Construction is ongoing in Grand Rapids for the Studio Park project, which includes a movie theater, hotel, retail, residential units and a parking ramp. Construction is ongoing in Grand Rapids for the Studio Park project, which includes a movie theater, hotel, retail, residential units and a parking ramp. PHOTO: NICK MANES

Developer cancels downtown GR office project amid low demand

BY Sunday, October 28, 2018 03:56pm

 

GRAND RAPIDS — With minimal “velocity” in the West Michigan office market, Franklin Partners LLC has backed away from plans to construct a $30 million, 100,000-square-foot glass and steel office project on the south end of downtown. 

The Grand Rapids and Oak Brook, Ill.-based real estate development and property management firm confirmed to MiBiz that it was abandoning plans to build a new seven-story office building as part of the mixed-use Studio Park development south of Van Andel Arena. 

Franklin Partners Principal Don Shoemaker said the firm approached a wide variety of large suburban employers across the region, expecting that they’d jump at the opportunity to lease space in a modern, Class-A office building. 

“We didn’t really gain any traction,” Shoemaker said, adding that he thought West Michigan firms would follow the trend of multiple large suburban Chicago companies in seeking out urban office space. “It led to very few second conversations. I’m a little surprised.” 

Shoemaker added that the project did receive some interest from existing downtown tenants, but those deals didn’t come together. 

MiBiz first broke news in February of the proposed new office building at Studio Park. 

It’s unclear what the termination of Franklin Partners’ option at the Studio Park project means for the broader development, much of which is under construction and set to consist of a movie theater, hotel, retail, residential units and a parking ramp. 

Executives with Jackson Entertainment LLC, the project’s primary developer, did not respond to a request for comment. 

News that Franklin Partners — known for its successful renovations of aging office buildings in downtown Grand Rapids — had scrapped plans for its first new office building in the market comes as other local developers continue to express reservations about the region’s office sector. 

“I don’t see a lot of vacancy, but I also don’t see a lot of demand,” said John Wheeler, president of Orion Real Estate Solutions LLC, adding that he envisions the need for new office space locally at some point in the future. 

Wheeler’s company, the real estate development arm of Grand Rapids general contractor Orion Construction Co. Inc., currently is building a new office building in downtown Grand Rapids set to open next year with space for Warner Norcross + Judd LLP and Chemical Bancorp., as MiBiz previously reported. 

The concerns over the downtown market come as office rents have started to cool down across the region, according to a recent report from Jones Lang LaSalle Inc. (JLL), a commercial real estate brokerage. 

With minimal sales activity and a likely vacuum coming in the near future as firms like Warner Norcross prepare to exit their aging space, downtown Grand Rapids office rents had leveled off at an average of around $20 per square foot gross, according to the report. The region’s office vacancy rate stands at approximately 10 percent. 

The JLL report — published prior to Franklin Partners announcing it was scrapping its office plans — noted that the project likely would have driven up asking rents for downtown office space. 

To build the building he envisioned, Shoemaker said he was targeting rents of around $38 per square foot, noting that the cost could have dropped slightly with fewer amenities. 

“There’s a flight to quality, there’s just not a lot of velocity,” Shoemaker said. “I think I let (the) Chicago (office market) influence me too much.”

Observers of the region’s office market note that while plenty of activity continues to shape up, the office sector is unlikely to be a large driver for growth in West Michigan’s commercial real estate industry. 

“I think you’ll see some movement, but I don’t think you’ll see much growth,” said Jeff Karger, a senior vice president in JLL’s Grand Rapids office. “I don’t think it will go backwards either. I think it will just be slow and steady.”

CWD Real Estate Investment Inc., downtown Grand Rapids’ largest office landlord, also has office renovations underway or planned in its pipeline, but it’s unclear if the firm has tenants signed for those spaces. Sam Cummings, the firm’s managing partner, did not respond to a request for comment at the time this report went to press. 

Franklin Partners’ difficulty in securing tenants is similar to the situation SIBSCO LLC faced in 2016 when it killed plans for a 12-story office building along South Division Avenue just south of Fulton Street.

“There’s a reason not much Class A space is being built,” developer Charlie Secchia said at the time. He cited the high cost of new construction, high rents and the difficulty in securing tenants for unbuilt buildings as ultimately dooming the project. 

The Secchia family real estate company currently is moving forward with scaled-back plans for a mixed-use project on the site with 22 apartments, onsite parking, six townhomes and 2,200 square feet of ground-floor commercial space.

Seeking big fish

West Michigan real estate industry insiders have long wondered when one of the region’s larger employers with a headquarters in the suburbs would make a significant jump into the central business district. 

“That’s the question I’ve been asking myself since I got into the business,” Wheeler said, noting that the city’s income tax and lack of free, available parking continue to serve as a hindrance for poaching large employers from the suburbs. 

“(The suburbs are) convenient for their workforce, but that model has changed considerably,” Wheeler said. “Twenty years ago, downtown Grand Rapids was not the place to be, not even close. But today and looking into the future, downtown Grand Rapids is the future and I think there are companies that are considering moving into the core.” 

While large corporate users like McDonald’s Inc. and Walgreen Co. have uprooted themselves from Chicago’s suburbs and Chemical Bank recently announced plans to move 500 employees from Midland to a new building in downtown Detroit, sources say that West Michigan’s culture and the convenience factor still keeps many large office users in the suburbs — at least for now.

“I think (the culture) will change … and we’ll try this again at another site in downtown Grand Rapids,” Shoemaker said. “I don’t see any negatives in the market. There’s just not a ton of velocity.” 

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