Metro Area's Office Market Is Improving

March 2, 2007
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Although the vacancy rate in the metro areafs office market has dipped slightly for the first nine months of 2006, the demand for space in Class A buildings has risen.

The rate for the areafs 14.8 million square feet of office space stood at 16.9 percent at the end of September, down two-tenths of a percent from the same time last year. The vacancy number, though, for the areafs top-of-the-line office structures was 13.7 percent at the three-quarter pole or 3.2 percent below the overall rate.

gOffice vacancy rates continue to improve, although this remains a slow but steady process. The demand for Class A space has increased, particularly in the central business district of downtown Grand Rapids,h said Matthew Abraham, research manager for Grubb & Ellis„ Paramount Commerce.

gThis will have the effect of putting landlords into the driverfs seat. In the months ahead, we expect to see rental rates increase while landlord concessions decrease in key parts of the West Michigan market,h added Abraham.

The average asking rate for Class A space in the market was $20.52 per square foot at the end of the last quarter, slightly higher at $21.74 for a square foot downtown. The market-wide asking rate for Class B structures averaged $16.53. In downtown, it was $16.76.

The survey, which is done quarterly and was released late last month, cited M-6 as creating new interest in office developments, especially near the Metro Health Village. Abraham said that interest would work its way west along the 20-mile-long expressway from the Metro project at Byron Center Road to Wilson Avenue in the coming years.

The gMedical Mileh on Michigan Street, just east of downtown, will also lead to more office developments. Other findings from the survey include:

**About 264,000 square feet of office space had been absorbed this year at the end of the third quarter, with most of the demand in the suburban market.

**Nearly 94,000 square feet of Class B and C buildings are under construction, with more than two-thirds of that footage being built downtown.

**The demand for office space this year will be influenced by the abilities of cities to offer tax-free zones and other incentives to lure companies from other regions.

But perhaps the biggest result of the quarterly survey is that the ownership consolidation of downtown office structures should move rental prices upward in the near future.

gWhen you see a mass consolidation like we saw this year, typically it will steadily increase the rate per-square-foot. If you have five buildings with five separate owners in a soft market like this, when a tenantfs lease comes up for renewal a tenant goes out into the market to get quotes until the tenant gets an absolute bottom-of-the-bill rate,h said Chip Bowling, an office adviser with G&E„ PC.

gNow when a tenant tries to play building against building, itfs the same owner. Theyfre going to put their foot down and hold the rate. That action is going to steadily increase the rate,h he added.

Outside investors have bought more than 500,000 square feet of prime Class A and B office space downtown this year, with the most recent major purchase happening in October when Three Oaks Group LLC bought the Waters Building from the Waters Corp.

The Waters Building became the third downtown holding for Three Oaks, as it had previously purchased the Ledyard and Trust buildings. The trio is located along Ottawa Avenue NW between Lyon Street and Monroe Center. The buy was the seventh in West Michigan for the Ann Arbor investment group over the past 18 months.

Another type of downtown development could eventually lead to a new office building going up in the central business district for the first time since 1993 when Bridgewater Place opened.

Residential developers are taking potential office space off the market by turning vacant buildings into condominiums and apartments. If enough office structures get converted, demand for new office space should surface downtown.

gThat is exactly what will happen,h said Bowling.

Office-building owners may not want to pop the corks off their champagne bottles yet, but they certainly should consider keeping a corkscrew handy in 2007.

gWe expect the office market in West Michigan will enter an expansionary period during 2007, with the southwest portion of Grand Rapids poised for new office construction,h said Abraham. gWhile we do expect improvement, it will be modest in the near term for the office market.h 

This Space Available

Research from Grubb & Ellis„ Paramount Commerce showed an overall third-quarter vacancy rate in the office market at just under 17 percent, meaning there is over 2.5 million square feet of vacant space.

The following chart lists the vital numbers for the various submarkets in the office sector.

Submarket

    Total Sq.Ft.

  Vacant Sq.Ft.

  Vacancy Rate

Airport Area 

886,531

77,868

8.8%

Burton/Breton 

541,241

111,199

20.5%

Cascade

1,367,815

215,208

15.7%

Centennial Park

759,147

160,686

21.2%

Downtown

5,804,055

1,121,265

19.3%

East Beltline 

815,329

169,391

20.8%

East Paris

973,657

174,885

18.0%

Northeast

471,610

60,792

12.9%

Northwest

703,149

108,553

15.4%

Southeast

1,670,931

236,225

14.1%

Southwest

883,798

73,187

8.3%

Suburban

9,073,208

1,386,994

15.3%

Downtown

5,804,055

1,121,265

19.3%

Total

14,877,263

2,508,259

16.9%

Source: Grubb & Ellis„ Paramount Commerce, Office Market Snapshot, 3rd Quarter 2006.
CQX

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