Government and Real Estate & Retail

Struggling office buildings face further losses: Existing tenants shopping for deals in troubled market

March 26, 2007

A big question is looming for property managers at National City Center and First Indiana Plaza: Will tenants stay or will they go?

Each of the downtown office buildings already is struggling, with occupancy rates in the 60-percent range at the end of 2006. But a grim situation could worsen if some of their largest tenants with expiring leases find a better deal elsewhere.

Law firm Bose McKinney & Evans is considering a move from 80,000 square feet at First Indiana Plaza to about 100,000 square feet in Chase Tower. The Chase space was used by Guidant Corp. before its sale last year.

And the Indiana Supreme Court, Court of Appeals and Tax Court are considering a move from National City Center to 30 S. Meridian, where Eli Lilly and Co. plans to vacate a total of 99,000 square feet.

If the courts take 70,000 square feet in 30 S. Meridian, it would be a huge blow to the 575,500-square-foot National City Center, which last year lost a 170,000-square-foot tenant when Simon Property Group Inc. built its own downtown headquarters.

"Downtown is a lot of musical chairs," said Sam Smith, CEO of locally based Resource Commercial Real Estate. "It's a lot of trading of tenants, not as much net absorption of space."

With the vacancy rate for downtown office space at around 16 percent and with few new players looking to rent downtown space, tenants are in the driver's seat.

Bose is hoping to take advantage of the market conditions before its lease at the 425,000-square-foot First Indiana Plaza expires in the fall of 2008, said Managing Partner Ken Crook. The firm is down to two options: Stay put or jump to Chase Tower, he said.

The courts are in negotiations to either stay in National City Center or move to 30 S. Meridian, said R.J. Rudolph Jr., a principal at Resource representing the courts.

"We're still in negotiations, working through details with both buildings," he said.

For the courts, the main concern is getting a good deal. Their lease expires at the end of 2007.

"I think they definitely would like to keep us," said Ted Boehm, a justice with the Indiana Supreme Court, of National City Center. "There are other buildings that would also like us. It's a good time to be shopping."

There is at least 1.8 million vacant square feet of office space downtown, according to the local office of St. Louis-based Colliers Turley Martin Tucker. The deficit deepened when Lilly decided late last year to move into its own space.

OneAmerica Financial Partners has similar plans. The company will vacate roughly 60,000 square feet in Capital Center to move into the Gibson Building, which it is renovating at Michigan Street and Capitol Avenue.

A sizable chunk of the vacant space downtown is in two buildings. First Indiana Plaza has 150,000 square feet vacant, and National City Center has 190,000 square feet vacant, Colliers data shows.

First Indiana was 65-percent occupied at the end of 2006 and National City Center was 67-percent occupied.

National City Center is owned by Massachusetts-based HRPT Properties Trust, and First Indiana Plaza is owned by New York-based Crown Properties Inc. Leasing agents for the buildings did not return phone messages.

A handful of brokers said the departure of Bose from First Indiana Plaza is a done deal-and devastating.

Occupancy at the 28-story building was a respectable 90 percent in the late 1990s, but a string of departures has plagued the property.

Brokers said that if the building loses Bose, the owners might consider turning the upper floors into condos.

National City Center, meanwhile, has shown progress filling the former Simon space. The courts ultimately might stay put, and the building recently signed the Indiana Utility Regulatory Commission to fill 27,000 square feet.

The IURC is moving from the third floor of the Indiana Government Center to allow for expansion of the Department of Child Services, said Elizabeth Barrett, a spokeswoman for the Indiana Department of Administration.

In all, state government pays $30.6 million a year to lease 2.5 million square feet of office space throughout the state.

Even if some tenants switch buildings downtown, the expansion of space for Bose and the courts and the addition of IURC will help the market as a whole, said Jon R. Owens, senior vice president and principal with Colliers Turley Martin Tucker.

"There will be a net increase in square footage," he said. "You're chipping away at that hole."
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