Office space: How much is too much?
New and renovated buildings will flood downtown over the next two years.
Available office space in downtown is set to grow in the coming months and years, but it’s yet to be determined if that’s a good thing.
As some developers are building new, including Orion Real Estate Solutions and Rockford Construction, others such as CWD Real Estate Investment and Chicago-based Franklin Partners are renovating older buildings to Class A office standards.
In the next 24 months, there will be plenty of existing square footage downtown to satisfy demands for office needs, according to Nick Koster, CWD vice president of operations, including 250 Monroe, 300 Ottawa, 50 Monroe and the Keeler Building. That doesn’t include the space in the Fifth Third Bank Building that will open up when Warner Norcross and Judd moves to its new home in an office tower development on Pearl Street NW.
Along with the proposed Warner tower, Orion is finishing up Arena Place, which is fully leased, and the proposed Twelve Weston project on South Division Avenue.
Koster said with so much speculative new and renovated office space, he has concerns regarding dilution of the market.
“We have this critical mass that is successful, and if we dilute that, the service level is suffering,” he said. “We have to be careful to not overdo it.”
According to a recent market report from CBRE|Grand Rapids, the downtown office vacancy rate is at 10.1 percent. The most recent report from NAI Wisinski of Western Michigan puts that number closer to 8 percent.
While those are healthy numbers, especially compared to the 18 percent Grand Rapids suffered through just a few years ago, there is a concern the vacancy rate could rise to a point where building owners are hurting, said Mary Anne Wisinski-Rosely, principal and office advisor at NAI Wisinski.
“There’s still a demand downtown,” Wisinski-Rosely said. “There are still some people who like the old loft-style feel and, frankly, that’s hard to come by. But there’s definitely space available.”
Once Arena Place is included in the market reports, those offices vacated by companies moving into the structure — including advertising agency Hanon McKendry and law firm Miller Johnson — will boost the rate a notch or two, Wisinski-Rosely said.
Growing the “pie tin” of buildings significantly without adding an equal amount of pie, or tenants, could hurt the market, Koster said.
“There’s however much space in these buildings, but the tenants there move from other buildings,” he said. “We grew the market but not the customer base.”
Orion did bring in several clients from outside the downtown area to help fill its Arena Place, including Meritage Hospitality Group corporate headquarters and an office for Atlanta-based Insight Global.
For Orion, it just made financial sense to build new, according to spokesperson Jason Wheeler. He said the opportunities to build new in the city’s core could soon be gone, and clients are driving the projects as they want a new, permanent home designed just for them.
“Oftentimes, the cost of renovating some of the existing office inventory in Grand Rapids’ urban core is unpredictable, whereas new-built office space can be easier to create a budget for, and typically we have less ‘hidden’ costs,” Wheeler said. “Another factor that plays into this is the desire of a client to have state-of-the-art, efficient space they can essentially design and customize to their needs.”
“We’re reinvesting based on faith,” Koster said of CWD’s projects. “Right now, all of our investments have been made on a core belief that Grand Rapids is excellent and will continue to be excellent.”
Wisinski-Rosely said office space preference is ultimately decided by the tenants, and a balance between new build and renovated space is essential.
“Some tenants don’t mind the older buildings,” Wisinski-Rosely said. “Other people want something new and shiny, and that’s not easy to come by downtown.”
Koster expressed some concern regarding construction- and broker-led projects because the fees those companies earn from such projects might trump any issues with types of tenants and the long-term fit for downtown.
While construction can be seen as a positive from outside investors and companies, Wisinski-Rosely said she doesn’t believe new buildings alone will draw people from out of town.
“They’re either coming to Grand Rapids or not,” she said.
As Wisinski-Rosely suggested, a fine balance of new and old space is key to a healthy real estate market, and Wheeler said that balance helps keep pace with similar cities.
“New construction gives us the ability to bring modern architectural elements and features to complement the traditional, existing space in our city,” he said. “We love to renovate and we appreciate the character and quality of our current inventory, but building new brings our image and offerings into the modern age so we can compete with other growing cities for corporations and entrepreneurs re-locating throughout the country that want fresh, new and efficient space.”
Office buildings are “sexy and exciting,” Koster said, but he said the demand is largely felt in the residential market, and that’s where he believes money should head right now. He said he’s working with the Downtown Development Authority to help change the way projects are incentivized by focusing on growth and not shifting existing tenants from one building to another.
He holds out hope the entire downtown will reclaim its vibrancy.
“The north side is coming back. For a while there was a lot happening in the South Arena area, and people forgot what the actual downtown area was. The north side suffered,” Koster said. “You have to have a strong core.”