Construction left in waiting room of office market

By Paul Snyder

Although a report predicts that filling Madison’s vacant office space will accelerate this year, construction of new office space probably will not follow quickly.

Such construction probably is two years away, said Chris Caulum, senior real estate associate for the Madison affiliate of Grubb & Ellis Co., a Santa Ana, Calif.-based real estate service and investment firm.

Grubb & Ellis is forecasting that after enduring a poor 2009, Madison’s office market will start improving in the second half of 2010.

Caulum said historic trends show the office market trailing the job market by 12 to 18 months.

Madison’s unemployment rate seems to have peaked in March 2009 at 6.5 percent, according to the Grubb & Ellis report, so the upswing in office occupancy should follow later this year.

Brad Binkowski, principal for Madison-based development firm Urban Land Interests Inc., called that projection “pretty optimistic.” He said even if occupancy rates increase this year, developers likely will not start proposing new projects for another 12 to 18 months after that.

“I think in certain market segments, you’re seeing a lot of activity,” Binkowski said. “But even in active markets, lenders are not putting financing out like they used to.”

ULI, which develops and leases office space in downtown Madison, is enjoying 80 to 90 percent occupancy in many of its downtown spaces, Binkowski said.

But he added the company will not build offices for at least two or three years.

“Some lenders are not even financing projects that are significantly leased,” he said.

Other developers are getting help by the growing medical markets. Meriter Health Services expanded in 2009, opening the doors for Madison-based The Alexander Co. to build a 110,000-square-foot office building on its Novation Campus.

According to the Grubb & Ellis report, Meriter’s occupancy of that building this year will help bolster the city’s office occupancy numbers.

But Alexander spokesman Dan Peterson said companies cannot continually expect such projects.

“It’s just as hard to find a big user for a building project as it is to find small users,” he said.

Alexander wants to construct another two-story office and retail building on the Novation Campus, but Peterson said the company’s leasing agents are still trying to find small tenants for the office portion. The company cannot get project financing, he said, unless there’s at least a 50 percent guarantee for occupancy.

“If we could find a tenant tomorrow,” he said, “we’d start building the next day.”
For now, Alexander and other firms throughout Madison will have to wait on construction as the market continues its slow recovery.

“If absorption picks up, we could see things happen more quickly,” Caulum said. “But even though it could start moving in the right direction this year, I think it could still take more than one year to get down to the equilibrium we’d like to see.”