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Perrigo Co. plc’s headquarters in downtown Grand Rapids will open 70,000 square feet of leasable office space. Perrigo Co. plc’s headquarters in downtown Grand Rapids will open 70,000 square feet of leasable office space. COURTESY RENDERING

‘Employee-driven market’ stalls commercial office leasing, investments

BY Sunday, November 07, 2021 06:50pm

West Michigan’s commercial office market is in a lull as companies remain hesitant to bring back workers while offering more flexible schedules, leading to worsening vacancy rates and a lack of investment in new construction.

Jeff Karger, senior vice president of JLL Inc., said the ongoing risks of COVID-19 and employers struggling to stay fully staffed are contributing to the office space uncertainty.

“It’s an employee-driven market right now, so there is still a need to give employees options on how they work and where they work. That is going to be prominent moving forward,” Karger said.

He also sees ongoing “shadow vacancy” in which companies are leasing space but employees are working from home, particularly in downtown Grand Rapids.

The majority of third-quarter office transactions in West Michigan were made up of lease renewals and smaller, shorter-term deals, according to JLL’s recent office insight report. Overall vacancy ticked up slightly to 11.9 percent in the third quarter. 

Market-wide average asking rents, which plateaued and stalled during the pandemic, are now on the decline by 90 basis points year-over-year to $18.79 per square foot, according to the JLL report. The overall amount of occupied office space is also shrinking as year-to-date net absorption levels are at negative 113,181 square feet, according to JLL.

Karger said he has seen some companies choose to downsize their office footprint when their lease comes to an end, while Grand Rapids’ suburbs are seeing net positive absorption levels compared to downtown. 

“There is a slight migration out of downtown to suburban areas for a few companies, which is something new in the last quarter or two,” Karger said. “I think it might be short-term, but it is a quantifiable amount.”

JLL’s quarterly report notes the construction of the new Perrigo Co. plc headquarters in downtown Grand Rapids that will open 70,000 square feet of leasable office space, as well as Spectrum Health’s eight-story office tower in the Monroe North neighborhood that will create vacancies elsewhere as the health system consolidates office workers.

“While transaction volume is down, there has yet to be a significant exodus from the market by office occupiers,” according to the JLL report. “Spectrum Health’s upcoming consolidation will create significant vacancies to be backfilled in the Downtown submarket, perhaps at a discount given the rent and concession trends we are seeing.”

Construction activity

Commercial real estate lenders are also seeing a stagnated market for new office construction in West Michigan, and experts are skeptical about the full return of office activity. 

“It surprised me a bit that some professional services companies and even banks are returning fewer people to their offices,” said Mike Chaffin, senior commercial banking executive at Fifth Third Bank in Grand Rapids. “I think the new normal will be that a decent percentage of the population will be remote from now on.”

He added that property retrofits are primarily driving the office construction market.

“As far as construction goes, it’s more retrofitting an older property to change the usage,” Chaffin said. “The people who have vacancies out there are doing all they can to market or support it, but as a general rule, I think everything is going to be on hold until we understand how this will all be settled out. It’s a shift and a little bit scary when you think about once this all settles down, how much vacant office space there could be.”

The “sweet spot” for office space needs right now is 2,500 to 4,000 square feet, which gives most companies the ability to let employees work in the office a couple of days a week if they choose, said Joe Elias, chief operating officer at Red Oak Capital Group LLC

“You’re seeing smaller office footprints, and maybe a day or two a week of people coming to the office just enough to keep company culture,” Elias said. 

The appetite for lending in Grand Rapids right now is for multifamily and industrial projects, Elias said. He also noted warehouse conversions, particularly light industrial and former offices near the Grand River in downtown Grand River, into multifamily housing.

Rehabbing office space — mostly converting space from bigger to smaller suites — is currently the primary driver of office lending, Elias said. 

Perhaps following trends in other markets, owners of vacant office space are “definitely running the numbers” on potentially converting offices into new uses such as residential, Karger said.

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