Economic indicator: Ann Arbor office vacancy report shows improving leasing market

Highlights from the three largest submarkets show:

• Downtown’s office market vacancy dropped to 13.57 percent after peaking in 2009 at 16.58 percent. • The “south market” of both office and flex space - which could be either office or light industrial uses - in the Briarwood and the South State Street areas improved from 20.96 percent to 15.81 percent. • The north office market - primarily the Plymouth Road corridor east to Domino’s Farms - was essentially unchanged at 12.64 percent vacant.

The gains, said Swisher CEO David Hamilton, “are a breath of fresh air.”

Last year’s report indicated fallout from the economic crisis, with vacancy rates climbing to record levels in the report, which has been conducted by Swisher since the early 1990s.

Agents at the firm contact landlords and their representatives, getting a sense of the largest deals and what kind of space remains available for lease.

The target properties are 3,000 square feet or larger and the survey excludes owner-occupied buildings. The total number of buildings surveyed was 318.

The survey is the deepest dive into the local office market available, and its consistent approach gives historical market data that otherwise would not be available.

The look at vacancy provides an indication of employment in the community, too: Companies that need more office space are using it to house staff. The reverse also is true.

The declines in 2009 and the gains in 2010 indicate that more companies downsized early in the downturn, said Swisher Vice President Bart Wise.

Then, in 2010, “there were far fewer losses and some gains,” Wise said. That trend mirrors recent unemployment data for Washtenaw County, which showed that the November unemployment rate of 7.2 percent improved the 2009 total by 150 basis points.

That represents a gain of 600 jobs, according to state data.

Anecdotally, local commercial real estate brokers say they’re seeing upticks in activity moving into the new year, a trend that started in later 2009.

On the leasing end, Hamilton said, more landlords are repricing their properties to reflect the availability of space. Some also are making more concessions.

But the freefall in rental rates seems to have stemmed, he added.

That’s not true across the boad. First Martin Corp., one of the area’s largest landlords with about 1 million square feet of commercial space, enters the year with a 3 percent vacancy rate.

That will change by a few percentage points in the first quarter as MSC Software downsizes, and sublease tenant Recellular moves to office space inside the Borders headquarters in south Ann Arbor.

Yet even the area’s overall vacany rate of 15 percent “is not bad,” said Chris Grant, First Martin’s vice president.

Many of the traditional office spaces on the market represent smaller floorplates of about 4,000 square feet, Grant said. And so far, the University of Michigan’s move to the former Pfizer campus in north Ann Arbor “has had no effect” on the leasing market.

Among the other submarkets, brokers already sensed that downtown is more active.

Michael Giraud of Colliers helped broker the transaction that sold the ex-Ann Arbor News building to the University of Michigan Credit Union. He then leased the third floor of the building to Arbor Research in late December, a deal that represents one of the largest office deals of the year.

“In recent weeks and months the pressure’s picked up,” he said. “I’ve seen a lot more people in the market downtown.”

And while the vacancy rate is still above 10 percent, Neal Warling of Jones Lang Lasalle described downtown as “incredibly tight,” particularly among tenants seeking larger spaces.

Much of the movement in the local office movement in 2010 involved companies already in this market, industry experts said. They’re watching for signs that new companies are moving into the community as a sign that the economy is improving.

Among the bigger deals that involve local expansions include Arbor Networks adding space in South State Commons and Amcor, which expanded when neighboring Phoenix Contact bought its own building.

Meanwhile, some areas are still soft, like west of Ann Arbor, including the Jackson Road corridor in Scio Township. The vacancy rate jumped from 19 to 25 percent, reflecting little demand for the many flex buildings there.

Meanwhile, there are owners across the area that won’t be able to survive another soft leasing year, said Jim Chaconas of Colliers. Some of the building purchases in 2010 involved foreclosures, and more seem ready to hit the market, he said.

Despite the challenges facing business across the area, Ann Arbor’s commercial real estate industry is staying hopeful that the recent trend toward improved occupancy will continue.

“There aren’t a lot of giant deals going on,” Hamilton said, “just a general improvement in the market. I think that’s a solid foundation to keep building from.”