Sluggish Economy, Changing Uses Affecting Downtown Office Market

May 9, 2003
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GRAND RAPIDS — Of the 77 office structures in the downtown district, 36 of those buildings have a higher occupancy rate today than at this time last year.

And while it’s true that a few of those gains were as sliver-thin as six-tenths of a percent — increases that surely won’t make their landlords’ IRAs bulge — some owners actually did fill some major space over the past year.

In fact, according to the latest Building Owners and Managers Association Occupancy Survey, a dozen buildings of various sizes bumped their rate by better than 20 percent from last year.

In turn, 20 buildings lost tenants from 2002 and 21 remained unchanged. The latter figure matched the overall downtown market itself, which had an 84 percent occupancy rate that was almost identical to last year’s figure.

So what do the findings mean for the central business district?

For building owner David Cassard, Waters Corp. president, the BOMA results show the downtown office market as sliding sideways. Cassard said a soft economy was one reason for the horizontal shuffle. Another? The market is slowly transitioning from one use to another.

“One thing that may not be that readily apparent in the numbers is, there is a trend toward some of the buildings that have been in the occupancy survey historically are being adapted to different uses besides office space,” he added.

Cassard, who directs activity at the Waters Building on Ottawa Avenue, is right. Some strictly office buildings, such as the People’s Building, are converting at least a portion of their space to housing, and Cassard felt those moves would continue this year and maybe into 2004. Changing a building’s clientele from businesses to consumers, of course, alters the downtown portion of the office survey.

“In a way, that is kind of like absorption because it helps to reduce the inventory of space that is out there competing,” he said. “But, all in all, I think the market has kind of gone sideways because demand has not been very strong.”

Sam Cummings, president of Second Story Properties, which has a handful of renovated office buildings downtown, said his occupancy rate was in sync with the survey’s finding. A few of his properties, such as the nearly full Brass Works building, have a higher rate, while others are below the occupancy average for downtown.

“We’ve had a steady stream of new candidates. Certainly not a flowing stream like it was a few years ago. But we’ve been able to put a couple of deals together. And we’ve had some folks move and some folks go out of business, as well,” said Cummings.

“But, overall, our occupancy has been stable.”

Another factor Cassard raised is that sometimes statistics don’t tell the whole story. One key to his claim is, it’s not always clear how each building owner defines occupancy. Some might consider space available for sublease as occupied, while others might list it for lease.

“Technically, it’s occupied in the sense that the landlord is collecting rent on it. But in essence, that space is still out there competing. So frankly, I really don’t know whether the statistics accurately reflect all that space,” said Cassard.

“I think BOMA tries to get landlords to report that consistently, but I’m not sure how consistently they do report that. I think it can be a little misleading and there may actually be more space out there competing than what the numbers show.”

Second Story has two subleases that it receives rent for but are empty, and Cummings said those spaces belong on a competitive listing for the market.

“When you’re trying to fill a space, a vacant space vs. a sublease, you’re still going head-to-head with that. And in some cases, the person that is subleasing the space may be a little more aggressive in discounting what they’re paying,” he said.

“As opposed to paying the full amount of rent, they may discount it and agree to accept X as opposed to paying Y over the remaining term of the lease.”

The BOMA survey also reported that tenants are still in the driver’s seat, and not just for downtown but throughout the metro market. Companies that don’t have specific needs in an office setting can ask for concessions and are likely to get at least a few from a landlord.

Cummings agreed and said his firm has had to be a bit more creative when Second Story presents a deal to a potential tenant.

“We have given them a little more build-out and have given them some free rent up front to induce them to rent. I would say those things are consistent with what I’m experiencing,” he said.

The survey said that trend, which has been going on for three years, was likely to persist for the rest of this year. Cummings also sees that trend continuing this year.

“I would say yes. It’s sort of a lagging indicator.”

But Cassard pointed out that firms with very precise needs aren’t as likely to get many allowances because they face limited choices. He used Standard Federal’s move to the Trust Building as an example of restricted options, as there weren’t a lot of structures that could accommodate the lender’s need for a large downtown space.

“You can still find situations where the unique business model of a tenant may say that they need a particular location or type of space and you can still have a fairly short supply of a given kind of space sometimes,” said Cassard. “As for the general rule, though, I’d say the survey is accurate.”

Although the occupancy rate for 2003 is much the same as 2002, the current number is 3 percent higher than it was five years ago. In 1998, office buildings in the downtown sector were 81 percent filled. In 1999, the rate was 84 percent.

But in 2000, BOMA redrew the district as downtown expanded. The new sector grew from 4.2 million square feet to 5.5 million, and its first occupancy rate was 86 percent.

“It’s been a fairly balanced growth. Demand for space and the supply of space have kind of grown together so the overall occupancy rate hasn’t changed dramatically over that time period,” said Cassard. “At least it hasn’t gone the other direction. Compared to other cities, we’re probably in pretty good shape.”

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