Large amounts of new office space, particularly for medical uses, will come online in suburban Grand Rapids in the near future, and it’s not expected to last long on the market.
Commercial real estate experts say there’s pent-up demand by a number of users, meaning absorption of the space is likely. However, the availability of new space creates a number of issues for investors and landlords who need to decide whether to pay now or pay later to upgrade their facilities, according to recent research from the West Michigan office of Colliers International Inc.
“Amenities are huge downtown but we’re not seeing suburban landlords putting in the same love,” Jeff Hainer, a senior research analyst at Colliers International, told MiBiz. “As a tenant, you’re at the mercy of your landlord, so they’re choosing to be owners rather than tenants.”
Hainer added that Colliers is seeing tenants-turned-owners choose to build more space than they anticipate needing with the intention of leasing it out, often for complementary users.
The Colliers report pointed out at least three different practices — Gaines Pediatric Dentistry, ABC Pediatrics and Gillis Family Chiropractic — that recently have acquired parcels of land with the intention of constructing new buildings.
“We are seeing an increase in activity from medical users, specifically in the dentistry field, that are acquiring land and starting the process of becoming owners versus tenants in the suburban office market,” Gary Albrecht, a Colliers office adviser, stated in the report. “Lack of quality inventory and location are the primary driving factors for these medical professionals.”
While the trend is driving some new construction, the shift of medical office tenants leaving their rented space in favor of ownership is creating a conundrum that could affect the region’s broader office market in the coming quarters, according to Hainer.
“Landlords aren’t putting money (into their buildings) the way we would hope,” he said. “Medical users want quality space. If you’re a landlord, you need to address that problem now. The landlords who don’t get ahead of this trend are going to be hurting.”
Commercial real estate sources told MiBiz they attribute much of the growth in suburban medical office space to a few key clusters in Kent County, most notably in southern Wyoming and in Byron Center near Metro Health’s campus. Another active spot is at the intersection of Burton Street and East Paris Avenue. That’s where Grand Rapids-based First Companies Inc. has constructed four buildings for a combined 131,000 square feet of leasable space.
Known as Heritage Pointe, the multi-phase development project has attracted an array of medical office users with a variety of options, including leasing and ownership of space. The buildings currently stand at about 75-percent occupied.
Craig Baker, president of First Companies, a construction, development and property management firm, said his company remains bullish on the medical office market for the greater Grand Rapids region. However, he echoed some of the sentiments put forth by Hainer and in the Colliers report.
“The old maxim, ‘location, location, location’ is true,” Baker said. “There are buildings that are being sold but you can’t lease them because they’re not in the right spot.”
The East Paris corridor where Heritage Pointe is located boasts a vacancy rate of just 8.15 percent, the lowest among office space submarkets outside of downtown Grand Rapids, according to the most recent reports from Colliers International.
Beyond just medical users, the Colliers report notes that the firm is tracking 10 new suburban office developments under construction around the Kent County region. As those projects are absorbed, Hainer says his firm and its clients will have to address what to do with the aging, undesirable space that users will vacate in favor of modern amenities.
“We’re advising our clients (to) do what you can to keep (your tenants),” he said. “They’re sick of Class B or Class C space. Put some money in now. There’s lots of conservative landlords out there. They’re old school and they don’t realize the pent-up demand. … But when they want to sell their building, they’ll go from having a stabilized asset to a destabilized asset.”