Commercial real estate experts have struggled to predict the future of the office market since the COVID-19 pandemic started, though they expect demand for high-quality office spaces to remain strong.
Office vacancy rates in downtown Grand Rapids hovered around 11 percent in the fourth quarter of 2021, according to market reports from JLL Inc. and Colliers International’s West Michigan office.
Colliers Senior Vice President David Wiener said Grand Rapids’ office market has further improved since the end of last year, which he expects will continue throughout this year.
“So far in 2022, it’s been unbelievably hot, the leasing market is very strong,” Wiener said. “It’s like someone turned on the faucet. If you have space available and it’s a good space, showings are up and people are committing to leases again. We are back to pre-pandemic activity except for there are less options now.”
However, not all brokers and investors share such an optimistic outlook.
Don Shoemaker, principal at commercial real estate developer Franklin Partners LLC, predicts vacancy rates could eventually reach 25 percent in some market segments as the widespread shift to remote work becomes more evident as leases expire. Demand will likely remain high for high-quality, Class A offices yet fall off for lower quality spaces.
“I just know how many people are working at home like me right now,” Shoemaker said. “The (Class) B and C office spaces will cause a 25 percent vacancy in most markets, including Grand Rapids. The impact of the ability to work from home will impact office space in all markets, but the best offices with the nicest amenities will be more successful.”
According to a McKinsey & Co. survey from December 2020 and January 2021, about 30 percent of the 5,000 corporate and government employee respondents said they were likely to switch jobs if their employers mandated a full return to onsite work.
As many companies’ five- or 10-year leases expire, Shoemaker said employers are weighing whether to renew or downsize their office footprint to accommodate employee preferences.
In a March 2021 survey by the American Institute of Certified Public Accountants, 21 percent of companies reported that they expected some shrinking of their office space within the year. That number would be higher if some companies weren’t tied to their space by long-term leases, according to the report.
JLL Senior Vice President Jeff Karger said he maintains a “cautiously optimistic” view of West Michigan’s future office market.
“There has not been movement in the office market in West Michigan since COVID-19 started,” Karger said. “The overall dynamic of the market is pretty neutral. But because touring (from potential tenants) is up, that could lead to some moderate gains in 2022. People are starting to make decisions right now.”
Meanwhile, commercial real estate lenders are more cautious in the office market than they were pre-pandemic, Franklin Partners Managing Partner Ray Warner noted during a March 1 commercial real estate forecasting event.
“Lending is out there, but it’s selective and people are being very cautious around appraisals right now,” Warner said.
Karger also said April appears to be a new target date among companies planning to bring workers back to the office.
“I don’t think there will be any mandate from most companies that employees must come back, but I see an easing of restrictions and peace of mind will increase on office premises,” Karger said.
Commercial real estate advisers and economic development leaders also have pointed to the U.S. Centers for Disease Control and Prevention’s recent lifting of its mask order on public transportation and other institutions effective Feb. 25 as a positive for getting people back in the office.
“Since the mask mandate ended, all of a sudden we’re seeing spaces no one had been in. You’re seeing those people back in their space now,” Wiener said.
‘Flight to quality’
The current excess of office space in the market is causing a demand for Class A space, while Class B and Class C offices could sit vacant longer, Shoemaker said.
Despite increasingly available downtown Grand Rapids office space, average asking rents have increased 8.9 percent since the start of the pandemic, reflecting the demand for quality space, according to JLL’s fourth quarter office report. Average asking rent for the entire Grand Rapids metro area was $20.70 per square foot at the end of 2021, according to JLL.
Landlords have been assessing their office buildings and making renovations to meet the demand for high-quality spaces, Shoemaker said.
Karger echoed Shoemaker’s sentiment about the emphasis on high-quality office spaces right now.
“In any recession, there is always a flight to quality, and — even more so in this case — amenity packages that emphasize health and wellness will be extremely important moving forward,” Karger said. “Buildings that have good answers to those questions are going to shine.”
This could be a contributing factor to whether Spectrum Health’s currently leased offices will be backfilled when the health system completes its Center for Transformation and Innovation campus in Grand Rapids’ Monroe North neighborhood. The health system expects the eight-story office campus to be completed in May 2023, and will consolidate operations from about 15 offices throughout Grand Rapids and three more outside of the city.
“In the future, we’ll have a better understanding of how many of the spaces they will be vacating downtown,” Wiener said. “Depending on the quality of the space, the market is in need of product. The backfilling of the quality space they leave behind shouldn’t be a difficult process.”
Spectrum’s downtown Grand Rapids office space at the Bridgewater Place building and 25 Ottawa Ave. SW are larger spaces that could take some time to absorb into the market, Karger said.
“Those are also really nice spaces because Spectrum has built them out so they will show very well,” Karger said. “It’s just about how fast the market can absorb large spaces like that.”
CORRECTION: A previous version of this story incorrectly spelled the name of Ray Warner of Franklin Partners on first reference.