OFFICE MARKETPLACE: Glut keeps rental rates down April 18, 2006 BY JOHN GALLAGHER FREE PRESS BUSINESS WRITER

Back in the mid-'80s, developer Peter Burton built the Arboretum office park in Farmington Hills and advertised space at the going rate of $18 per square foot. Today, in an office market awash with high vacancies and low demand, the rental rate Burton can charge is stuck at that same $18 per square foot -- or about 50% less than 20 years ago, once inflation is taken into account.

Market Indicators "There's some really cheap deals out there right now," Burton, 52, says wryly. Nor are the office market's problems just a temporary rough patch. Aside from a brief, buoyant spell at the height of the dot-com boom in the late '90s, landlords of office buildings in southeastern Michigan have been in trouble since the 1980s. That's when overbuilding and easy money created a cascade of foreclosures and financial ruin for landlords. Today, to attract and hold tenants, most owners of office buildings will pay move-in costs, decorate the space and sometimes grant a year or more of free rent to good tenants signing a multiyear lease.

Competition Among Suppliers The Comerica Tower at Detroit Center building, which opened downtown in 1992, is losing 2 important tenants this year. The J. Walter Thompson advertising agency is moving to Dearborn, and the Ernst & Young accounting firm is moving to downtown's newest office building, One Kennedy Square, which is under construction. In the suburbs, most owners of office buildings are faring just as poorly. "It's been very, very soft for a long time," said Joel Feldman, an office-market broker. There are many reasons for the problem but perhaps one overriding one. "The biggest thing is pretty darn simple," said Steve Morris, an office broker. "Corporate America, because of technology and information and bandwidth, doesn't need the kind of space they needed before." That trend, of course, afflicts landlords in other cities, too. But Michigan's blend of automotive layoffs, outsourcing and poor record on job creation makes the office market here more vulnerable than in many places.

Origin of the Troubles? Morris and Feldman trace the troubles to the early 1980s, when General Motors Corp. bought Electronic Data Systems, the Texas-based firm founded by Ross Perot. EDS moved its operations here, almost overnight sopping up 2 million square feet of vacant office space, mostly in Troy and Southfield. Lenders started pouring money into new office construction in metro Detroit. It was an era of loose money, thanks to the mistakes of the savings-and-loan industry and to tax incentives later rescinded. "There were just too many buildings built," Morris says. When the market crashed in the early '90s, more than 100 local office buildings skidded into foreclosure. The market recovered somewhat during the dot-com boom of the late '90s. But the bursting of the dot-com bubble evaporated the demand for a lot of office space.

The Economics – S & D Textbook SR/LR (Rent/sf)/year sf of Office Space $18 D S Q 1985 S D'D' S'S' $Higher $Lower SR LR