Office market getting better

April 15, 2011
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A first-quarter report from Colliers International West Michigan showed more activity is going on in the Grand Rapids office market, in both the downtown and suburban sectors, than has been seen in the last few years.

But the report also noted that more office leases and rental proposals were made over the year’s first three months in the Central Business District than in the outlying metro areas. The report indicated that the walkability of the downtown sector, along with the potential live-and-work opportunities offered there, outweighed the additional parking cost that comes with choosing space in a CBD location. Still, both market segments had positive absorption during the first quarter.

“This is the first positive absorption in both suburban and downtown that we’ve seen in years, and that’s quite a turnaround. We will have statistics to show to back up that things are getting better,” said Scott Morgan, a principal at Colliers International/WM who has worked in the local office market for 15 years.

“We’ve been on a downward slide for so long and what we’re really seeing from the street-broker level is a substantial increase in activity. We’re seeing tenants expand their square footage and upgrade their offices from a Class C to a Class B,” said Morgan of the suburban activity.

About 19,000 square feet was absorbed during the first quarter. That may not seem like a lot of space, but put in the proper context, it reflects a shift of roughly 175,000 square feet from the previous quarter, when nearly 155,000 square feet was vacated.

Even with that activity, Morgan thought rental prices would remain depressed or drop a tad over the next two quarters or so. But as he prepared recently to show a client some suburban spaces, he noticed that many of the more notable locations were fuller than a year ago. “It has been absorbed over the last 12 months and it will continue to be,” he said of space in the suburbs, while adding that vacancies will likely continue in the Class C buildings.

“That’s a product that really needs to be renovated and is under a lot of stress. Number one, it doesn’t show very well. Number two, when a product gets to that stage, it’s hard for the owner and the owner’s lender to justify lending money to bring it back up to market. So that’s where the vacancies are going to linger and the rents are going to get more and more depressed.

“I think the good-quality product we’re seeing is really getting people’s attention, and that is going to be absorbed pretty quickly,” he said.

David Wiener, an associate at Colliers International/WM who covers the downtown office market, said even though some hurdles still need to be cleared, he has seen “some nice steady improvement” take place in the district.

“We don’t see it as a blip,” he said. “We feel that we hit the bottom of the market downtown last year, when our rates bottomed out. We’re seeing rates firm up. We’re seeing tenants extend to longer terms.”

Until recently, Wiener said, most deals were for a year, or maybe two at best, even though rental rates were low enough to suggest that a longer lease would be in a tenant’s best financial interest. But he said many company executives didn’t sign longer leases over the past few years because they were uncertain about the economy and nervous about their firm’s future.

“This year, but really starting in the third and fourth quarters of last year, we are seeing tenants lock into 10-year deals — which is what they should be doing because the market is so good,” he said.

A division of the McKinley Group, which is based in Ann Arbor, awarded Colliers International/WM the listing for Bridgewater Place. With 17 floors and 410,000 square feet of space at 333 Bridge St. NW, it’s downtown’s and the metro area’s largest and most lavish office building. GMAC Commercial Mortgage Securities Inc. took possession of the building in late January when it bought the $34 million left on the foreclosed mortgage it had issued to the previous ownership group. A few weeks later, the McKinley Group was appointed the building’s receiver.

Wiener, along with the firm’s Bill Bowling and Chip Bowling, is marketing the structure, which has about 100,000 square feet available. “It is the nicest Class A office building in West Michigan, and I don’t think anyone would dispute that,” said Wiener of the structure’s top-selling point. “In the past, the negative issues on Bridgewater were uncertainty with the CAM (common area maintenance), the triple-net charges — and the other hurdle is it’s on the ‘other’ side of the river.”

But Wiener said the triple-net charges are gone, and the building is being offered on a gross basis, which allows it to be listed like downtown’s other Class A buildings, making it easier for potential tenants to compare Bridgewater with other office addresses. As for being on the west bank of the Grand River, the Collier brokers are pushing the location as an advantage with a view.

At the same time, Wiener didn’t feel it’s more difficult to find tenants for a higher-priced, downtown Class A building than is it for a nicely renovated, but less expensive, Class B building. He said Class A rates have fallen the past few years, making the premium space more affordable. In addition, he said certain tenants, such as national companies and law firms, only want a Class A address.

Wiener said that Smith Haughey Rice & Roegge PC is an exception to his second point: The law firm is preparing to leave the Calder Plaza building for the soon-to-be-renovated Flat Iron structure this fall. But he noted that many of the city’s top law firms, such as Varnum, are comfortable being in Class A space. Varnum has settled into Bridgewater Place.

“At Bridgewater, the two things we’re selling on a positive note is that, one, now it’s listed with a gross rate so it’s listed in the same way as all the buildings downtown, so you can compare it fairly. Second, the location has oodles of parking and is wonderful in-and-out for clients. All the views are great but specifically on the river, and a lot of the suites have little decks facing the river, which is spectacular space,” he said.

For many years, landlords have been forced to offer concessions to tenants, including free rent. But Morgan said that scenario should change as the market continues to absorb more space, and it could change as early as the end of this year for both suburban and downtown property owners.

What may not change, at least not as quickly, is the relationship property owners have had with lenders for much of the last three years.

“They still are having difficult times with the banking environment because appraisals of almost any building are still going to be down — probably many below what the loan value would be. That really causes a lot of owners and landlords to lose sleep at night. That’s an ongoing issue, especially when a landlord has to rely on their bank to give them a loan so they can get a new tenant,” said Morgan.

“Right now, for national tenants, we’re seeing the national brokers ask for some kind of a letter from a lender to prove that owners have the ability to fund tenant improvements, pay commissions and be there for the long haul. That’s probably difficult for some owners to get from a bank right now.”

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