It started with two large office deals, then a few midsize and small office deals. Apartments started filling up, and retail projects are being planned.
The momentum for real estate deals in Detroit has been hard to miss during the first half of 2011, with close to 1 million square feet of office space in the process of being occupied.
The level of real estate activity has many optimistic about its future.
“Right now, the fundamentals of the Detroit office market are the health-iest they’ve been in my lifetime,” said A.J. Weiner, a office broker withJones Lang LaSalle who has worked in Detroit for 15 years.
“The CBD is reaping the benefits of a dramatic amount of absorption in a short period of time and is now seeing ripple effects from that.”
At the center of the activity have been the real estate deals by Detroit-based Quicken Loans Inc.,Blue Cross Blue Shield of Michigan’s decision to move 3,000 people to the city and General Motors Co.’s pressure on its advertising and marketing suppliers to be downtown.
Midsize and small companies are taking space for recruiting reasons or to be near their clients.
Birmingham-based Sachse Construction & Development Co. recently opened an office in the Guardian Building to keep several employees downtown.
As the firm is handling much of the construction work on Quicken projects, it became necessary to be downtown, said President Todd Sachse.
“We’ve been going back and forth too much,” he said. “It’s a matter of being more efficient.”
Similarly, Rochester-based Trent Design opened a 1,000-square-foot office at 71 Garfield as a satellite to its headquarters.
With clients such as the Detroit Historical Society, Midtown Detroit Inc. and the Detroit Medical Center, the design firm needs to be closer to them, said principal and creative director Marilyn Trent.
“It’s exciting to be part of the creative class that’s bringing the city back,” she said.
Farmington Hills-based Friedman Integrated Real Estate Solutions has opened an office in the Penobscot building for brokers doing work downtown.
Skidmore Studio is moving out of Royal Oak and into the Madison Theatre Building on the city’s Grand Circus Park, in part, as a recruiting tool, said President, CEO and owner Tim Smith.
“It’s an emotional boost for the people who work here and want to be in the city,” he said. “But this is also going to help us attract employees who want to be part of downtown’s growth.”
The business decision to be in Detroit is one of the most encouraging signs right now, said George Jackson, president and CEO of the Detroit Economic Growth Corp.
“These are smart people making investments,” he said. “People who’ve done well in business are coming in and making the business decision to be in Detroit. That tells you something.”
The second-quarter research report on the city shows a 29.9 percent vacancy rate, according toGrubb & Ellis Co.
The firm’s research report shows 112,000 square feet of positive absorption this year — a real estate metric that shows how much new space is being used, minus the space that has been vacated.
The Blue Cross deal has not been recorded because the health insurer has yet to move all its people into the space, and the Quicken lease in the Compuware Building was not recorded because it was a single-tenant building. Likewise, the additional space Quicken is going to use for its employees in the Chase Tower has not yet been recorded.
“While we have yet to see the real impact on paper, there’s almost a million square feet of space either occupied or accounted for that was vacant 12 months ago,” Weiner said. “This much absorption is positively changing the competitive landscape in the CBD and, as a result, is limiting the uncertainty of the market, block-by-block, and that’s making for stronger fundamentals in what has historically been one of the regions most challenged real estate environments.”
Related to the office deals, many of the city’s apartment buildings are near or at full capacity, with some reporting waiting lists.
A recent study by Midtown Detroit Inc. showed apartments in the Midtown neighborhood are at 94 percent occupancy.
That level of residential demand is fueling moves such as Austin, Texas-based Whole Foods Market Inc. to open a store in the city and Troy-based Somerset Collection to open a temporary retail collection in the city.
It’s all part of the cycle a city goes through as it comes back to life, said Robert Gibbs, managing principal of Birmingham-based Gibbs Planning Group and instructor of an urban retail course at Harvard University.
“Employment, housing, then retail is the pattern that occurs in every city,” he said.
Retail development is sure to come after new office deals, he said, citing a national study which shows an average office worker spends $157 per week on food, clothing, gifts and shoes.
“Publicly traded retailers need to show growth,” Gibbs said. “Across the country they are no longer going to the edge of suburban areas to wait for farms to become subdivisions. They’re going into the cities and opening smaller stores in historic buildings.”
Detroit is following the exact same patterns as other cities on the upswing, Gibbs said. Providence, Rhode Island; Charleston, South Carolina and Seattle all went into decline, bottomed out and started a cycle of new investment.
“It’s always the same thing. When the cities are at their low, everybody says “there is no way it’s going to change, it’s always going to be the worst,’ ” he said. “And then when it’s done, they say “Wow that was easy. Why didn’t it happen sooner?’ ”
For now, many commercial real estate brokers have clients interested in being in Detroit.
Lynne Drake, president of Troy-based Compass Commercial, has done two small Detroit office deals this year, moving the Michigan Women’s Foundation into 3,500 square feet at 333 W. Fort St. and finding a 1,000-square-foot office for Auburn Hills-based Brownrigg Cos.
Drake said she has had more requests to show Detroit office space than any other time in her career.
“You can get space outside the city for less money,” she said. “But there’s just a momentum in the city that people want to be part of.”