GRAND RAPIDS — Offering shorter lease terms and increased flexibility to tenants may seem counterintuitive to executives in the office development and property management sector.
But increasingly, stakeholders say providing tenants with more options can help bring stability for landlords in the long term.
For Grand Rapids-based Rockford Construction Company Inc., the company offers the flexible plans to help smaller tenants grow, with the goal that they will eventually move into larger spaces as needed, said Mike Mraz, managing partner of real estate development.
“Offering flexibility in lease terms, when available … allows our tenants to grow and be successful without being constrained to a space that may not suit their needs,” Mraz said in an email to MiBiz. “We are able to build a relationship with them during the early stages, and ultimately find them a space that will work long term. This helps our portfolio in that we build and maintain loyal clients. It’s a win-win for everybody.”
In partnership with Holland-based furniture manufacturer Haworth Inc., Rockford Construction developed and operates the eight-story Blue35, an office and co-working building at 35 Oakes St. SW in the Heartside neighborhood of downtown Grand Rapids.
The facility offers a variety of leasing scenarios, Mraz said. Although the office space in Blue35 is currently full, the partners designed the facility to offer a mixture of open co-working and shared workspaces, as well as private offices of various sizes and conference facilities. Tenants can lease whole floors, if needed.
“We try to be as creative as we can with the space we renovate to users’ needs and also fit them for the long term,” Mraz said. “We do have companies that experience significant growth in a short period of time. The typical leasing model is challenging for them.”
In the Grand Rapids market, most office lease terms range from three to seven years, said Blake Rosekrans, an associate office adviser at CBRE | Grand Rapids, a commercial real estate brokerage. For startups that might not know how many employees they’ll have in a year, such lengthy leases can pose a challenge, he said.
That’s why Rockford Construction leases desks at Blue35 by the day, week or month, or longer, Mraz said, noting the developer modeled the project after its MoDiv retail incubator at the corner of Monroe Center Street NW and North Division Avenue in downtown Grand Rapids. That project offers short-term leases for retail tenants to test the waters for a bricks-and-mortar store, as well as helps grow the central business district’s retail sector, he added.
BUILDING A COMMUNITY
Blue35, which opened in 2014, is one of a growing number of co-working or shared office providers in downtown Grand Rapids. For example, Worklab by Custer, a facility operated by office furniture dealer Custer Inc., also opened in 2014 in the renovated 99 Monroe building.
However, co-working space in downtown Grand Rapids actually dates back to 2009. That’s when Aaron Schaap, founder of web development firm Elevator Up LLC, moved his co-working space dubbed The Factory from Zeeland to the fourth floor of the building at 38 West Fulton St.
Schaap acknowledged that all of the co-working facilities aim to offer flexibility and the ability to let workers rent the space for a term that fits their needs. However, Schaap thinks The Factory stands out because it brings professionals from a variety of sectors together to work in a shared, communal environment.
“A lot of times, people look at co-working through a real estate lens and they think it’s (about) packing a bunch of people in a small amount of space and make some more money,” Schaap said. “They have no idea what co-working is, so they fail really quickly.
“I think why The Factory has been successful is it has relatively nothing to do with real estate and all to do with community. From a co-working perspective, we’re all doing our own separate things, but it’s boring to work from home or from a coffee shop.”
While the capacity for co-working has grown in Grand Rapids, the city still lags far behind some of the nation’s largest metro areas in terms of adapting to the co-working trend.
According to research from commercial brokerage Jones Lang LaSalle Inc. reported in Bisnow, co-working facilities now make up 1.8 million square feet of Washington, D.C.’s leased office space. If the current trends continue, that number could grow to 13.5 million square feet of space by 2021, according to the report.
Similarly, WeWork Cos., the rapidly growing New York City-based brand of co-working and shared office spaces, reached a reported valuation of approximately $16 billion, making it one of the world’s most valuable startups, according to a Wall Street Journal report.
While Grand Rapids may not be the typical market a company like WeWork would target, local industry sources say generational trends and a more mobile workforce should continue to make co-working or shared office space a growth sector.
“I think it definitely can grow and I’m kind of surprised it hasn’t yet,” The Factory’s Schaap said of the West Michigan co-working market.
Co-working and shared spaces do lead to higher cost-per-square footage for tenants, but the upside for them comes in having pre-furnished offices that tend to be equipped with most-needed supplies, as well as amenities like kitchens and conference facilities — even workout space.
“The biggest advantage of co-working is the term you have to commit to,” Rosekrans said. “On a price-per-square foot basis, it’s more expensive but it allows ultimate flexibility. You get all the little things that companies that take on office space might not think of.”
The need to provide the added amenities led one of the largest downtown Grand Rapids development and office management firms to hold off for a while on offering co-working spaces, despite the upside of charging higher rents.
“In our market, we’ve found (that co-working) is very capital-intensive,” said Sam Cummings, managing partner of Grand Rapids-based CWD Real Estate Investment Inc. “You need to provide the environment and the furnishings. It’s tough to do.”
Instead, CWD has offered smaller, single-occupancy private offices across its eight-building downtown portfolio, Cummings said. That’s led CWD to be able to take on small startup firms who require minimal space and then provide them with larger office options as they grow, he added.
With a handful of proposed office developments slated for the downtown core, it’s not clear when or if more co-working and shared work spaces could be added to bolster capacity.
But for Cummings, whether the added capacity comes in the form of co-working space or more traditional offices, the Grand Rapids market should be attractive to more companies seeking space.
“Our office rates are dramatically lower than even Ann Arbor, and that gives us a lot of security,” said Cummings, adding that West Michigan isn’t prone to the extreme swings often felt in larger markets. “Our market represents a lot of value.”