Commercial real estate executives largely share the view that more answers about the future of the West Michigan office market will emerge in the next year or two as more office leases come up for renewal.
Many companies want to cut costs to prepare for negative economic headwinds in the new year, so they’re consolidating offices, reassessing how much office space they need and reevaluating what they’re spending on parking, industry sources said.
Grand Rapids office space had a total vacancy rate of 13 percent in the third quarter of 2022, on par with the last few quarters, according to the latest report from Chicago-based JLL Inc. Some activity still remains in the local office market, with rents increasing by 3.9 percent since the end of 2021.
“A lot of companies are battening down the hatches for 2023 in preparation for a recession and are not spending on new build-outs,” said Jeff Karger, senior vice president of JLL Inc. who’s based in Grand Rapids. “This also contributes to downtown having less activity.”
Downtown Grand Rapids’ skyline offices have a vacancy rate of 18.4 percent, which was pushed up by the delivery of 370,000 square feet of new inventory this year. JLL expects no new Class A office projects to open downtown next year. That excludes about 150,000 square feet of office space at the $100 million Corewell Health Center for Transformation and Innovation office park in the Monroe North district, which is slated for completion in summer 2023.
The lack of new projects is a factor of reduced demand for new space, according to Karger.
“Most of our clients are looking at Grand Rapids as a tertiary market and are downsizing their space, no question,” he said. “There is a laundry list of corporate clients that are doing that and it’s more than the market probably knows about. There are still some bright spots in the market where you’ve seen some local companies expand, but I can tell you with certainty that there is downsizing.”
Downtown activity remains muted as companies for several reasons are increasingly considering adjacent suburban office spaces, said Gary Albrecht, principal at Advantage Commercial Real Estate.
“It’s certainly been much more active in the suburban office than downtown, which has been very quiet,” Albrecht said.
As well, many prospects perceive downtown as lacking in available parking and they’re second-guessing parking expenditures generally, said NAI Wisinski of West Michigan Partner Rod Alderink.
“A lot more companies are paying attention to their parking expenses and are looking at near downtown where parking is cheaper or even free,” Alderink said. “People might be moving out of the core of downtown, but many still like to be close to downtown.”
Grand Rapids is far from alone with a struggling downtown office market. During an economic outlook event hosted this month by The Right Place Inc., Jeff Korzenik, chief investment strategist at Fifth Third Bank, called commercial office real estate a “slow moving trainwreck,” and noted that only three cities nationwide currently had office usage rates of more than 50 percent in their downtown business districts.
“Industrial space is not an issue, multifamily is not an issue. It’s all about the return to the office,” Korzenik said. “There’s no clear-cut formula for what differs from one city’s performance in getting back to the office. Some of the ingredients seem to be things that would favor Grand Rapids. People don’t have super long commutes to get to affordable housing and good schools. That’s been a key component, as is quality of life in the downtown central business district. You don’t have some of the public safety issues here that are plaguing some of our large cities. So I think Grand Rapids is better positioned.”
Future of office
Within the next year or two, a much clearer picture of the office market should emerge, Albrecht said. Many companies re-signed their leases right before or shortly after the pandemic hit, and will have to make a decision when their lease comes up for renewal, he added.
“When it comes time to say what are we going to do with our lease, are we going to stay, relocate or downsize, there is a large group of people out there that haven’t been forced to make that decision yet,” Albrecht said. “Businesses are taking a look and reassessing square footage needs and if there are less employees in the office throughout the week, they are looking at ‘maybe we don’t need as much square footage to accommodate our employees.’”
NAI’s Alderink said he has worked with a few firms with about 10,000 square feet of offices who are downsizing and subleasing the rest of their space, he said.
“Some companies are still making major commitments for the long term and we’re working with tenants that are looking at a three-year lease instead of five,” Alderink said. “Tenants are trying to find out what their future needs will be and are giving themselves additional flexibility.”
