Climate improving for office space in South Bend, Indiana

by Lori Snyder on 4/15/2014 in south bend, indiana

Downtown residential conversions could be key

Downtown South Bend is seen from the County-City Building on Dec. 20, 2013. (SBT File Photo/JAMES BROSCHER)

SOUTH BEND — Three of downtown’s notable buildings are recovering from foreclosure, but the city center’s office market is holding steady with some signs it could improve.

Local real estate professionals predict downtown will continue to evolve into more of an entertainment destination and a place where people want to live, but those developments won’t change downtown’s position as the region’s business hub.

Downtown is home to about half of the office space in St. Joseph County, and that doesn’t include government buildings. The occupancy rate for office space downtown is about 80 percent, which is an improvement of a couple of percentage points since 2011, according to local real estate firms’ research.

“We’ve got better market fundamentals than we have since probably 2006 or 2007,” said Brad Toothaker, a principal with Bradley Co., a South Bend-based commercial real estate firm, and Great Lakes Capital, a private equity and development company.

There are three big question marks downtown, however.

The 25-story Chase Tower is under new ownership after New York-based Washington Square Realty acquired it last month at a county sheriff’s sale. The Commerce Center at 401 E. Colfax Ave. and One Michiana Square at 100 E. Wayne St. also have been through the foreclosure process since last summer.

Ed Bradley, senior vice president of Mishawaka-based Newmark Grubb Cressy & Everett, said such high-profile foreclosures have “sort of a paralytic effect” on office tenants.

“That affects the psyche of the market and the tenants in those buildings,” Bradley said. “I think most of the tenants in those buildings are happy to be in those buildings, but they want to know what’s going to happen.”

The price to lease a downtown office — about $20 per square foot for top-rated Class A space and $10 to $15 per square foot for Class B space — is competitive with suburban options, but the cost associated with old buildings is a challenge for downtown property owners.

Paul Phair, vice president of market and tenant relations for South Bend-based Holladay Properties, said owners of multi-tenant buildings need to spend money on upgrades to attract new tenants, but it’s difficult to find that capital when rent prices are as flat as they’ve been downtown.

“You’re always having to reinvest,” Phair said. “At the same time, you’re not seeing rent growth, but your operating expenses are always going up.”

Everyone interviewed for this article agreed the rising interest in downtown living will help the downtown office market.

Less than half of the office space downtown is in Class A buildings. In comparison, almost 80 percent of the office space in suburban Mishawaka is Class A.

Converting some of downtown’s older, Class C office spaces into residential buildings will improve occupancy rates by removing supply from the lower end of the office market.

An example of that is happening at the old Hoffman Hotel, also known as the Amerigo Building or the Northwestern Mutual Building, at 120 W. LaSalle Ave. The 12-story building, which opened in 1930, offers Class C office space.

Equal Development, a developer based in Carmel, Ind., has landed affordable housing tax credits to fund a $5.3 million conversion of the Hoffman into apartments for artists. It’s planning to buy the building from Italbro Enterprises in June.

Pete Agostino, a local lawyer and one of the Italbro partners, said growing downtown’s residential population will create more demand for downtown office space.

“When you had the growth in the ‘80s and the ‘90s in Granger, I think that created the pressure to then create office space closer to where the people lived,” Agostino said. “What happened was you had an excess of office space in downtown, but I think that’s going to reverse itself.”

The JMS Building, a Class C office building at 108 N. Main St., is another candidate for a residential conversion. John Freidline, the owner of the eight-story building that dates back to 1909, said he is considering that possibility.

Another assist for the downtown office market could come from startup companies that outgrow the incubator Innovation Park at Notre Dame and technology firms that want downtown headquarters to complement their buildings at Ignition Park south of downtown.

There are examples of that already with Data Realty at American Trust Place, 101 N. Michigan St., and Vennli, which is planning to move into the Citizens Bank & Trust Building, 112 W. Jefferson Blvd.

“I think the commercialization of research out of the university will help with the office market, downtown and in other places,” Phair said. “If we do see a recovery in the office market, I think Innovation Park and Ignition Park will have a lot to do with it.”

But that doesn’t mean new office towers are likely to start rising anytime soon.
“It’s really, really unlikely that we’ll see brand-new construction out of the ground,” Bradley said. “There’s enough product still in the Class A market to support historical demand. I don’t see new construction happening.”

There are more office building renovations on tap, though.

Great Lakes renovated Citizens Bank & Trust, which is six stories and was built in 1912, last year. The project raised the building’s status to Class A from Class B.

The company owns two other Class A buildings — American Trust Place and Leighton Plaza — and is planning an overhaul for Main Street Row, a two-story Class C building at 209 N. Main St.

“The trend that we’ve seen the past couple years has been kind of a flight to quality,” Toothaker said, referring to the movement of tenants to top-rated space. “The fundamental economics of building ownership are getting better.”

Allen, Kevin. “Climate Improving for Office Space.” South Bend Tribune. South Bend Tribune, 13 Apr. 2014. Web. 15 Apr. 2014