Feeling The Optimism

April 2, 2007
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GRAND RAPIDS — Although the office market occupancy rate didn't begin the year with a big bump from last year, the market itself got bigger over the past dozen months.

Twenty more buildings and nearly 400,000 more square feet are in the 2007 edition of the Building Owners and Managers Association of West Michigan annual occupancy survey than what was reported in the 2006 version. The office market now consists of 488 buildings and 14,856,889 square feet of space.

And even with the additional square footage, which can lead to more empty space, the market's overall occupancy rate grew. It rose by less than 1 percent from the 2006 BOMA survey to 85 percent — but it still grew.

"When you're adding space to the market and gaining some ground with occupancy, that spells 'positive absorption,' which is really the key thing that everybody wants. More square footage vacant without considering what was built doesn't give you an accurate picture, and looking at occupancy without considering those factors doesn't give you the best picture, either," said Charlie Hoats, past BOMA president and a property manager with Grubb & Ellis|Paramount Commerce.

"The true measure is, what's the absorption? If we can say that we built a bunch of space and the occupancy rate is still climbing, that means a positive absorption and that's good for the market," he added.

There were other signs of an improving market last year that didn't make the BOMA report because the projects weren't completed by the survey's deadline; most of those lead to an emerging medical office field.

"The 80,000-square-foot Harley medical building on the corner of Cascade and I-96 is a bold move, but it points to the trend of medical office use growing so much. Those are positive signs," said Hoats of medical office construction.

"We haven't seen a ton of spec buildings going up over the last five years or so, but people are starting to feel the optimism, and then those kind of projects are starting to be considered. We know there are at least a couple of others planned that may break ground in 2007, as well," he said.

Here are some of the highlights from the 2007 BOMA survey that captured the office market's activity from 2006:

  • The Northeast sector, which contains portions of
    East Beltline Avenue
    and
    Michigan Street
    , registered an occupancy gain last year of nearly 6 percent, making it the area with the largest percentage increase for the year. The Northeast sector also had four new buildings open last year, which added 81,000 square feet to the corridor, bringing it to over 1 million and making it the fourth largest of the survey's 14 sectors.
  • The Plainfield sector, a northeast side corridor that includes part of
    East Beltline Avenue
    , had five new buildings go up last year. That construction added 58,000 square feet of space to the sector and pushed its total square footage from 352,473 to 410,810.
  • The Wyoming sector, which includes portions of 28th, 36th and 44th streets, along with Wilson, Burlingame, ClydePark and ByronCenter avenues, had three new buildings open last year. Two were from Spectrum Health and Metro Health and these added a combined 91,000 square feet to the sector, which had the second highest occupancy gain percentage-wise at 4.8 percent.
  • The Northwest sector, which includes Alpine Avenue and Three and Four Mile roads, had the third highest percentage increase in occupancy rate at 4.7 percent.

Here are a few lowlights from the 2007 survey:

  • The Breton/Burton sector on the city's southeast side registered the largest percentage of loss in occupancy among the 14 sectors by dropping 9.4 percent to 74.1 percent occupied.
  • The Standale sector, mostly buildings on
    Lake Michigan Drive NW
    , had the second biggest occupancy loss of 5.3 percent. Still, the corridor's occupancy rate was the market's highest at 92.7 percent.

BOMA conducts the survey with the Genzink Appraisal Co. The occupancy information is gathered from building owners, property managers and leasing agents.

Rents should remain stable this year and landlords are expected to continue to offer incentives to tenants. Hoats said whether a business buys a building or leases space this year could hinge on which direction the cost of money goes.

"2006 marked a period where more users started looking seriously at leasing as opposed to purchasing or building, because interest rates increased and land and construction costs rose, as well. But if the interest rates hold steady or fall, that could mean leasing could slow a little bit in 2007 as users try to buy instead of lease," he said.

The Federal Reserve has passed on raising the prime interest rate, the one banks charge each other for loans, for its last six meetings. A report earlier this month predicted the board would lower the prime by a quarter point at its next meeting, dropping the rate to 5 percent.

"That could start to make people give strong consideration to a purchase instead of a lease," said Hoats. "Now for some of those people, it really kind of depends on the user and their level of comfort with the risk of owning real estate."

Annual Office Occupancy Rates

Sector    2000     2001    2002    2003    2004     2005    2006     2007
Downtown 86% NA 84% 83% 85% 84% 85% 86%
Suburbs 91% NA 83% 83% 83% 81% 83% 84%
Total market 88% NA 83% 83% 84% 83% 84% 85%

2007 Office Occupancy Summary

Office Sector     Number of Buildings Square Footage Percent Occupied Percent Change
Downtown 84 5,825,294 85.79% 0.47%
Northeast 47 1,074,015 81.68% 5.94%
Breton/Burton 13 123,408 74.13% -9.37%
Burton/E. Beltline 13 434,314 88.03% 3.78%
Cascade Road/I-96 73 1,917,707 86.59% -2.99%
Centerpointe Mall 25 600,359 81.87% -0.35%
28th Street/
I-96
39 1,458,555 78.60% 0.94%
Airport 11 909,022 87.84% 3.82%
Kentwood 45 139,623 79.23% -2.08%
Wyoming 25 375,054 88.42% 4.76%
Grandville 43 617,486 89.58% 1.39%
Standale 11 95,964 92.74%            -5.30%
Northwest 27 43,603 87.28% 4.73%
Plainfield 32 43,603 83.25% -1.01%
Total 488 14,856,889 84.77% 0.70%

Note: Percent change is from the previous year.

Source: Building Owners and Managers Association of West Michigan, 2007 Annual Office Occupancy Report of Greater Grand Rapids

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