Jared Friedman, director of opportunities in the Farmington Hills, Michigan-based office of Friedman Real Estate, is, like everyone else in commercial real estate, working through the challenges brought by the COVID-19 pandemic. And, like the rest of his fellow CRE pros, he can’t predict when the pandemic will end and when life will return to at least something approaching normal in the United States.
But here’s the good news: Friedman sees plenty of hope in the Detroit-area commercial real estate market today. Yes, Detroit and its suburbs face challenges and certain commercial sectors are struggling mightily. Others, though, continue to thrive.
And Friedman predicts that the Detroit-area commercial real estate market will soar even higher once the economic slowdown caused by the pandemic and business shutdowns comes to an end.
Midwest Real Estate News spoke with Friedman earlier this month about both the hope and the challenges in Detroit’s CRE market. Here is some of what he had to say.
I know this is a broad question, but let’s start with this: How is the Detroit-area commercial market doing during these challenging times?
Jared Friedman: It is very asset class specific. When you break down the different asset classes, some are doing fine while others are facing challenges. Industrial is on fire. That sector is as hot as it can be. Three years’ worth of demand for industrial space has been pulled forward and needs to be in place this quarter. The industrial demand is extremely high.
Conversely, office space demand is down. We are collecting about 94 percent of the rents due on the office side, which is a positive. But we are not leasing much new space. There has been some movement from companies downsizing or reconfiguring their space. But there hasn’t been much activity. It’s a murky outlook right now on the office side.
The office sector is an interesting one today. Do you think the pandemic and the resulting work-from-home movement will bring lasting changes to this sector?
Friedman: Absolutely. 100 percent, companies’ needs will change. If you look at office space the last 30 years, about every five years we see a new trend hit the sector. In the early 2000s, working remote was a big thing. Then they brought everyone back. Then companies decided that they needed to go high-rise in urban areas with open floor plans. The trend used to be toward private spaces in the suburbs. Every five years a new trend arrives. I think this pandemic will cause office users to shift. It won’t be 100 percent work from home. It probably won’t be 50 percent work from home. But there will be a substantial increase in the number of people who do work from home after this.
Of course, there are still a couple of things that you can’t do from home. You can’t create a culture. You can’t train. You still need that physical office space. But how many people will work from home most of the time? I don’t know if it will be 5 percent, 15 percent or 20 percent. But there will definitely be a number of people who work from home on a regular basis.
You’ll also see companies increase the amount of office space per employee. The densification of officer users has increased during the last decade. Offices typically have about 250 to 300 square feet of space per employee. Pre-COVID, that was down to 175 square feet per employee for the densest users. That will tick up. Companies will take more space and spread out.
How strong is the industrial market in the Detroit area today? Is that sector still thriving?
Friedman: Industrial is extremely strong. The recent announcement that Amazon is building a 3.8-million-square-foot facility in Detroit just gave the market another boost. This will be Amazon’s sixth facility in the market. Amazon has taken close to 8 or 9 million square feet of space in our market, all new construction. What that is doing is benefitting a lot of companies that feed Amazon, the trucking services the 3PL logistics services. I have a project in Detroit now, a building with 18 docks. We’ve gotten four offers to lease space in that building from third-party logistics providers who need that space.
I have seen a lot of outside national interests come into our market to build spec industrial buildings. That hasn’t happened in 10 years, at least. We are seeing spec industrial buildings going up on a steady basis for the first time in a long time. There is such high demand. Overall, the industrial market is very good.
Retails are facing big challenges today. How is the retail sector performing in the Detroit market?
Friedman: That is the sector facing the biggest struggle right now. Before the pandemic even hit, we were oversupplied from a retail perspective in terms of square foot per person in the United States. We are oversupplied compared to every other country in the world. There is just too much retail space in this country.
Now we are seeing these retailers have to adapt and change their business models. They are going to struggle. Some retailers that have been doing well, like T.J Maxx, Ross Stores and pet supply stores, will power through and do well. Quick-service restaurants are doing well. Places like Chipotle and Panera are looking for space with drive-throughs. Those quick-service, fast-casual restaurants will seek new space at high premiums to build drive-throughs. The rest of retail world will shake up a bit.
Downtown Detroit was in the middle of a rejuvenation before the pandemic hit. Are you worried that this momentum will slow?
Friedman: Unfortunately, the momentum in downtown Detroit has slowed. The good news is that during this period of COVID, Quicken Loans went public. Dan Gilbert, the founder of Quicken Loans, has been one of the primary drivers of development in downtown Detroit. He went public with his company during this pandemic. What it revealed about his company is that it is even more well-capitalized then people thought. That is a very strong, well-capitalized company. They will continue to grow and they will continue to take space and expand.
Bedrock, the real estate arm of the company, brought in a new chief executive officer, Kofi Bonner from San Francisco. They brought him in to finish some of the projects, to get them off the ground. There is still some good momentum happening, then, in downtown. It will slow. It will take longer for projects to happen. The other parties and developers will have a harder time. We will see some of those other projects stall. Over the long term, though, downtown is probably still on a growth trajectory.
We’ve heard CRE pros across the country saying that they are seeing a move from the city now to the suburbs. Are you seeing this, too?
Friedman: The movement to the suburbs is a real thing. Our suburban housing market is on fire. I have friends and family members living downtown who are looking toward the suburbs. The good news in Detroit is that there are not a lot of downtown multifamily units to begin with. A lot of the new demand and development downtown will be put on hold. The suburbs will benefit the most from this period. And it’s not just multifamily. Think of office users. Before this pandemic, you’d drive downtown, find a parking lot and take the elevator up to your floor. That doesn’t work anymore. Now people want to drive up to their suburban office building, walk in the side door, walk up the stairs to the second floor and sit at their desk. That happens in the suburbs. Both office and multifamily in urban environments will probably see demand decelerate.