This isn’t the building-boom time of the 1980s, when the suburban office market was arguably overbuilt with fresh new product, creating the Southfields and Troys and Farmington Hillses that we know today.
This is 2020, good riddance. The year in which our collective engine of personal and economic despair has been running nonstop, without a modicum of mercy.
That’s why I was so surprised to hear that a new 75,000-square-foot office building is being constructed in Bloomfield Hills — on spec.
Wait … what? That definitely wasn’t on my 2020 bingo card.
First of all, when I say “on spec,” I mean it is being built speculatively. As in, it doesn’t have any tenants secured. As in, the developer doesn’t know who will be paying rent there when it’s built. As in, it’s very, very risky.
Second of all … what?
In some real estate classes, spec builds are regular — think industrial and warehouse space, for example. Happens all the time for a host of reasons.
Apartments, by their very nature, are generally speculative; it’s typically not until construction is well underway that preleasing begins. That’s just the nature of the business.
Speculative office space, however? That’s very, very rare these days and has been for some time, and for good reason — it’s an incredibly expensive gamble that can easily go sideways. The region has 78.2 million square feet of office space and 15.5 percent of that, or nearly 9 million square feet, sits vacant, according to one market study done last quarter.
Not to mention that the state of the office market is in flux as working from home remains common.
But Bloomfield Hills-based JFK Investments Company LLC, which has about 2.5 million square feet in its office and flex portfolio, is confident in its new building, the Bloomfield Hills Office Center at the northwest corner of Woodward Avenue and Long Lake Road, that is anticipated to be complete by September or October.
“It’s speculative, but it’s long term speculative. We’ll build it and they will come,” said Tim Jarzembowski, director at JFK Investment, which is run by the Kosik family. “Maybe we’ll draw from Birmingham or other buildings.”
Jarzembowski said the company is targeting lease rates at $35 per square foot per year, with utilities and parking included; the site also includes a 77,000-square-foot existing building and a 300-space parking deck that was built two years ago to accommodate tenants of both buidlings. He declined to disclose the cost to build the new property, the architect for which is Bloomfield Hills-based Young & Young Architects.
“At that rate, they are way above Bloomfield and competing with Birmingham,” said Steve Morris, managing principal of Farmington Hills-based brokerage firm Axis Advisors LLC. “The advantage they have is free parking.”
The Bloomfield Hills office market is 3.03 million square feet, according to a third-quarter report from the local offices of New York City-based brokerage firm Newmark (formerly Newmark Knight Frank). The vacancy rate is 16 percent. The average asking rents are $26.09 per square foot for Class A space and $25 per square foot per year overall, according to the report.
The net absorption this year is close to 279,000 square feet — or 9.2 percent of the market.
Much of that can be attributed to homebuilder PulteGroup Inc. leaving the city and its longtime headquarters building for Troy. John Fricke, executive vice president in the Southfield office of Colliers International Inc., which leases the former Pulte building at 100 Bloomfield Hills Pkwy. to tenants, told me in October 2019 that PulteGroup’s lease expires in March 2020 for 160,000 to 170,000 square feet, but the company physically occupies only about half a floor, or about 33,000 square feet in the 198,000-square-foot building.
There are other large vacancies near the new building that also will provide competition for tenants, Morris said.
Those include 84,000 square feet at the Stoneridge I building at 41000 Woodward Ave., and the Pinehurst Office Center at 39400 Woodward, the Bloomfield Centre-South building at 39533 Woodward and Bloomwood Office Centre at 39577 Woodward all have more than 20,000 square feet available for lease, according to data provided by Morris, who is also a lecturer in the Stephen M. Ross School of Business at the University of Michigan.
“You’ve got vacancy in that area and I would say they are going to have a challenge” leasing the new building, Morris said, noting that he thinks law firms and wealth management companies seeking a prestigious Bloomfield Hills address would be likely tenants.
He added that the last spec office buildings he remembers rising out of the ground were by Farmington Hills-based Northern Equities Group in the Haggerty Corporate Office Centre park.
That was 10 or 15 years ago, Morris said.