Signature Associates

As Michigan office vacancies increase, what happens to the unused space?

A few years ago, Butzel decided it had more office space than it needed in Oakland County and Detroit and wanted to downsize. Having gone digital, the law firm didn’t need a library or a place to store files.

Then the COVID-19 pandemic hit the state in March 2020, forcing many businesses to shift staff to remote work and reassess their space needs.

“All COVID did for us — because we had started this planning ahead of time — was to reaffirm that we were moving in the right direction,” said Joanne Klimko, chief administrative officer for Butzel, which started last fall to reduce its office space nearly 40%.

The law firm has plenty of company, as evidenced by increasing vacancy rates in commercial office buildings, data shows. That, in turn, has affected businesses that rely on office workers as customers. What happens with the unused space remains to be seen as companies reconfigure their footprints and reassess how their employees operate in light of COVID-19’s impact.

“In the office world, as you could expect, obviously, with what’s happened in the last couple of years and how tenants are using office space, we’ve been seeing negative absorption,” said Paul Choukourian, executive managing director of the Southfield office for Colliers International, a commercial real estate company. “We’ve been seeing vacancy increasing.”

Vacancy rates were nearly steady at 12.5% for the first part of 2022, according to Colliers Detroit’s first-quarter 2022 Office Market Report for Metro Detroit. In a report for the third quarter of 2021, the company pegged the vacancy rate at 12.4% and said it had risen for eight straight quarters. Office vacancy in Metro Detroit was 9.6% in the fourth quarter of 2019, the last full quarter before the pandemic hit the state.

“Office leasing remains slow as companies evaluate their return-to-work plans, but many employers are expecting a return to the office in mid-2022,” the report stated.

In addition to Butzel, other employers are shrinking their office footprint. For example, later this year Bank of America will leave the 144,000-square-foot office space it rents at its headquarters in Troy and send 349 employees to work in three other Bank of America office buildings in Oakland County.

The fate of other office space is unclear as some say the Renaissance Center, where General Motors Co. is headquartered, is like a “ghost town,” and Ford Motor Co., while still paying rent, hasn’t occupied its offices at Fairlane Town Center since the pandemic started more than two years ago.

As far as office space construction, most of the projects underway have been in the works for years, Choukourian said, using Bedrock Detroit’s redevelopment of the Hudson’s site in downtown Detroit as an example.

But demand isn’t there and construction costs have “greatly increased,” Choukourian said, “so we’re going to see a shortage of new construction for office, especially.”

Bedrock, though, hasn’t backed down on offering thousands of square footage in office space in the Hudson’s project. The major downtown Detroit developer on Thursday released new renderings showing open floor plans for office space with floor-to-ceiling windows to bring in natural light and offer grand views of the city.

Kofi Bonner, CEO of Bedrock, the largest real estate owner in downtown Detroit, said in a statement to The Detroit News that the area “is proving quite resilient as the office occupancies are approaching pre-pandemic levels. While many companies are still operating in a hybrid mode, we are pleased to see significant increases in signs of pedestrian and auto traffic in the downtown core.”

Shrinking footprints

This past fall Butzel moved from Bloomfield Hills to Troy, and in the summer, the firm will downsize from two floors to one in its leased space at 150 W. Jefferson in Detroit.

Overall, the firm will downsize its Detroit and Oakland County offices from 94,476 square feet to 58,394 square feet, resulting in a 39% reduction in rents over the term of the leases.

“With any business, the two major costs are compensation and space, leased space,” Klimko said. “So we had to figure out a way that we could continue to grow the firm and grow revenue without commensurately increasing our brick and mortar costs, which is what traditionally, everybody’s always had to do.”

The firm’s solution was to outfit its new space at 201 W. Big Beaver in Troy to suit its new needs. Offices are now the same size and are available by reservation for lawyers who aren’t on-site regularly. The layout includes offices along the perimeter of the floor for window views as well as modular glass-enclosed offices.

The firm also added features to its Troy space, including a meditation room, mother’s room, wellness room and collaboration spaces. The Detroit office is getting a similar renovation. Klimko emphasized that Butzel is not reducing staff but is “able to accommodate the same number of people with less space because of the new design.”

“We want our employees … to know we care about them,” Klimko said. “And we want to make everything as comfortable as we can for them, but also give them the tools to be as productive as they need to be.”

Restaurants take hit

Business at restaurants has been difficult to maintain throughout the pandemic. Owners were shut down for months at a time in 2020 and 2021 as a result of pandemic safety measures taken by the government. Now, they are hopeful this will be the first full year without any interruptions.

