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Monday, 15 April 2013 15:49

Positive momentum bolsters downtown real estate market

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99 Monroe, downtown Grand Rapids 99 Monroe, downtown Grand Rapids MIBIZ FILE PHOTO

The deal momentum from the end of 2012 gave the downtown commercial real estate market a strong start for the first part of 2013.  

Vacancy rates for office and retail space in the city are down and activity levels in both sectors have brokers bullish on the progress of downtown, according to a new market report from brokerage firm Colliers International.

Activity in the West Michigan office market saw 50,641 square feet of new absorption in the first quarter of 2013, according to reports from Colliers. The downtown and central business district accounted for approximately 11,381 square feet of that figure.

The numbers are a modest improvement over total office absorption of 49,026 square feet in the fourth quarter last year, but the new data also marks nine straight quarters of positive absorption.

“We’ve seen increased activity in leasing, and there are more people looking for downtown office space,” said Jeremy Veenstra, a broker with NAI-Wisinski and leasing agent for the Waters Building in downtown Grand Rapids. “Clients are still moving laterally to more maintained buildings, and that’s pushing lower-end Class B and Class C building owners to spend on capital improvements.”

Brokers say the supply of desirable space is diminishing and property owners are pushing up rates, which means companies looking to trade up offices at a discount won’t be able to do so for much longer. In fact, that wave is almost over, according to some brokers.

They say that if landlords and owners of struggling properties failed to invest the cash necessary to make capital improvements, tenants likely left in favor of newer or rehabbed spaces.

Going forward, those owners of less-desirable or dated properties who haven’t made any capital improvements could find themselves behind the curve, Veenstra said.

There is still plenty of room in the downtown office market, but a lot of the available space needs a solid facelift, Veenstra said. Vacancy rates in the central business district and greater downtown are hovering around the 21-percent mark, according to the Colliers report.

Based on the recent attention of the national press on Grand Rapids, more eyes are looking for deals. While buyers are still active in the market, they are now faced with a limited supply of Class A inventory, Colliers reported. This is especially true downtown where most of the buildings have already been acquired, leaving little space available for purchase, the report continued.

The attractiveness of downtown is also luring tenants to renew and extend leases. Following on the lease of more than 38,000 square feet in Bridgewater Place to Spectrum Health, the first quarter saw a 26,000-square-foot renewal by Comerica Bank in the newly upgraded 99 Monroe building downtown.

“This is where companies want to land,” Veenstra said of the city’s business district.

As for new office construction, Veenstra said it is probably still a ways off. While rates are going up and landlords are making fewer concessions, the expense of new construction isn’t completely justified yet, he said.

“I think we’re just on the front end of increased leasing activity. We need to sustain that to keep growing,” he said. “There are some large chunks of space still available. Once those get filled up, I think we’ll see developers starting to look more seriously at new projects.”

In the retail segment of downtown, activity kept pace through the previous quarter, but buyer activity slowed as both investors and owner-occupants searched for suitable space, according to the Collier’s report. The popular suburban retail corridors including 28th Street SE, East Beltline Avenue NE, and the Rivertown and Alpine corridors continue to draw potential retailers away from the downtown, the report concluded.

Overall rental rates across the entire retail market are pushing upward toward an average of $11 per square foot, with occupancy rates hitting roughly 90 percent.

While the downtown has captured a handful of national retailers like Bagger Dave’s, Panera Bread and others, brokers say the area still needs more known national stores to raise its standing and attract other outlets to the market.

“We’re probably going to see more restaurants, but we’ll likely get more hard goods stores as time moves on,” said Earl Clements, retail principal with Colliers.

Downtown Holland in West Michigan and Birmingham in southeast Michigan are two places that succeeded in attracting recognizable national brands, he said.

For Grand Rapids, the problem with attracting new retail to the downtown is rather straightforward, according to Colliers: The demographics aren’t strong enough, there are few stores – and especially hard goods retailers – that have made the leap, and space is limited for users who have very specific needs.

But that situation could change as the right conditions draw more national chains to the central business district, the Colliers report concluded.

