Finding Office Tenants Is Tough

May 30, 2003
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GRAND RAPIDS — It’s a tenant’s market out there, whether it’s Class A or Class B office space you’re seeking.

There’s more than 13.8 million square feet of rentable office space in Grand Rapids. Some 62 percent of it is Class B space, 30 percent is Class A, and the remaining is Class C.

“Activity in general has picked up and I would say activity, especially on the investment side, has picked up significantly in the central business district,” said John Mundell III, vice president and managing director of CB Richard Ellis – Grand Rapids.

He attributes that to the DeVos Place convention center, due to open in December. 

According to the 2002/2003 occupancy survey by the Business Office Managers Association (BOMA) of Greater Grand Rapids, there is 6.2 million square feet of rentable office space in the central business district, which constitutes 44 percent of the Greater Grand Rapids office market.

There’s some 8.3 million square feet of office space in the suburban market, 68 percent of it concentrated in the city’s southeast quadrant, and 11 percent, 6 percent and 15 percent, respectively, located in the southwest, northwest and northeast quadrants.

According to BOMA, the downtown office market continues to have higher than normal vacancy rates and tenants continue to have an advantage in lease negotiations.

The BOMA survey indicates downtown office space occupancy is nearly 84 percent and suburban office space occupancy is around 82 percent.

The class ratings represent a subjective quality rating of office buildings that indicate their competitive ability to attract similar types of tenants, according to BOMA International.

Some of the measures used to rate office buildings are rent, building finishes, system standards and efficiency, building amenities, location, accessibility, parking and market perception.

Figured into the rating system are a combination of factors, such as the quality of materials used, hardware and finishes, architectural design and detailing, and elevator system performance.

Service amenities such as food facilities, copying services, express mail collection, physical fitness centers or child-care centers also play into the rating system. 

According to BOMA, Class A buildings are “the most prestigious buildings competing for premier office users with rents above average for the area.”

These buildings have high-quality standard finishes, state-of-the-art electrical, safety and fire systems, exceptional accessibility and “a definite market presence.”

Class B buildings, on the other hand, compete for a wide range of users with rents in the average range for the area. Building finishes are fair to good for the area and systems are adequate, but the building does not compete with Class A at the same price.

Class C buildings serve tenants requiring functional space at rents below average for the area.

That’s how BOMA generally defines the classes.

“But there is a Grand Rapids interpretation of that because truly, by definition, there are very few Class A buildings in Grand Rapids,” Mundell said. Class A rates downtown average $20.34 per square foot for a full-service lease and range from $16.25 to $24.50 per square foot, gross, plus electric.

According to CB Richard Ellis, only Bridgewater Place, Frey Building, Bank One Building, 171 Monroe and 99 Monroe qualify as Class A buildings in the central business district.

Scott Morgan, vice president of Paramount Properties, adds to that list the Calder Plaza Building at 250 Monroe. But as Morgan points out, just because an office building doesn’t’ make the Class A list doesn’t mean it’s not an excellently managed building with a great reputation for keeping tenants happy.

“It’s really just more of a subjective national standard that we’re trying to apply locally,” Morgan explained.  

Class B office space in the central business district currently averages $16.06 per square foot. The Ledyard, Trust, Waters and 15 Monroe buildings are among the Class B office buildings in the district, Morgan noted.

In the large southeast submarket, 63 percent of rentable office space is Class B and 35 percent is Class A.

Class A space in the suburban office market ranges from $15 to $17 per square foot (triple net leases), or $20 to $22 gross, Mundell said. Most of the Class A suburban space is located along Cascade Road and East Paris, though there is new Class A space in the northeast along the East Beltline, as well, he said.

Class A buildings in the suburban office market include 5136 Cascade Road; 5211 Cascade Road; 1350 East Paris Avenue; 625 Kenmoor; and the Hilltop Building at 4940 Cascade Road. The later two are now under construction.

In the same market there are clusters of Class B office space along East Paris and around the Ford International Airport and I-96 area. Average rental costs for Class B space in the suburban market averages $15.16 per square foot, Morgan said. 

CB Richard Ellis makes a distinction between Class B and “B loft” space — the latter being newly renovated office space in older buildings, or the “conversions” that often incorporate office, retail and residential.  

“B lofts have a much higher occupancy right now than B, which is lending to increased activity in the B market. What you’re seeing is some B buildings being converted to other uses,” Mundell said.

“I think B loft can cross genre — everything from planning to architectural type tenants to a law firm. The majority of B loft space was filled by B tenants.” 

The loft space is generally on the fringe of downtown, such as the Brassworks Building and the Berkey & Gay Building. But there also is loft space south of the Van Andel Arena, a little closer to downtown, Morgan noted.

Morgan said in the past five years there’s been “tremendous” migration not only from Class B to B loft, but from Class A to B loft and suburban to B loft.

But the demand isn’t what it was two years ago, he observed. 

“It was very, very popular with the creative people, the advertising and public relations companies, and more of the cutting edge technology companies. The popularity even expanded to law firms. It really wasn’t a price issue — it was almost an ‘image’ or a ‘fun factor’ why they gravitated there, plus, lower parking costs.”

But that slowed down like everything else during the economic downturn. Morgan thinks a lot of the types of companies that gravitated towards the B loft product have been badly hurt by the recession, particularly the advertising and technology companies.

“There’s a lot of sublet space for that product that’s on the market,” he added.

There’s no question the economic downturn has increased the competition for tenants. Mundell said current incentives include rent reduction, free rent, more aggressive tenant improvement allowances and parking incentives.

“One that’s unusual for Grand Rapid, but not for larger markets, is lease ‘pick-ups’ — where the new landlord picks up a portion of the lease to move the tenant earlier. But I haven’t seen a lot of that,” he noted.

BOMA expects such concessions will continue.

Overall vacancy is likely to decrease in buildings with good design and functional space, BOMA predicts, because of lack of construction in 2002 and limited prospective construction this year.

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