Holding Their Own

April 2, 2006
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GRAND RAPIDS — Even though rents are starting to inch up a bit, landlords are still making concessions and offering incentives to tenants. But for building owners the glass is now beginning to appear half full instead of half empty.

“I’m optimistic that the market is starting to creep back to the point where we all want it,” said Charlie Hoats, property manager for Grubb & Ellis/Paramount and president of the Building Owners and Managers Association (BOMA) of West Michigan.

Part of his optimism is driven by the fact that the office market could easily be in much worse shape than it is today considering the lengthy economic struggle the state continues to find itself waging. The recession that drove Michigan’s unemployment rate upward hasn’t done the same to the market’s vacancy rate. There could be dozens of reasons the two rates haven’t paralleled each other and many could be unknown, but Hoats offered one.

“I think a lot of it may have to do with tenacity, for one thing. Since the recession hit people have constantly tried to reinvent themselves career-wise. I would imagine a lot of people have gone into business for themselves and that may have spurred activity with smaller spaces, the 1,000 to 3,000 foot offices,” he said.

“I know for a fact that for the past two or three years these smaller spaces were a lot of the activity. A 10,000 foot tenant was a rarity.”

Another reason for his optimism is that eight of the 14 sectors listed in the BOMA 2006 Annual Office Occupancy Report registered gains in tenants from 2005 to 2006.

Of those eight, the 28th Street/I-96 sector had the largest occupancy gain. The southeast side corridor, which includes Cascade Road and Patterson Avenue from 28th to 36th streets, had its occupancy rate grow by 11.75 percent to 77.66 percent from the 2005 report.

Two buildings that were vacant there last year are completely occupied, with one being purchased and filled by Rockford Construction. Two others had occupancy gains from last year of more than 60 percent, while four more structures had gains of over 20 percent.

Still that office sector had the second lowest rate of the 14. Only the Northeast Area, a corridor that runs along the East Beltline from Fulton Street to Four Mile Road and includes a portion of Michigan Street, was lower with an occupancy rate of 75.74 percent. But despite that rate, the Northeast sector had the greatest increase in building area for the year as the corridor added 109,262 square feet last year.

Overall, occupancy in the Greater Grand Rapids office market grew by just under 1.2 percent in 2006 from 2005.

“Some segments of the market are certainly coming around more slowly than others. The suburbs are still struggling a little bit and that is partly because there is so much space available,” said Hoats.

“But downtown is starting to get much more exciting, in large part to the upcoming projects on the Medical Mile, as they call it, with Spectrum Health and others,” he added.

Downtown, the single largest sector with 83 buildings and over 5.8 million square feet, remained flat for the fourth consecutive year with an occupancy rate of 85.3 percent, but up slightly from the previous year.

The 13 suburban markets, with 387 buildings and 8.7 million square feet, fared a little better with a 1.5 percent hike from 2005 to 83.23 percent in 2006. Standale was the only district with an occupancy that topped 90 percent at 98 percent.

Seven new buildings went up in the suburban sectors last year and those added 216,675 square feet of office space to the market. None were built in downtown last year. But the Riverfront Plaza Building on Campau Avenue began a 50,000-square-foot expansion in 2005 and Spectrum Health started work on a six-story medical office building.

The BOMA report has downtown rents increasing slightly in the future, but building owners are expected to continue to offer incentives to tenants. At the same time, suburban tenants are likely to maintain an advantage in lease negotiations as a lot of space is available.

But buildings with good functional space in all the sectors should experience an increase in occupancy in the future.

“Every owner would like to be 100-percent occupied, but I think a realistic breakpoint of where a landlord could feel they’re standing on solid ground is somewhere between 85 and 92 percent occupancy in their building,” said Hoats.

“Break-even numbers are lower in most cases. But the point at which landlords can really say I’m very comfortable is probably somewhere between 85 and 92 percent, depending on the market.”

BOMA and Genzink Appraisal Co. completed the report from information voluntarily supplied by building owners, property managers or leasing agents. To be included in the report, a building has to have at least 5,000 square feet of office space. The survey reflects occupancy rates at the end of last October.

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