Downtown office vacancies force landlords to get creative

Despite downtown’s vacancy woes, the market still holds a lot of promise and can rebound from recent setbacks.

That’s the view from Rich Forslund, an office broker at Summit Realty, who served as a panelist Friday at IBJ’s annual Commercial Real Estate and Construction Power Breakfast at the downtown Marriott hotel. (Forslund shares his thoughts in the following video; story continues below.)

Vacancy in 14 of the largest Class A office towers downtown is 22.6 percent, according to a Cassidy Turley report. Those buildings have a total of more than 1.3 million square feet of vacant space, and have suffered negative net absorption of 71,813 square feet through the first eight months of the year.

“They’re not considered the hotspots,” Forslund said of the towers. “That said, though, just because you’re a tower owner doesn’t mean you can’t attract the creative-type users.”

Technology firms are moving downtown, but they generally prefer older buildings with a certain character, such as the Century or Gibson buildings—two locations where ExactTarget has a major presence.

To compete, the towers need to get more creative by opening up ground-level common space into more than just areas where workers “wipe their feet,” Forslund said.

Coffee bars, restaurants or fitness centers make the most sense, he said. With both Regions and Market towers changing hands, opportunities are available for new ownership to reverse the trend, he said.

The 36-story Regions Tower on the northeast corner of Pennsylvania and Ohio streets has been purchased by New York-based The Nightingale Group LLC. And the 30-story Market Tower at Illinois and Market streets is going through a foreclosure in which Chicago-based Zeller Realty has purchased the note.

Occupancy in both buildings is below 70 percent.

What’s keeping occupancy low is a lack of new, large tenants entering the downtown market. So if occupancy increases in one tower, it’s typically because an existing downtown tenant jumps ship to another tower, in a musical-chairs scenario, Forslund said.

The good news for landlords is that rental rates are holding steady, ranging from $19 per square foot at several office towers to $27 per square foot at Chase Tower, which boasts the most expensive leases.

Suburban office markets such as the North Meridian Street corridor and Keystone at the Crossing are performing much better. In fact, financial firms increasingly are moving to the north side to be closer to their affluent clients.

If occupancy remains high in those areas, ultimately pushing rates up, companies preferring space around the beltway might consider downtown instead, Forslund said.

What prevents many companies from moving downtown, though, is a lack of on-site parking.  Forslund argues that workers should be willing to accept a short trek to and from their cars.

“We’ve got a lot of parking. It just tends to be a little farther out,” he said. “The fact that folks aren’t willing to walk more than two to three blocks to get to parking, that’s the true issue.”

Overall, with the addition of the Cultural Trail and other amenities, such as the Indiana Pacers Bikeshare and the electric car-sharing programs, downtown is vibrant, he said, which makes him bullish on the downtown office market.