GRAND RAPIDS — Rental rates are rising for prime downtown Grand Rapids office space, but vacancy rates are also up significantly compared to previous years, according to a recent report from global real estate services firm JLL.
The cause of the increased vacancy rate among Grand Rapids’ skyline buildings — which is currently at 18.3 percent — is two-fold, said JLL Senior Vice President Jeff Karger. Recently completed projects and ongoing construction are adding square footage to the market while some companies are relocating or downsizing their downtown office footprint, he said.
“We are starting to see the effects of that,” Karger said, citing Morgan Stanley’s relocation from its downtown offices earlier this year to Cascade Road as a “small example.”
“There are a few more companies who plan on relocating from downtown. I foresee vacancies going up,” he said.
Properties in JLL’s 2021 skyline report are classified as buildings that are tall enough to shape the downtown skyline, usually more than five or six stories in height, that either have been or continue to be class A buildings downtown, Karger said.
Grand Rapids has 17 buildings in the skyline report, which includes the 10-story building under construction that will house Perrigo Co. plc’s future North American headquarters on three floors. However, the Perrigo building is not yet contributing to the city’s vacancy rate.
Mary Anne Wisinski-Rosely, partner and office specialist at NAI Wisinski of West Michigan, said Grand Rapids’ office market has not yet recovered to pre-pandemic levels of activity.
“Everyone wanted to be downtown pre-pandemic,” Wisinski-Rosely said. “It has been quiet downtown, and there has been more activity in the suburbs. Maybe people are thinking about cost — they might be more cost-conscious at this point and it is more costly to occupy space downtown because of the added expense of parking.”
The Perrigo headquarters will add 125,000 square feet of office space to downtown next year. Meanwhile, Spectrum Health’s planned eight-story office development in the Monroe North neighborhood near downtown will create several downtown office vacancies as the health system’s employees consolidate. That includes leaving behind a large presence in the Bridgewater Place building.
“We’ve always talked about having corporate headquarters downtown being gamechangers, but companies are going into buildings that are new construction and are not affecting vacancy downtown,” Karger said.
Backfilling space from several companies that have relocated away from downtown, as well as filling new skyline office space being constructed, will “not necessarily” be an easy task, Karger said.
Jeff Tucker, senior managing director of brokerage and principal at Bradley Co., agreed that backfilling office space currently used by Spectrum might not happen quickly, though it would remain prime office space.
“That is going to have ripple effects downtown,” Tucker said of the Spectrum plan. “But what they’re leaving behind is diverse. It’s not like they’re leaving behind all the same class of building. Ultimately it won’t stay vacant.”
Karger noted that the report does not reflect shadow vacancy, or companies that may have leased space but don’t have employees in the building.
“Some of these buildings are not vacant from a lease perspective, but (employees) are working from home,” he said. “The delta variant has pushed return-to-work back to the first of the year, which will directly continue to affect the office market.”
Larger, global companies that have a presence downtown are still working remotely or on a hybrid model, Wisinski-Rosely said.
“Local and regional offices, I see more of them working in the office, not so much remote,” Wisinski-Rosely said. “It’s more the bigger companies that are working remotely.”
Meanwhile, Grand Rapids’ skyline office vacancy rate is almost double the Detroit market’s 10.2 percent vacancy rate. Detroit’s vacancy rate also increased from last year because of the pandemic, according to JLL data. In Detroit, asking rents are on a slight decline, dropping 0.4 percent to $25.92 per square foot. Skyline property rent in Grand Rapids increased 1.7 percent from last year to $22.22 per square foot, according to JLL.
Amid the shifting dynamics, West Michigan commercial real estate experts have differing views on the health of downtown Grand Rapids’ office market. Some are optimistic that remote work will be a short-term trend that will soon end. Others suspect the pandemic could cause longer rang negative effects on the office sector as companies downsize or delay in-person work as new variants of COVID-19 emerge.
“We have experienced some folks who haven’t renewed their leases, but we also have pretty decent activity right now,” said Sam Cummings, managing partner at Grand Rapids-based CWD Real Estate Investment LLC. “It’s not yet net positive, still a little negative. I’m not ready to call it yet, but the fundamentals of downtown Grand Rapids are better than some other major cities.”
David Wiener, senior vice president of Colliers International’s West Michigan office, views the downtown office market in 2021 as “fairly stabilized.”
“Overall, we feel the downtown office market is strong,” Wiener said. “We’ve seen very little subleases, and we’ve seen ... strong trends of companies touring and getting back to looking at office spaces downtown. We have definitely not seen a trend of people exiting the market.”
Projects like Spectrum’s consolidation will free up some space in the market, giving companies more choices when considering whether to relocate to downtown Grand Rapids, Wiener said.
“Having that space come back on the market will give tenants more choice and encourage people to go out and look at new office space and what buildings have to offer in terms of amenities,” Wiener said.