Office market may be recovering

October 9, 2011
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According to commercial real estate firm CB Richard Ellis of Grand Rapids, the local office market is going through a few subtle, but important, changes that just may lead to a long-awaited recovery.

Although the vacancy rate stood at 22 percent at the second-quarter mark, the CBRE/GR MarketView report indicated that long-term leases were returning, having begun a comeback six months earlier. At the same time, landlords also raised improvement and build-out allowances for tenants. Both changes mark a turn in the office market, which has about 16 million square feet of space in the metro area.

“During the past few years, landlords and tenants alike focused on short-term lease agreements and renewals citing a lack of predictability in their operations. During the recession, few tenants opted to lock in the aggressive rental rates and concessions offered during lease negotiations with long-term lease agreements,” wrote Jill Langosch, vice president of research for CBRE/GR, in the report.

But Langosch also pointed out that even though lease activity has picked up and terms have gotten longer, neither of those positive moves have done much to fill the surplus space because tenants are continuing to downsize and now need fewer square feet. This movement has been a plus for architects.

“Companies are actively looking to downsize their footprint, and shared space, remote work and mobility all offer opportunities to save on occupancy costs while increasing productivity,” she said. “Many times office renewals and relocations are excellent opportunities to commission architectural drawings to show how tenants use their space.”

Langosch offered Smith, Haughey, Rice & Roegge as her downsizing example. Even though the law firm is growing, it traded in its 32,000-square-foot, Calder Plaza space for 27,000 square feet in the Flat Iron Building. Other recent shifts in the downtown market had Deloitte moving from Bridgewater Place to 38 Commerce SW and BDO relocating from Campau Square Plaza to the Chase Building.

“It is important to mention another continuing trend in the market: properties going back to the lender,” said Langosch.

The state’s new 6 percent business tax, which replaces the Michigan Business Tax on Jan. 1, could have a positive effect on the office market, as well. That’s because total business taxes will drop by an estimated 86 percent starting next year, which will free up company revenue for other things.

“In summary, office fundamentals indicate we are getting closer to a recovery phase,” said Langosch. “We are not forecasting a robust or swift recovery. Rather, we expect the recovery will continue with positive growth, though not necessarily consistent from period to period.”

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