But the decision by many companies to offer their employees the option to work from home on some or all days of the week has slowed the return to pre-pandemic levels of business.

The lack of people in downtown Detroit has led to store closures along Woodward , including retailers Madewell and Under Armour.

General Motors Co. has established a “work appropriately” strategy that allows employees to decide with their supervisors where the best location is for them to work.

“We continue to monitor and evaluate office and hotel occupancy, and it is trending upward,” said GM spokeswoman Maria Raynal in a statement.

Other businesses inside the Renaissance Center have reportedly downsized their offices to other locations. Deloitte Services LLP, a consulting firm, moved out of its about 100,002-square-foot space to a smaller space downtown, Crain’s Detroit Business reported.

Stephanie Brown Nesbeth, a spokeswoman at Deloitte, confirmed to The News that the firm’s Detroit office relocated but did not specify where.

Blue Cross Blue Shield of Michigan has apparently also relocated some employees from the Renaissance Center.

In a statement, the insurance agency said: “Like many businesses, we are taking steps at this time to reintegrate remote workers back into the office environment. This includes an ongoing evaluation of where our employees are based within our facilities. We have a long-term lease at Renaissance Center that runs through 2026, and we will continue to have employees based at RenCen throughout that term.”

The result of GM’s move and the decision of other companies to go remote or relocate has made the Renaissance Center look like a “ghost town,” said Joe Vicari, owner of two restaurants inside GM’s downtown headquarters: Andiamo and Joe Muer Seafood.

Business is down 30% at Andiamo and 15% at Joe Muer, Vicari said. He hasn’t reopened Andiamo for the lunch crowd yet.

“If the RenCen was back to pre-pandemic volume, we would be great,” he said. “Things would be good.”

Beyond the lack of workers coming to offices, restaurants and other businesses are also losing customers to rising inflation. In March, consumer prices increased 8.5%, marking the largest uptick since May 1981, according to the U.S. Bureau of Labor Statistics. Inflation showed signs it was leveling off slightly in April, with prices increasing 8.3% compared with a year ago, according to data released Wednesday by the bureau.

Still, Highlands restaurant at the top of the Renaissance Center has kept going. The high-class steak house opened in November 2019 ahead of the March 2020 start of the pandemic in Michigan that led to two months-long restaurant shutdowns initiated by the government.

Weekends are going great at the restaurant. Weddings have come back. Corporate events, not so much. The restaurant is planning to open a sixth day on Mondays, said Richard Camarota, a partner in the business.

“We’re fortunate that we’re still doing what we kind of projected, what we thought we could do,” he said. “It might be a little less than originally thought when we looked at this project back in 2018.”

Future of unused space

The fate of office space at Fairlane Town Center is unknown as Ford has not occupied its offices there since the pandemic, said Carl Tash, chief investment officer for Dallas-based Centennial, the new owner of the mall. The automaker continues to pay its rent, he said.

Ford officials did not answer questions regarding the company’s space at the Dearborn mall but did say the automaker’s hybrid workers can choose between five “collaboration centers” to work from, including Ford World Headquarters, the Advanced Engineering Center, the Product Development Center, the Rotunda Center and the Ford Experience Center.

“During this time, we are closely monitoring and evaluating the space needs of our workforce in our new hybrid model to ensure maximum productivity and efficiency, and we will revise our list of collaboration centers as needed,” said Gabrielle Poshadlo, a Ford spokeswoman.

So what could become of vacant office space?

Choukourian said commercial buildings could be converted to other uses, such as residential.

For example, the Albert Kahn Building, a former office building in the New Center area, opened 206 residential units in the fall. Plans to convert the building to residential date back to before Lutz Real Estate Investments and Northern Equities bought the property in 2018 and redeveloped it.

Matthew S. Sosin, president of Northern Equities Group, who owns 30 office buildings, mostly in Novi and Farmington Hills, said his company has sought other buildings to convert to residential.

Sosin said factors to consider include ceiling heights and window lines. Price and zoning are also factors, he said.

“Our zoning at the Kahn, the commercial zoning residential was a use-by-right,” he said. “That would be a consideration. Many buildings are not zoned that way.”

He expects higher-caliber properties in good locations to remain office space: “Maybe buildings that are of an older vintage or haven’t been kept up or not in a great location for offices, those are going to be the ones that people look at for alternative uses.”

Posted By: The Detroit News on May 17, 2022.  For more information, please click here to read the source article.

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