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Downtown office market in question, retail expected to pick up in 2022

BY Sunday, December 19, 2021 04:45pm

After nearly two years, the effects of the COVID-19 pandemic can be seen across all sectors of the commercial real estate market, but especially in downtowns. And the biggest question surrounding commercial real estate remains largely unanswered: What is the future of office space?

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West Michigan real estate advisers’ best guesses still vary in optimism over the return of in-person office work and to what degree.

The majority of third-quarter office transactions in West Michigan this year were made up of lease renewals and smaller, shorter-term deals, according to JLL’s quarterly office report.

Downtown office vacancy rates ranged from about 8 percent to 12 percent in the recent third quarter, according to JLL and Colliers International’s West Michigan office.

“The overall health of the office market is good and we expect that to continue into 2022,” said Colliers Senior Vice President David Wiener. “Even companies who don’t have people going back to work yet aren’t giving up their office space. Renewals have been strong in the third and fourth quarter and we expect renewals to be strong in 2022.”

Some bigger downtown office buildings are only 30-40 percent occupied currently, but Wiener doesn’t consider this shadow vacancy because the companies intend to return to the office, he said. 

“A lot of tenants were looking to come back by the end of the year — that was kind of the benchmark for a lot of national companies,” Wiener said. “With the delta and omicron variants, people are now saying it will be the second quarter of 2022.”

Wiener believes the office market in West Michigan will see slow, steady growth and return to pre-pandemic levels in 2022.

Employee preference

Amid the public health concerns of fully returning to offices, employers competing for talent must also consider the wants and needs of workers who might desire more flexible or hybrid workspaces.

In a December 2020 McKinsey & Co. survey of 556 U.S. consumers, 72 percent said they prefer remote work. Yet working fully remote can be challenging if not impossible for many companies, making the hybrid work model an increasingly preferable option now and in 2022, said Jeff Karger, senior vice president at JLL. 

“I do not see the office market ever returning to what it was pre-pandemic,” Karger said. “In 2022, you’ll see a lot of companies starting to figure out their occupancy plan moving forward and that will definitely include hybrid workers. That will mean the brick and mortar office market will plateau. Toward the end of (2022) we might see an uptick in occupancy.”

Even hybrid workspace models are taking various forms as companies determine their needs and employees’ preferences. 

“With the popular new hybrid model, there are different components to it,” Karger said. “There is going to be an adjustment in the square footage of office space, and most likely it will go down.”

He added that shifting office space design is another likely trend moving forward. These new spaces will likely emphasize employees’ health and wellness in the office and throughout shared amenities in the building. 

“The most important thing is employee experience,” Karger said. “People would rather work from home permanently unless you provide an inviting atmosphere that the employees will want to come to.”

Retail market strong

A lack of downtown office workers during the day, coupled with many businesses struggling to fill open positions, has resulted in many restaurants and retailers downtown cutting back operating hours. 

While those staffing challenges are expected to continue next year, some experts predict a promising year of activity for food in a variety of establishments.

“People are finding different ways in the food service industry to survive,” said Mark Ansara, managing principal at Advantage Commercial Real Estate. “Local operators are able to adapt to the talent shortage more than chains.”

On the retail side, the announcement of Gazelle Sports opening a storefront in downtown Grand Rapids will be a major addition that could spur some other developments, Ansara said. 

“We don’t have much downtown for retail, it’s mostly food and pocket retail. We don’t really have a retail corridor downtown like a lot of cities do,” Ansara said. “It could start a really good, positive trend getting Gazelle.”

For downtown to have a successful year and quicker recovery, Ansara said there needs to be more activity at hotels and the convention center.

“Next year is going to bring us some good new life for our retailers,” Ansara said. “Just from what we’re doing in our office that we can’t talk about yet, it will help bring some new business to West Michigan on the regional and national level next year. It should be a good year for new businesses coming to town.”

Meanwhile, downtown Grand Rapids is poised for at least a couple of major real estate transactions, including the expected sale early next year of The B.O.B. and GLC Live at 20 Monroe.

“I’m encouraged that someone would take on that project,” Karger said. “(The B.O.B.) is an iconic venue and to get that up and running again in full force is incredibly good for the downtown market.”

Read 2117 times Last modified on Friday, 17 December 2021 12:45
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