Volume 5, No. 4
June 2009

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Ann Arbor Area BUSINESS MONTHLY magazine brings the reader the latest business news and information important to the businesspeople in Washtenaw County. Each month articles cover real estate, legal, Internet, employee concerns and the climate of business in the greater Ann Arbor area. There is news about company employees and feature articles on local businesses. We cover business news from Ann Arbor, Chelsea, Dexter, Manchester, Milan, Saline, Whitmore Lake, and Ypsilanti.

Local Commercial Property Market Shows Signs of Hope

Local realtor signs

By Mark Ziemba

Swisher Commercial Vice President and Treasurer Barton Wise sees light in the local commercial real estate market.

"In the leasing market in the last 45 to 60 days I've seen an uptick," says Wise, referring to March through May. "I've done eight leases in the last two months," he adds. "That's probably as many deals as I did in the previous five months."

Although the economic downturn hit hard last fall, the Ann Arbor area's commercial real estate market held steady in 2008 and may remain so for the near future, but some local commercial property brokers say they are already seeing signs of improvement this spring.

Swisher Sees Encouragement in Ann Arbor Market

Wise is familiar enough with local commercial property figures to be pleasantly surprised by the recent increase in business. He cautions that this is not enough to call it a trend yet, however.

Wise coordinates Swisher Commercial's annual vacancy report, a survey of larger office and flex commercial space in the core Ann Arbor area, excluding retail and industrial property. In 2008 the report covered a total of 11.43 million square feet from 305 buildings of 3,000 square feet or larger.

At the end of 2008, Swisher's annual report put the total Ann Arbor area commercial vacancy rate at 14.75 percent, which edged up 0.52 percent from the end of 2007.

"It shows higher vacancy numbers than certainly landlords want to see," says Wise. "It's discouraging," he says, "but it's not horrible." He adds, "There are other markets in southeast Michigan and across the country that are much worse."

Southern Ann Arbor had the highest vacancy rate at 20.41 percent, mainly due to the departure of ProQuest and Parametric Technology (formerly Arbortext) from this area.

Western Ann Arbor marked the biggest increase in vacancy rates, up 5.86 percent to 15.37 percent, as Con-Way Freight relocated to northern Ann Arbor.

The Clark-Golfside medical area to the northeast maintained the lowest vacancy rate at 3.85 percent, thanks to a high percentage of medical tenants in proximity to St. Joseph Mercy Hospital.

Northern Ann Arbor witnessed the biggest drop in vacancy rates, down 5.81 percent to 6.09 percent, mainly due to leases with Con-Way Freight and Barracuda Networks.

Wise explains that economic uncertainty has made businesses very cautious about expanding or moving, which has dampened the commercial real estate market.

"Since October everyone has been very closely watching their pennies, trying to be very careful, and that affects the leasing," he says.

Wise says that he hears from other commercial property brokers that their phones are ringing, however.

"There's a lot of bargain shopping, but people are out leasing space," says Wise. "We've seen some movement this spring. That's encouraging."

Swisher Commercial currently lists 318 commercial properties in Washtenaw County, totaling about 2.5 million square feet.

Colliers Content with Ann Arbor, Concerned About Outlying Areas

Colliers International Ann Arbor office Vice President Jim Chaconas also feels that the commercial property market in the city of Ann Arbor is doing alright.

"We get calls every day," Chaconas says.

Chaconas expects the commercial property market to remain steady. "It's going to be a flat year. Maybe next year will be flat," he says. "I don't think it's bad."

Regarding retail leasing, "It's not as strong as it was five years ago," says Chaconas. "Our vacancies, instead of being filled up in 30 days, are 60 to 90 days, but we're still filling them." He adds, "We have done over 20 retail leases over the last eight months."

For office leasing, "the leasing market in the city of Ann Arbor is fine," Chaconas says. "We didn't show big increases," he says, but "we're really not down."

Commercial property sales do well, when available, says Chaconas.

There hasn't been that much retail property for sale in Ann Arbor, Chaconas says, but "the value of the real estate downtown and the campus area is exceptionally strong." He says, "We could sell them for more money than we could have two years ago."

As far as office property sales, Chaconas says, "There's not a lot that's in the city that's for sale."

Outside Ann Arbor, the commercial property market isn't as good, says Chaconas. Chelsea, Dexter and Saline have all been hit hard, he says. He says that he's mainly seeing leases for medical offices outside Ann Arbor.

"We've done four leases in Saline," says Chaconas. "Three of them were medical."

A Boston-based, global commercial real estate company with 1.1 billion square feet of property under management, Colliers lists 145 commercial properties in Washtenaw County, totaling roughly 420,000 square feet of property.

