[animatedmartian]

Google's move reveals challenges for downtown Ann Arbor
By Nathan Bomey, Detroit Free Press



Google's decision to build a new corporate campus in northern Ann Arbor is another sign of the city's economic momentum, but it also exposes a lurking crisis for the growth prospects of downtown.

Construction cranes dot Ann Arbor's bustling urban core, erecting several new high-rise luxury apartment complexes geared primarily at wealthy students and young professionals.

What you won't see across the shifting skyline is new office construction. Tech companies are aching to locate downtown, but real estate developers say it doesn't make financial sense to build new offices to house them.

So as downtown Ann Arbor's thriving tech companies grow, they won't just be tempted to leave. They'll be forced to leave.

"If we had more space would we able to have more companies downtown? I think the answer is yes," said Paul Krutko, CEO of economic development group Ann Arbor SPARK. "Right now it's a restrictor."

It's already happening. Google ran out of space at the McKinley Towne Centre complex at the corner of Liberty and Division in the heart of Ann Arbor's technology corridor, where it was previously leasing 85,000 square feet.

With more than 400 employees at its Ann Arbor sales division and smaller Birmingham office, Google's decision to leave downtown was inevitable. Google signed a deal with First Martin to lease an existing office on the city's north side and construct an adjacent new facility, all totaling about 140,000 square feet to accommodate its growth.

By comparison, at the end of 2014 downtown Ann Arbor had a total of 61,399 square feet of office space available, according to Swisher Commercial's annual real estate survey.

That reflects a stunningly low vacancy rate of 3.62%, compared to southeast Michigan's overall office vacancy rate of 25.1%, according to National Association of Realtors.

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The question many people are asking is, 'At what point will a new building be built to meet the demand for downtown office space?'" Swisher reported.

It's not far off. McKinley, for example, owns the air rights to develop the McKinley Towne Centre complex skyward.

Within a few years, it will probably make financial sense to build up.

Average commercial office space rent is about $20 to $25 per square foot in downtown Ann Arbor right now. Berriz said it needs to reach about $40 to $45 to justify new development.

"The rents have grown a lot in the last 10 years," he said. "I don't think it's there today to build the kinds of buildings some of these companies would like to have. But I also think that places down by the airport, places down by Briarwood Mall -- if you look at all parts of Ann Arbor, they're all full. So what's happening is it's all going to push back to the downtown. And sooner or later, downtown development for office will be justifiable."

The first stage of downtown Ann Arbor's development boom was high-rise student luxury apartments, with sparkling new towers charging high rates for plush amenities.

But Berriz said he believes that phase is coming to an end.

"Candidly that market is over-saturated in my opinion," he said. "We do a lot of distressed real estate across the country and that's an asset class that in many locations is overbuilt and in trouble. I think there's a limit to the number of students that can pay $1,400 for one bed. There was a surge. I think that surge is over."

The vexing challenge now is making the numbers work for new downtown office developments.

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http://www.freep.com/story/money/bus...rket/27713089/