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|What does Bridgewater default mean for Grand Rapids|
|Published: January 17, 2011|
Only time will tell what is in store for the downtown office market with the city’s most lavish and largest office address going on the foreclosure auction block in two weeks. The same can also be said for the building’s tenants.
Bridgewater Place, which opened in 1993, broke the market’s development pattern when it became the first serious office building to locate outside of the downtown business core. The structure’s 17 stories, which offer 400,000 square feet of space, overlook the west bank of the Grand River at 333 Bridge St. NW. Before it opened, all downtown office addressees were east of the river.
The fact that its owners have defaulted on the mortgage could speak volumes about the market’s future — or maybe not: The sale’s impact is uncertain for now. In the meantime, most in the industry will be paying a lot of attention to see what happens.
“My sense is there will probably be a heightened awareness of the big players in the office market and the realities of vacancy,” said Doug Taatjes, a partner in NAI West Michigan, a commercial real estate firm located downtown on Grandville Avenue SW.
One effect from a sale, for instance, could be on rents. Downtown lease prices ranged from $10 to $19 per square foot last year. For Class A space, the type Bridgewater Place offers, the range was $16 to $19 per foot. Jim Decker, also a partner at NAI WM, said that, after the building goes through the auction process, the district’s landlords could find themselves in a deeper pricing pinch than they are in now.
“I think what happens when you have a signature building like this heading for foreclosure is it creates a perception or an attitude in the marketplace that there is a good deal, a big deal, a low-price deal to be had. The building can be bought out of foreclosure for something probably substantially less than the mortgage,” said Decker.
“So now you have a perception in the marketplace that you can get a great lease deal in that building, and it drives the lease prices down in that building. But probably because of the size of the building, it may drive the lease prices down in the whole downtown market,” he added.
Taatjes agreed and said lease prices are likely to fall if someone is able to buy downtown’s premier building for less than the reported $36 million owed on the mortgage.
“The water is just going to drop to a lower level across the market. It’s big enough to impact the market,” he said.
The downtown office market has roughly 6.2 million square feet of leaseable space and the vacancy rate was recorded at 19 percent last summer, meaning about 1.2 million square feet was unoccupied at that time. Empty spaces, sparked by the Great Recession and high unemployment, are most likely what drove the building into bankruptcy.
“This is just a speculation, but I think it’s primarily vacancy,” said Taatjes.
Another potential factor is that the downtown office market has grown since Bridgewater Place opened. A number of structurally sound but vacant buildings were renovated into competing and lower-cost office spaces, and some downtown tenants left the business core for other sectors, such as the North Monroe Business District.
That expanding market probably affected Bridgewater Place to some extent over the years. Key tenants such as Consumers Energy and accounting firm Plante & Moran moved from the building, and Deloitte Inc. is leaving this spring. (See related story, page 15.)
Early this month, the building’s website listed 98,842 square feet available for lease on nine of its floors, meaning nearly a quarter of its total space was available. Vacancies, of course, put more pressure on a landlord’s financial operations.
“Those operational costs cover taxes, insurance, the common area and utilities. Those in a downtown building will run anywhere from five to eight dollars per square foot. When you have a tenant there, the tenant is paying those, plus rent. When you don’t have a tenant there, there’s no rent coming in and the landlord is paying for all those square feet,” said Taatjes. “So vacancy is the enemy that usually creates these issues.”
If Bridgewater Place is sold at the upcoming auction, it doesn’t mean that current tenants are released from their leases. The standard office lease does not contain a clause that lets a tenant out of an agreement due to a change in ownership.
“Most leases have a clause that specifically says that a tenant will, in fact, continue to pay rent to whoever owns that building, whether it is the lender or whoever is in control of it,” said Taatjes.
At least some tenants may have moved into Bridgewater Place because it was seen by many as the city’s most prestigious office building, and doing business from there added an impressive address to a firm’s letterhead. But will the stigma of the building being in foreclosure lessen its status and push its remaining tenants into leaving?
“No, I don’t think so. I don’t think that there is a direct impact on a business if the building changes hands due to a foreclosure or a debt issue. There may be an indirect effect on the business,” said Decker.
“The indirect effect is … you’ve got this period where a lender is managing and leasing the building and some of the maintenance issues may fall through the cracks, and that may affect the business. But that’s sheer conjecture, and it wouldn’t be a big deal on a short term. No, I don’t think that a building going into foreclosure would affect the businesses in the building,” he also said.