Surveying offices of 10,000 square feet or greater, the Colliers first quarter 2009 commercial office report places the total Detroit metro and Washtenaw County office vacancy rate at 17.8 percent, but the Washtenaw County office vacancy rate at 12.1 percent. This report excludes industrial and retail space.

"In retail in the city of Ann Arbor it's running less than 6 percent," says Chaconas of the vacancy rate.

Shaffran Focuses on Downtown's Niche Market

Handling a little over 300,000 square feet of smaller downtown Ann Arbor commercial property, Shaffran Companies President Ed Shaffran says, "I'm betting on the downtown."

Shaffran focuses on smaller properties. He says that most of his office tenants occupy properties between 500 and 1,000 square feet, and most of his retail tenants operate in spaces from 1,200 to 2,000 square feet.

Commenting on the area commercial real estate market, he says, "It's not as strong as it's ever been," but "it's probably stronger here than it would be in some of the neighboring communities." He cites the suburban Detroit cities of Troy and Birmingham, where the market is weaker.

Shaffran's own vacancy rates are very low. "It's ridiculous how low ours can be," says Shaffran. "It's certainly under 3 percent."

Shaffran says that his business has done well because he has focused on a niche market, advice which he believes will help retail tenants survive in the difficult economy.

"The mom-and-pops are going to have a little more difficult time if they're not specialty-oriented retail," says Shaffran.

He points to some successful downtown niche businesses as knitting store Busy Hands, gift store Four Directions and Schlanderer & Sons jewelers.

"There's no sense in trying to be all things to all people," Shaffran says. "Whatever you do, do it well."

Shaffran also attributes his own commercial success to competitive pricing.

"Our rental rates have never been at 100 percent of the market," says Shaffran.

Transwestern Invests in Amenities and Infrastructure

Transwestern Detroit office Senior Vice President Bill Harvey thinks the Ann Arbor commercial property market is fairly robust. Based in Houston, the national commercial real estate company handles 979 properties totaling 185.7 million square feet. In Ann Arbor the Transwestern Detroit office runs the 777 Eisenhower and 789 Eisenhower buildings, located in southern Ann Arbor just off State Street.

"Ann Arbor has never had a super high vacancy. That's a testament to the discipline of the developers," says Harvey. "I don't think there will be as severe a downturn as in other markets," he says, mentioning Troy, where he says some portions of the city are experiencing above a 30 percent vacancy rate. "That said, it's going to take some time for the market to get back, and I think when it does, Ann Arbor will rebound more quickly."

Transwestern attracts tenants to its Ann Arbor buildings by improving the properties. Harvey says that the 789 building is fully leased, while the 777 building is 90 percent leased.

"Transwestern has invested significant dollars into both amenities," says Harvey, "and the infrastructure over the last five years, and that has paid off."

Improved amenities include landscaping and significant interior renovations, including a new cafe.

The new infrastructure includes energy efficient chillers and fans with variable frequency drives.

"These buildings now receive national Energy Star awards," says Harvey. "Before 'green' became popular, we were pursuing that."

Commercial Market Opportunities

A positive effect of the tougher economy on the commercial property market is that landlords are working more closely with tenants.

"We service our listings better than we ever have," says Jim Chaconas of Colliers International's Ann Arbor office. "We've sharpened our skills." Chaconas recently joined Colliers, and now has access to greater research resources for his clients.

Swisher Commercial's Barton Wise says that rental rates may be better.

"Many landlords have been adjusting their pricing," he says. "If they have a vacancy and they want to attract tenants, they have to be flexible."

Ed Shaffran agrees. "It's a little soft in some areas, so you're probably going to get some better pricing on rental rates."

Bill Harvey of Transwestern's Detroit office sees similar opportunities for tenants.

"A lot of tenants now can renew a lease or negotiate a new lease at rates that are below what they were paying in the past," says Harvey.

While obtaining credit may still be an issue, perhaps this is only because easy credit became so commonplace.

Chaconas says that financing is harder to get for the commercial property market, but "in Ann Arbor, if it's a good project you can get the money." He tips his hat to local banks such as Michigan Commerce Bank (formerly Ann Arbor Commerce Bank), United Bank & Trust, Bank of Ann Arbor, Ann Arbor State Bank and Chelsea State Bank, which he says can help with commercial property purchase loans under $3 million. "They'll lend us money," he says. "They're a little tighter on the qualifications."

Shaffran sits on a loan committee and says, "When we had easy access to money, we think that becomes the standard."

Shaffran says, "Good people with good credit will always be able to borrow money." He adds, "In fact, they're getting very good deals. People with marginal credit, they're borrowing money at a higher rate."

Not much new commercial construction has happened in the area, which has probably helped maintain the lower vacancy rate. "We don't need anything right now," says Chaconas, although he points to the property across from Whole Foods on Washtenaw and believes there will be some room to grow on the west end of Ann Arbor.