GRAND RAPIDS — Facing a dearth of high-amenity space in the downtown Grand Rapids market, commercial real estate stakeholders hope developers can soon begin to add Class A office inventory.
However, when that new development might break ground remains somewhat of an open question among downtown investors and brokers.
For its part, Orion Construction Company Inc. hopes to be the developer that brings the next building online. It’s been nearly a year since the Grand Rapids-based general contracting and development firm first announced plans for a two-tower development at the northwest corner of Ottawa Avenue and Lyon Street in the city’s central business district on what’s currently a surface parking lot.
The plans to build two towers — each around 14 stories and consisting of Class A office space, market-rate apartments, ground-floor retail and parking — remain on track, but the developer said he still has his work cut out to get the project over the finish line.
“We continue to work on the incentive package for (the project),” said John Wheeler, Orion Construction’s vice president of business development and president of the company’s real estate development division, Orion Real Estate Services (ORES). “Those buildings still have a lot of details to come together to make it work. There’s a lot of factors still at play.”
Specifically, Wheeler said the estimated $63.5 million project — which would include 13,000 square feet of retail space, 120,000 square feet of office space, 123 apartments and about 450 parking spaces — still requires state brownfield incentives.
In mid-October, the board of the Grand Rapids Downtown Development Authority (DDA) voted unanimously to support the project’s owners, Orion Construction subsidiary 150 Ottawa Development LLC, with a reimbursement of $3.7 million over 15 years.
Wheeler told the DDA he plans to present the project to the Michigan Strategic Fund in January 2017 and begin work on the site next spring. The project has a construction timeline of about two years.
“If the brownfield is approved, we’re good to go,” Wheeler said. “But if the brownfield isn’t approved, we’re not good to go.”
To date, Warner Norcross & Judd LLP remains the only firm that’s publicly announced it will be a tenant of the proposed project, but Wheeler said he’s got letters of intent from other companies, including an unnamed, out-of-market lending institution.
Last November, law firm WNJ announced its intentions to vacate its space about two blocks away at the Fifth Third Bancorp campus, which the financial company recently sold.
Grand Rapids-based real estate development and property management firm CWD Real Estate Development Inc. purchased the two 1960s-era buildings and a parking garage earlier this year, as MiBiz reported in June.
Because of overall market conditions, Wheeler said his proposed project still won’t offer the speculative office space that commercial real estate sources say is needed to begin alleviating pent-up demand.
Wheeler said it’s still difficult to scale up and develop more office space, based on required parking ratios, the need to identify the right number of apartments, and a hesitancy on the part of lenders. To that end, the developer said he aims to have the office space leased by the time any groundbreaking occurs.
And while many sources talk about continued demand, two recent research reports suggest that sentiment may be more perception than reality.
The overall vacancy rate for downtown office space hovers between 7 percent and 12 percent, according to recent market reports from NAI Wisinski of West Michigan and CBRE Grand Rapids.
Overall, the development of additional high-end office space in the central business district has come in fits and starts, as two high-profile projects fizzled out in recent months.
As MiBiz first reported in September, Grand Rapids and Naperville, Ill.-based Franklin Partners LLC walked away from plans to redevelop the Keeler Building at 56 N. Division Ave., downtown Grand Rapids’ last major vacant building. Franklin Partners principal Don Shoemaker said at the time the company was unable to reach a final agreement to acquire the building and property from its current owner, James Azzar.
Franklin Partners had previously redeveloped two downtown office towers at 99 Monroe Ave. NW and 25 Ottawa Ave. SW, eventually fully leasing them and then selling them for a combined $50 million.
In May of this year, Secchia family real estate firm Sibsco LLC decided to halt development of its proposed 12 Weston office project at the southwest corner of Division Avenue and Oakes Street in downtown Grand Rapids’ Heartside neighborhood. Principal Charlie Secchia cited a lack of potential tenant interest beyond the announced anchor tenant, digital marketing firm Adtegrity Inc.
“There’s a reason not much Class A space is being built,” Secchia said at the time, referring to the high cost of new construction, high rents and the difficulty in securing tenants for unbuilt buildings.
Indeed, commercial real estate sources indicate there’s a Catch-22 dynamic playing out in the downtown Grand Rapids office market wherein financing can be hard to come by without committed tenants but tenants are hesitant to sign on without construction already underway.
“Once a building is under construction, our activity is fantastic,” said David Wiener, a senior vice president and office adviser in Grand Rapids for Colliers International Group Inc. “But it’s difficult to pre-lease without an anchor tenant or (development) partner.”
Orion Construction’s Wheeler agrees.
“I think Grand Rapids could use another Class A office building — if there was an 80,000- to 100,000-square-foot building and an anchor tenant,” Wheeler said. “But this is a tangible market. You have to feel it.”