Taking it a step further, Taatjes felt a sale could ultimately be a good thing for the tenants.
“I think actually, in the long pull, it goes the other way. Because if somebody buys the building and they’re able to buy it at a better price, one of their strategic ways of filling the building up is going to be to re-freshen and change the game a little bit, and make it again something that is that prestigious address — something that is now under new management, new ownership. And new capital will need to be spent to freshen it up,” said Taatjes.
“So I think you’ll see, in the short term, what I think Jim just described. But in the long term, if you reduce the debt on the building, it’s probably going to get more competitive, and people are going to put some money into the thing to freshen it up,” he added.
The foreclosure notice listed SH-2 LLC, BT-2 LLC and Bridgewater Place LLC as the firms that defaulted on the mortgage, and GMAC Commercial Mortgage Securities Inc. as the debt holder. Wells Fargo Bank is representing GMAC in the action, while Signature Associates represents the owners. The auction is scheduled for Jan. 26.
“When you talk about the impact on the businesses because of this, the fact is the foreclosure issue is not new news. For quite some time now there has been reasonable belief that it was going to happen, at least in the commercial real estate world. Varnum was aware this was going on for quite some time,” said Decker, of the building’s largest tenant.
Also, it’s not necessarily major news to learn that an office structure is going through foreclosure, considering the state the economy has been in for the last two years.
“It is happening all over the country,” said Decker. “But it’s big news for Grand Rapids, in that it is a signature building.”
Peter Linneman, Chief Economist for NAI Global, is widely recognized as one the leading strategic thinkers in the real estate industry.
Peter recently shared his take on the current housing market at a recent NAI Global webinar:
- U.S. does not have excess housing inventory (single- and multi-family), just a lack of household formation. We do not lack people, just new households.
- Total population continues to grow. U.S. currently adding 3 million people per year to national population, & only forming 450,000 households.
- There are 1.5 million households that have not formed based on actual population growth since downturn.
- It used to take 2.4 people to form a new household, now it takes 6.6 people to form a new household.
- 1.4 million excess housing units, 2.1 million unformed households. If all households formed that would be expected to form, we would be 700,000 units short on housing. Therefore, there is net pent up demand for housing units of approximately 700,000.
- People need jobs to feel comfortable to strike out on own & form household (such as renting an apartment).
- Multifamily Housing Stock: Absolute supply is falling. Destroyed 150,000 units while adding only 95,000 units in past 12 months.
- Corporate profits are at all time high, even though they fell significantly in 2008 and 2009. Efficiency is up, and productivity & profits almost match historic highs. 7.4 million fewer workers producing same GDP. What have they done with profits? Cash holdings $3.2 trillion and rapidly rising vs. historic norm of $1.2 trillion.
- Since downturn, U.S. has added 1 million jobs, lost 10 million. U.S. will probably add 3 million jobs each year for next 3 years.
BOTTOM LINE: There is pent up demand for housing in general & a shrinking unit supply. As corporations begin to use cash to add jobs (and increase productivity), multifamily fundamentals should rebound dramatically. Transparent cash flows & “mark to market” rents will make multifamily the preferred asset class for commercial property investors.
For more information about the West Michigan multifamily market, or for a free property evaluation of your apartment communities, please contact Scott Nurski or Craig Black at (616) 776-0100.
NAI West Michigan Commercial Real Estate Services, Worldwide welcomes Glenn Carlson as a Realtor Associate specializing in commercial, retail and office sales and leasing. Carlson has been actively involved in real estate for over ten years. Prior to NAI West Michigan, Glenn owned and operated a residential construction company.
Carlson holds a bachelor’s degree from Calvin College. He is a member of the Commercial Alliance of Realtors®, the Michigan Association of Realtors®, and the National Association of Realtors®. He is currently working toward acquiring the Certified Commercial Investment Member (CCIM) designation.
As a small business owner Carlson is familiar with NAI West Michigan’s background and shares their vision, core values statement, and commitment to providing the highest degree of consistent customer service. He joins a team of 26 commercial real estate advisors and staff at NAI West Michigan. Carlson is looking forward to being involved in the commercial real estate business climate and is optimistic of West Michigan future.