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Sunday, 29 May 2016 11:19

$50M in deals for two office buildings not the norm in downtown GR

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Two newly renovated office buildings in Grand Rapids’ central business district each fetched hefty price tags when they sold earlier this year. However, commercial real estate brokers say that with the amount of renovation work that can still be completed, they’re not expecting many more sales in the downtown market. Two newly renovated office buildings in Grand Rapids’ central business district each fetched hefty price tags when they sold earlier this year. However, commercial real estate brokers say that with the amount of renovation work that can still be completed, they’re not expecting many more sales in the downtown market. Courtesy Photo

GRAND RAPIDS — Commercial real estate brokers say the sale of two fully-leased, recently renovated office buildings in downtown Grand Rapids points to a healthy local economy, even if the transactions are far from the norm. 

The buildings in question — 99 Monroe Ave. NW and 25 Ottawa Ave. SW — netted Naperville, Ill.-based Franklin Partners LLC approximately $50 million. 

According to Kent County property records, 99 Monroe sold for $31.95 million, while 25 Ottawa fetched $19.55 million. The sale prices were roughly three times what Franklin Partners paid for each building when they were acquired in 2012 and 2014, respectively. 

Local real estate industry executives think those are fair prices for the projects. 

“Simply put, when you have two strategically located buildings like those two where owners have put in money and they’re fully-leased … — with the tenants they were leased to — they were super-attractive,” said Jason Makowski, a principal and office adviser at NAI Wisinski of West Michigan, with a focus on the downtown Grand Rapids market. 

“It’s simple math at the end of the day,” Makowski said of the prices paid for the two buildings. 

Neither Makowski nor anyone at NAI Wisinski were involved in the transactions. 

MiBiz first reported on the transactions when they occurred in February, but at the time, all parties declined to discuss any terms of the deals. Even now that details of the transactions have been made public, executives from both Catalyst Development, which bought 25 Ottawa, and Vision Real Estate, which acquired 99 Monroe, declined to talk specifically about the acquisition costs, citing privacy. 

While the sale prices represent a premium over what Franklin Partners paid, brokers involved in the deals quickly downplayed the amount of money invested in the transactions. 

“Franklin Partners and Colliers don’t always look for the highest price when it comes to finding the right investors for our region,” Duke Suwyn, chairman and CEO of Grand Rapids commercial brokerage Colliers International West Michigan, said in a statement to MiBiz. “We want to empower companies within our market and we want a positive impact on the community, which may mean focusing on the best buyer, not necessarily the highest price.”

Suwyn was one of the Colliers brokers involved in the transactions. 

Knowing that his investment partners hoped to see good returns from the two projects they’d helped to support, Franklin Partners principal Don Shoemaker said that finding the right buyer for each building was critical. 

“We cared as much about who we sold it to,” he said. “We wanted to make sure we left the tenants in good hands.” 

Franklin Partners will now turn to other renovation work in and around downtown Grand Rapids, particularly for the Keeler Building at 56 North Division Ave. and the Display Pack Inc. building at 1340 North Monroe Ave., Shoemaker said. 

Both buildings are expected to be converted to office space. 

MAKING A MARK DOWNTOWN

For the new owners of the two buildings sold by Franklin Partners, executives say their work now turns to customer service and finding new methods to improve the tenant experience. 

“The only changes we would consider making would be ways to improve services and amenities for our tenants,” Tim Engen, president of Vision Real Estate, said in an email to MiBiz.

Likewise, Patti Owens, vice president and managing partner of Catalyst Development, said her firm was implementing new security features such as key card access and cameras. 

Two ground-floor spaces totaling approximately 7,200 square feet remain vacant at the 25 Ottawa building, with tenants expected to be announced later this year, Owens said.

Both buildings feature amenities typical of Class A offices such as on-site restaurants and fitness centers, as well as common areas and meeting space. 

Executives from Vision and Catalyst said separately that they viewed their purchases as an opportunity to make a mark in the growing Grand Rapids market.

Vision Real Estate, which formed earlier this year, manages and owns a handful of smaller buildings, although 99 Monroe is by far the firm’s largest asset. 

On the other hand, Catalyst Development owns or manages more than 1 million square feet of real estate, largely in the Kalamazoo market. Owens said 25 Ottawa makes for the company’s first step into the Grand Rapids market.

“The Grand Rapids market is unique in that there a few large players who own the bulk of the buildings, but the community has been warm despite us being outsiders,” Owens said. 

ROOM FOR MORE

In general, brokers remain bullish on the office market, particularly in Grand Rapids’ central business district and its adjacent neighborhoods, where multiple buildings are undergoing renovations and transitioning to Class A space. 

The central business district and the broader downtown market boast an occupancy rate of around 90 percent, according to a first quarter 2016 report from Colliers. 

According to Makowski of NAI Wisinski, lease rates for downtown Class A space are in the range of $20 to $25 per square foot, modified gross, meaning tenants are responsible for utilities.

Additionally, Makowski said he believes Franklin Partners’ recent sales are the exception and not the norm given the current market in downtown Grand Rapids.

“I wouldn’t anticipate you’ll see many sales over the next few years,” Makowski said. “Vacancy rates are creeping downward and downtown has been kind of a gold mine for leasing activity.”

Despite the high occupancy rate, new construction has shown mixed results so far. 

The new mixed-use Arena Place development began to open its leased office space in early May However, the backers of a proposed office tower at 12 Weston in the Heartside neighborhood of downtown Grand Rapids told MiBiz they placed the project on hold and likely would convert their plans to residential use. 

Commercial real estate executives frequently cite the high cost of construction as an impediment to new development and note it can prove difficult to attract potential tenants to unbuilt buildings. 

Still, others like Shoemaker at Franklin Partners say the market can bear additional supply of high-quality, amenity-driven space, particularly because employers view it as a talent attraction tool. Franklin Partners is simply pursuing that business via renovations, not new construction. 

“There continues to be job growth,” Shoemaker said. “As downtown employers see it as more of a recruiting tool, there will be more companies downtown. I don’t see that slowing down.” 

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