It's a GREAT TIME
to be an OFFICE TENANT!
Rates are in a Deflationary Spiral
DETROIT OFFICE MARKET-5 YEAR
By Levi F. Smith, Esq.
January 1, 2009
The results are in and Metro Detroit office lease asking
rates are down significantly from 5 year ago before and after adjusting for inflation! Office vacancy rates increased from 6% to 17.2% during this period! Simply economics 101-supply and demand have kicked in. For example, average rental asking rates on Class A space decreased from $25.38 to $23.00* since 2000. This is calculated before inflation.
Office employee (white collar) unemployment increased from 3% to 8% over this 5-year period. Vacancy rates and unemployment rates are obviously related because the unemployed do not occupy office space. Further adding to the vacancy rate are new buildings containing 11,5000,000 sq.ft. of office space that have been built and delivered in the last 7 years.
The good news for landlords is that there is no new speculative product under construction. However, If Chrysler merges and vacates its headquarters in Auburn Hills the market will deteriorate further. This building in second only to the Pentagon in size.
What is not reflected in the average asking rates is the amount of concessions negotiated by tenants including rent reduction and abatement, increased tenant construction allowance, smaller annual increases, and more tenant friendly lease clauses. A
further bottom line reduction of 10% or more is likely. Add inflation and the decrease is even more dramatic.
Tenants with expiring leases should be careful about exercising options to renew with rates calculated 5 years ago.
You need to be fully informed on the market including available concessions-ask and you shall receive! Better yet, contact a bona fide tenant representative to protect your interests.
*CoStar Group, a publicly traded real estate real estate information services company,
provides the above statistics.
BIO: Levi F. Smith, a native Michigander, lives in West Bloomfield.
After passing the bar in Michigan and California and practicing law for 6
years, he entered the commercial real estate field. In 1988 he founded the first corporate real estate firm,
Levi F. Smith Real Estate, Inc. in Michigan to exclusively represent tenants and buyers. For
more information, visit
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