A new office tower in downtowns future

April 13, 2009
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It has been almost a decade since there has been serious talk about building a new office tower downtown.

Back in 1999, DP Fox and the Ellis Family Trust announced their intention to put up an $80 million, 25-story, 343,000-square-foot office structure that would rise 400 feet above the pavement at the southeast corner of Ottawa Avenue and Lyon Street. An architect was hired; a construction manager was chosen. But an anchor tenant or two couldn’t be found, and the adventurous project that duly excited the office market back then was put on the shelf.

One veteran and prominent player in the market, though, is confident downtown will get a new Class A office building in the not-too-distant future because growth in the medical and bioscience industries will warrant one.

“We’re going to see a building downtown. In the next three years, I think we’ll be sufficiently postured to be able to break ground on a new building. We’re working through this process and I fully expect to see that happen,” said Ray Kisor, executive vice president at Grubb & Ellis|Paramount Commerce and office market specialist.

But nothing quite as exciting as the thought of a soaring new office tower happened in the market last year, as the overall occupancy rate fell by 1.5 percent from 2007 to 82.6 percent.

The best numbers were in the downtown market where Class A space had occupancy just under 89 percent and the Class B buildings were nearly 94 percent full. In the suburbs, Class A and Class B structures were 81 percent occupied.

Kisor, though, said some of last year’s vacant space was absorbed this year by existing tenants that wanted more space.

“We’ve had the good fortune to transact a number of leases so far this year. They’re mostly tenants that are relocating. There is very little new market entry, so we’re shuffling tenants, so to speak,” he said.

“We’re ahead of the game a little bit. We’re leasing more space than we’re moving tenants from, representing a growth in their businesses. We also have people who are holding back making a decision as to what to do, because there still is a lot uncertainty in the marketplace.”

Kisor explained that if companies were required to make a decent-sized investment to move, those firms will likely wait and see what happens to the economy and in the credit market before relocating or leasing more space at their current sites.

“If it’s a landlord making the investment, then they’re a little more apt to make a move,” he said.

Not much happened last year to rental rates. Downtown Class A space went from $21.11 per square foot in 2007 to $21.20 in 2008, less than a half-percent rise. Class B space in the Central Business District rose to $19.41 per square foot in 2008 from the 2007 average of $19.33. And tenants are still holding the supply-and-demand trump card in leasing deals as they have for the past five years or so.

“A landlord has to look at a lot of variables. (A landlord can) hold a vacant property or reduce what his holding costs are by making a little more of an aggressive deal than he might have. We have landlords that are not really willing to break the lease rate for a building but maybe give up some free rent and average (the lease rate) down some. So when things do turn, the building is still stabilized and what they’ve given away does translate to a very attractive transaction,” said Kisor.

Kisor added that the current landlord-tenant situation will likely stay in place at least until the first quarter of next year.

“We’re going to get turnaround quick when it happens, just simply because the world of communication has allowed good news to spread quicker than it has in the past. But it’s still going to be that through the first quarter of  ’10,” he said.

Besides the medical office construction that is changing the persona of Michigan Street, Kisor said the city’s southeast side is also going well — especially Centennial Park at 2828 Kraft Ave. SE at 28th Street, where single-tenant users have filled office space. He also said the downtown market was solid, and offices along and near the East Beltline were also doing fairly well.

“The beauty of our market is we’re not overbuilt. We may be sitting with a couple of spec buildings, but we’re not sitting with 10 space buildings and really dragging things down. That’s the beauty on both our industrial and office sides,” said Kisor.

“The market has been in the doldrums the last three or four years, and that pretty much discourages speculative development. At least people have been attuned to market conditions when they think about doing something.”

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