McKay Tower Goes Mixed-Use

April 11, 2008
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GRAND RAPIDS — The addition of condos to downtown’s McKay Tower brings stability to an office building with a lineage of vacancy problems.

Owner and developer of McKay Tower Partners LLC, Mark Roller bought the building at 146 Monroe Center about two years ago. He knew exactly what he wanted to do to attack the occupancy problem.

“The problem with the building, historically, has been occupancy. The building never was full or really even close to full from an office perspective,” he said.

Part of the issue, Roller described, was that the building was owned for many years by the University of Michigan, which didn’t know what to do with it. It was then purchased by a party in Chicago who held it for four to five years before Roller came across the property.

The economy had not been kind for commercial real estate in West Michigan, said Roller.

“To sit and fight for tenants to bring the occupancy up is kind of a downward spiral for landlords.”

So, instead, Roller consolidated space by moving a few companies that were spread throughout the top three floors to lower levels, clearing the upper levels for 12 condos, known as The Residences at McKay Tower. The condos make up roughly 15 to 16 percent of the 140,000-gross-square-foot building, leaving the majority for offices. Roller estimated that the office portion of the building is 88 percent occupied.

“The expense to run a building is pretty much the same whether it’s halfway occupied or 100 percent occupied,” said Roller. “If you can arrange the tenants in such a way that they’re consolidated, and then take those upper floors and carve those off and make them residential, then what you’ve done is you’ve kept your same revenue, but you’ve partitioned off some of the expense from the rest of the building.”

Roller renovated the top floor into a penthouse suite, with a private deck, an owner’s lounge, a rooftop deck and a workout room.

Making space for residential in the building involved more than just moving some companies around. Many renovations needed to be made in order for the building to be residential-ready. Roller updated the electrical system, ventilation, sprinkling systems and fireproofing, and changed from steam heat to boilers.

For 11 of the 12 condos, the floor plans can be customized by the buyer. In order to accomplish this, the utilities had to be brought “to the door.”

“The units themselves are empty shells right now; however, all of the systems they need are in place,” said Roller. “The idea is that we have an architectural design laid out, but we wanted to give buyers the ability to make changes, rather than building it and saying ‘Well, what you see is what you get.’ We took the approach of ‘Here’s what it is going to look like; if you want it to look like that, fine. If you want to change it, now is the time.’”

Roller said doing it that way took more time and money up-front, but believes buyers will be happier with being able to personalize their unit. Having all the utilities brought to each unit also allows for a quicker finish to the condo. Roller said from signing the paperwork to the move-in date, each unit can be put together in 60 to 90 days.

“I like the idea of saying, ‘OK, I have made the decision; this is what I want. I’ve got 60 to 90 days to sell my place or get out of my lease, and I’m in no uncertainty. I can see it being built day by day. If I want, I can walk around ahead of time in the space and look at the exact views I’m going to have,’” said Roller. “So that’s why we took that approach. It’s turned out to be probably a more costly approach from a developer’s standpoint to do it that way, but I think that, ultimately, we’re going to see the benefit of people really thinking they can make the space their own.”

Space restrictions in one of the one-bedroom units has put it in a “white box” phase, meaning the floor plan is set, but the finishes are left for the buyer to choose. Another unit is finished as a model, and a third, the original model, sold in September of last year and has been occupied since.

Prices are based on the standard layout by McKay Tower Partners, which consists of hardwood floors, marble and granite finishes, and stainless steel appliances. Each unit can be upgraded or downgraded. Pricing for a one-bedroom starts in the mid-$200,000 range; a large three-bedroom in the upper-$500,000 range; and the 29,000-square-foot penthouse is $1.5 million to $1.75 million.

Roller is not targeting any specific market and has seen a wide mix of potential buyers, from people looking for a second home to retirees looking to live downtown. Most, however, have been young professionals, a demographic his instinct tells him will make up the majority of the tenants.

“One of the things that is most appealing about the McKay is that it is right downtown,” said Roller. “Right now, many of the downtown attractions are restaurants, nightclubs, the Van Andel, and I think also it will see professionals who are coming in from an urban environment and are used to not having a garage where they park their car and take four or five steps to unload their groceries. That tends to be the No. 1 objection that we hear, is: ‘Gosh, what do you do when you have a bunch of groceries?’”

Roller, who owns seven other commercial buildings on the East Coast, lived in Chicago for more than a decade and said he didn’t think twice about parking his car and walking a few blocks. He believes young people are more open to assimilating to that lifestyle.

Both residential and office tenants benefit from each other’s presence in the building. Because a portion is residential, more attention is given to the building by the owner and developer, and since a portion is commercial, residential tenants are not the sole financial bearer of building maintenance costs.

Initially, some office tenants had concerns as to how the new mix would affect them, but Roller has noticed a change.

“Now, instead of people having that concern or fear, it’s curiosity. It seems like every day we’ve had at least one of our tenants up there looking around.” BXJ

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