Thank Ross Perot in part for the two most frenzied years of new metro Detroit office construction in the last four decades.
Part of the reason 11.7 million new square feet of office space opened in 1986 and 1987 was that the 1992 billionaire presidential candidate’s company,Electronic Data Systems Corp., needed 2 million square feet in the region following its purchase by General Motors Corp. in 1984 for $2.55 billion.
Developers pounced, opening 6.5 million and 5.2 million square feet of new — and mostly speculative — office space in 1986 and 1987, respectively, according to data from the Southfield office of Newmark Grubb Knight Frank. It was unprecedented.
Crain’s reported in 1985 that 7.7 million new square feet was expected to come online in 1986.
Put another way?
That’s the equivalent of more than one new Renaissance Center (5.5 million square feet) being built each year.
“Those were the freakin’ days,” said David Friedman, president and CEO of Farmington Hills-based Friedman Integrated Real Estate Solutions LLC. “It was great.”
But was it too much, too fast? Is the region still paying the consequences? Opinions differ.
Friedman said there was significant demand for new office construction following a comparative lull in new buildings in the suburbs due to the economic recession of the early 1980s.
Steve Morris, principal of Farmington Hills-based Axis Advisors LLC, a tenant representative firm, also said an economy improving from the recession, generous federal tax incentives for developers, and companies being willing to build larger offices for their employees were contributing factors.
The onslaught of new space had a lasting impact on the suburban office markets, said Levi Smith, the principal of Southfield-based Principal Associates LLC, who developed a small speculative medical office building in Southfield during that period.
“The market that was built for EDS soon was overbuilt,” he said.
Even today, the 17.2 million-square-foot Southfield market and the 13.3 million-square-foot Troy market have felt the consequences, in part because of too much space built over the years and not consistently enough tenants to fill it, Smith said.
The vacancy rate was 25.7 percent in Southfield in the fourth quarter last year and 24.8 percent in Troy, according to Newmark Grubb. And while the markets have improved in recent years, supply and demand still aren’t equalized for many large available spaces.
As for EDS, that company occupied a significant portion of what is now the North Troy Corporate Park, formerly the Bellmead, and Travelers Tower II in Southfield.
The company eventually vacated that space, as well as space in Auburn Hills and Farmington Hills, and took space in the RenCen. But the company was spun off from GM and then purchased by Hewlett-Packard Co.in 2008 for $13.9 billion. The former EDS, as part of HP, now occupies a 638,000-square-foot former GM building in Pontiac.
Time has shown developers that the ebbs and flows of corporate business moves are hard to predict.
“Picture this: If Quicken Loans (Inc.) would have stayed in the suburbs and not moved downtown, downtown wouldn’t be doing as well right now,” Friedman said. “Because they moved downtown, downtown started booming. That was the effect of EDS in the suburbs.”
Doug Etkin, principal of Southfield-based developer Etkin LLC, said the boom of 1986 and 1987 was particularly beneficial for the northern Troy area, which hadn’t had the amount of office development as the southern part of the city.
“If it had 1 million square feet before that era, after it, it had 3 million,” he said.
Real estate experts say an office construction boom like there was three decades ago just isn’t in the cards, and wouldn’t be responsible.
Just 68,000 square feet of new office space was constructed last year, according to Newmark Grubb, the lowest figure in 40 years worth of data provided by the company. The next lowest totals were in 2010 (77,000 square feet) and 1995 (74,000).
A.J. Weiner, executive vice president in the Detroit office of Jones Lang LaSalle, said the local office market doesn’t generate the type of new tenant prospects and rental rates to accommodate that level of new office construction.
“The cost involved in building that much square footage would require an entirely new tenant base,” he said. “It just wouldn’t be a viable project.”
