee at a desk are over,” Mazzola said.
The developers of the District Detroit, Olympia Development of Michigan and Related Companies, aren’t changing direction. Instead, they hope businesses will rent offices from them once they get to know the spaces the companies called a “highly amenitized Lifestyle Office” in a joint statement.
The companies didn’t detail how much they expect to charge in rent or what amenities they’ll offer.
Becker of Avison Young said the new buildings will likely rent for much higher than the current market average — at least triple.
“Are there going to be enough tenants to rationalize what amounts to paying three times the rent compared to other buildings?” he said. “That’s the conundrum.”
The companies believe tenants will be willing to pay these premium rates.
“Lifestyle Office tenants are successfully using these high-end offices to recruit top talent and draw them into the workplace,” Olympia Development spokesperson Ed Saenz said. “We remain optimistic that Lifestyle Office will be a key differentiator in Detroit in addition to all The District Detroit has to offer from living and learning to sports, entertainment and hospitality, enabling our proposed best-in-class offices in the city to outperform the market.”
The project is putting so much faith in offices that the first District Detroit building to break ground includes 16 floors of Class A office space, the most expensive type of space meant for tenants seeking upscale amenities and locations. Construction is expected to begin this year and finish in 2025.