Vacancy in downtown’s office towers has climbed steadily in recent years. And the sheer volume of available prime space is prompting one of the city’s top brokers to take action.
The rate among downtown’s priciest office digs, or Class A space, began approaching 20 percent in 2011 for the first time in at least 15 years and kept trending upward to settle at 21.4 percent at the end of last year. That’s more than a percentage point higher than downtown’s overall office vacancy rate of 20.3 percent, according to Cassidy Turley statistics.
At the same time, the metro area’s second-largest office submarket, the North Meridian corridor in Carmel, saw its vacancy rate fall last year to 16.1 percent while absorbing more than 215,000 square feet of space.
(IBJ Photo/Aaron P. Bernstein)
The disturbing contrast has caught the attention of Cassidy Turley office broker Jon Owens, who is bringing an informal group of industry experts known as the Downtown Office Initiative back to life.
“Maybe we don’t come up with any silver bullets, but I think it’s time that we address it,” Owens said of the trend in rising vacancy. “I don’t think this issue is going away anytime soon.”
Led by Indianapolis Downtown Inc., the initiative disbanded in August 2012 upon the departure of IDI’s former president, Tamara Zahn. But Owens is spearheading an effort along with new IDI leader Sherry Seiwert to jump-start the group.
The new name has been shortened simply to the Downtown Initiative to reflect a broader membership and mission. The aim of the office brokers involved was to ensure the satisfaction of downtown tenants. Now the group has been expanded to include employers, building managers and owners and even downtown residential builders.
Space has opened up in recent years as such downtown stalwarts as David A. Noyes & Co., Periculum Capital Co. and Woodley Farra Manion Portfolio Management Inc. have left for outlying submarkets. Meanwhile, large law firms, including Ice Miller LLP and Bingham Greenebaum Doll LLP, have reduced space, and upstart companies like Street Links and Tinderbox are shunning traditional office space for hipper digs that might show more character than traditional towers.
“A part of it is changing office trends,” Seiwert said. “The folks occupying space—there’s a reduction in the use and their preferences.”
Making matters worse, both Cummins Inc. and ExactTarget are looking to expand their downtown presence but not in an existing building. They’re scouting locations to construct their own buildings, with ExactTarget’s reaching as much as 500,000 square feet.
The Downtown Initiative boasts about 25 members and plans to convene quarterly. They met for the first time March 5 at the old Indianapolis City Hall.
Deals hard to come by
For much of the past 15 years, until more recently, Class A downtown vacancy has been up and down like a roller coaster. In 1998, during the height of the tech craze, the rate stood at a minuscule 8.7 percent, according to Cassidy Turley.
It climbed above double digits in 1999 and rose to 18 percent in 2002 before falling back to 15.6 percent the following year. It increased to 18.3 percent in 2006, slid to 15.7 percent in 2007, and chugged back to 18.2 percent in 2008.
The vacancy rate hovered between 18 percent and 19 percent for the next three years before topping the 20-percent mark in 2012.
A few of downtown’s office high-rises have managed to weather the economic hardships. The 36-story OneAmerica Tower is nearly full and the 48-story Chase Tower is 90-percent occupied, according to the most recent IBJ statistics.
Others are having a much tougher time attracting tenants. The 28-story BMO Plaza and 30-story Market Tower, for instance, have several entire floors available for lease.
BMO Plaza, 135 N. Pennsylvania St., is 58-percent occupied. The top six floors, totaling 105,964 square feet, are open and believed to be the largest single block of space available downtown.
Summit Realty Group announced in November that building owner True North Management Group LLC selected the local real estate brokerage to take over marketing and leasing services from Cassidy Turley.
Owens and Russell Van Til of Cassidy Turley had been in charge of BMO Plaza’s leasing since 2009. In the four-year span, Owens said they negotiated with 95 companies and signed leases with just six. And many of the new tenants, excluding the U.S. Department of Defense, which moved from Kansas City, had been leasing in other buildings in the city, thus didn’t soak up additional space.
“In this market downtown, you almost have to buy a deal,” Owens said, noting that a building owner might pick up moving costs to coax a lease signing. “Because if you don’t, you’re not going to get it.”
Market Tower is 65-percent occupied and hamstrung in its efforts to attract tenants by a foreclosure filing. Union Bank in December filed suit against MT Acquisitions LLC, an affiliate of Indianapolis-based HDG Mansur, which owns the tower at 10 W. Market St. The bank claims MT Acquisitions failed to pay off the $60 million balance on its mortgage.
Reasons for optimism
Brokers are optimistic, though, that the downtown market for Class A office space will improve.
John Robinson of JLL attributes the rise in vacancy to the sputtering economy.
“We’re coming off of six or seven years of a recession, which has had everybody in a standstill or shrinking mode,” he said. “I think downtown has bottomed out and is on the way back up.”
Robinson has his work cut out, too. He’s the leasing agent for the AT&T building at 220 N. Meridian St. that’s now known as Monument City Center under new ownership.
Geis Properties, a division of Streetsboro, Ohio-based Geis Cos., purchased the 558,000-square-foot building for $16.5 million last May from AT&T. Roughly 150,000 square feet is available on floors eight through 14 of the 20-story building, as AT&T has reduced its footprint in the building.
On top of that, another 80,000 square feet could become available in 2016 and 95,000 square feet more in 2018 when AT&T is set to nearly vacate the building. Robinson has yet to sign a tenant but is in discussions with several companies interested in blocks of 20,000 square feet to 40,000 square feet.
“We’ve taken a run at a couple of users, 100,000 square feet and over,” Robinson said. “We’re going for size; we don’t want to break it up too small.”
Another building, Regions Tower, hit the block last month. Todd Maurer and his father, Michael S. Maurer, co-own the tower with local businessman Robert Schloss and Pittsburgh-based McKnight Group. Michael Maurer and Schloss also own IBJ Media, publisher of IBJ.
Real estate brokers say the 662,000-square-foot building, which is 71-percent occupied, could fetch more than $60 million, or about $100 a square foot.
While 71 percent might not seem impressive, the building was hemorrhaging tenants and boasted a dismal occupancy rate of 30 percent when the Maurer group bought it in October 2001 for $25 million.
Todd Maurer asserted that the tower could be 90-percent occupied if he hadn’t lost six years to a painstaking exterior renovation following a 2006 storm that blew out dozens of windows.
He said he applauds and supports Owens in his efforts to address downtown office vacancy.
Owens, meanwhile, hopes his group can make a difference.
“What can we do, if anything, to enable building owners to make this existing inventory of space more desirable? And I don’t know the answer to that,” Owens said. “That’s why I’m getting this group together.”•