Office activity up but so is vacancy rate

April 15, 2011
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CB Richard Ellis/Grand Rapids found an increase in office activity and a growing confidence that the real estate segment was improving at the end of last year.

At the same time, the commercial real estate firm warned that local companies may continue to reduce their footprints as a way to lower operating expenses, and without significant job growth, vacancy rates could rise when leases roll over.

Despite reports of more activity and confidence in the market, the vacancy rate grew in 2010 to 23.3 percent for the entire Kent County market, which is up from 21.9 percent in 2009. The downtown office market ended last year with vacant spaces accounting for nearly 20 percent, while the suburban market reached 25.5 percent.

CBRE/GR said roughly 249,000 square feet, or 1.5 percent of the total market, was vacated in 2010. No new office construction was being built in a market that has 16.2 million square feet of total space.

Not counting medical-office space, which accounts for 9 percent of all space, Class A space had an average vacancy rate of 23 percent, Class B space averaged 23.2 percent, and Class C space was 37.3 percent vacant.

The vacancy rate for Class A medical space was 7.1 percent, while Class B medical space was 16.9 percent. Class A space makes up 62 percent of the medical-office segment.

“Rental rates have remained varied and largely flat, with some decreasing slightly. Significant concessions are available in most all buildings, often in the form of free rent,” wrote Jill Langosch, CBRE/GR vice president of research, in the firm’s MartketView office report.

Still, Langosch indicated the market could swing toward landlords for the first time in years.

“The key to office recovery is tenant demand, as new supply is nonexistent. With corporate profits and productivity at their peak in the fourth quarter of 2010, job growth is imminent, and this will, in turn, fuel absorption of both shadow and vacant space,” she added.

Langosch said a supply-side concern could replace the current demand-side concern, possibly beginning later this year. The factor that could change the market’s tone might come from large users wanting leases in buildings with available adjoining space.

“With no new supply and moderate demand, the next few years will see falling vacancy rates and rising rents,” she said. “Tenants that were looking to ‘blend and extend’ will see the market power slowly shift back to landlords.”

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