SIDEBAR: EIGHT DOWNTOWN PROJECTS THAT MATTER

 

99 Monroe

  • What: Chicago-based real estate investment group Franklin Partners LLC bought the dated downtown property in June 2012 for $11.8 million. The firm is in the midst of a multi-million dollar renovation to modernize the building.
  • Why it matters: The purchase marked Franklin Partners’ first foray into downtown commercial real estate and was the tip of the iceberg for new investor deals in the city. Previously, the firm’s West Michigan activity had only focused on the industrial sector. The company’s principal, Don Shoemaker, said he has further interest in properties in the downtown.

 

Bridgewater Place

  • What: The city’s largest class A office building was sold to California-based Hertz Investment Group.
  • Why it matters: Hertz’s portfolio contains primarily multi-story class A office and mixed-use properties in second-tier markets across the country. The deal for Bridgewater typified the hype of brokers claiming more outside investors are paying attention to the Grand Rapids market.

 

Morton House

  • What: The historic hotel property most recently used for Section 8 housing is now under the control of Rockford Construction and RDV Corp. The companies entered a partnership to buy the 13-story property in June 2011.
  • Why it matters: After a long spell of not contributing any property taxes due to its status as Section 8 housing, the building is back on the tax rolls and its value is expected to rise even further. Planning is underway to turn the building into approximately 100 market-rate apartments. With rentals in short supply downtown, the companies are hoping to capitalize on the perceived demand.

 

Waters Building

  • What:  The property, now in receivership, is one of the largest historic office properties in the heart of the city. The building is now controlled by Friedman Real Estate Solutions Inc. of Farmington Hills.
  • Why it matters: The property’s value took a huge hit during the recession, which forced former owners Three Oaks Group of Ann Arbor to lose the building. The firm told MiBiz it purchased the property for $27 million in 2006, but the facility was appraised last year for just $12 million.

 

2 East Fulton

  • What: Locus Development owns the long-vacant property at the intersection of Division Avenue and Fulton Street. The firm purchased the building from Mercantile Bank last year with the intent of renovating and leasing the space.
  • Why it matters: After a drawn-out development process, the building is finally on its way to seeing better days. Kalamazoo-based architecture firm TowerPinkster, which was contracted to design the renovated space, recently signed a 10-year lease for the 7,500-square-foot upper level.

 

Trade Center Building (50 Louis)

  • What: Development partners Sam Cummings, Scott Wierda and Dan DeVos of CWD Real Estate purchased the red brick building in March of last year. After some renovation and façade improvements, the firm announced that new tenant Start Garden would anchor the building.
  • Why it matters: The purchase is one of many recent CWD moves in the downtown area. Other property acquisitions include The Leyard and Trust buildings, both undergoing renovations similar to the Trade Center building this year. A speculative future development on the corner parking lot adjacent to the Trade Center building was proposed by the firm; however, no further plans to move forward on the project are known.

 

38 Commerce

  • What: The property is a rather recent addition to the Grand Rapids office and residential market. Plans for Locus Development’s $26 million project kicked off in 2008 and were finished in 2011. Thirty-Eight, as it’s known, is in the Heartside district just south of the city’s core business district, an area that brokers and developers say holds future potential.
  • Why it matters: The building was sold in March for an undisclosed price to MP1 LLC, an investment partnership between local investors and Maplegrove Property Management of East Lansing. The deal indicates that the transaction momentum in late-2012 for class A mixed-use property is carrying over into the early part of this year.  Thirty-eight is Maplegrove’s second investment in the West Michigan area, according to previous reports. There is 3,900 square feet of first floor retail space along with 12,000 square feet of office space still available that Locus Development continues to own.

 

McKay Tower

  • What: A Grand Rapids landmark, the 18-story property was sold last May for $10.5 million to Steadfast Property Holdings LLC, an investment company operated by the Borisch family, founders of Borisch Manufacturing Corp.
  • Why it matters: Another example of a historic property changing hands, McKay Tower is currently undergoing interior and exterior renovations under the new ownership. Steadfast is dropping approximately $1 million into renovating the second floor — the former Grand Rapids National Bank lobby — into a ballroom to rent for weddings and parties. The installation of new elevators is also underway. Renovations to the building’s 15th floor apartments are also taking place. The owners expect work to finish by next year.

 

 

Read 2582 times Last modified on Monday, 15 April 2013 16:12
Elijah Brumback

Staff Writer

ebrumback@mibiz.com

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