Why downtown Ann Arbor needs more office space, and why it’s unlikely to get some

One North Main

NATALIE BURG / CONCENTRATE | FRIDAY, JUNE 26, 2015

In 2013, we spoke with Duo Security co-founder & CEO Dug Song about how Ann Arbor’s high residential rental costs were affecting his company’s ability to grow. While he acknowledged rental rates as a major challenge for attracting talent, he counted another factor as a top concern:

“It’s hard to find large floor space,” he said at the time. “The challenge for us is partly residential issues, but it’s just as much about commercial space.”

As it turns out, that wasn’t just one entrepreneur’s opinion. Less than a year later, a downtown market report by 4ward Planning  identified demand for an additional 90,000 to 100,000 square feet of office space within the City of Ann Arbor by 2019. That’s about the amount of apartment space in the 10-story Zaragon Place building. And considering it takes years for development projects of that scale to be planned, approved and constructed, someone had better get a move on if downtown Ann Arbor is going to meet that goal. Because companies aren’t waiting around—just look at Google.

While Google representatives declined to be interviewed for the story, it’s safe to assume the tech behemoth’s upcoming move out of downtown and into a much larger campus they’ll soon build on Traverwood Dr. has something to do with the need for room to grow. And that’s just the latest and most high-profile example.

“We need more space for Duo immediately, and have opened offices in the Bay Area and London to accommodate our need for talent,” Song says today. “But beyond Duo, more space means more companies like us can grow here, which increases the available talent pool for all of our companies in the long run. For Duo to be successful in Ann Arbor, we need Ann Arbor to be successful in developing its tech ecosystem.”

The office space challenges

Well, that sounds like a good plan. What’s stopping it from happening? Though the need for more available office space may be straightforward, filling that need is anything but. As Ann Arbor Downtown Development Authority Executive Director Susan Pollay explains, multiple factors make building new office space a challenge downtown.

First, there’s the obvious: There just isn’t a lot of space available to build downtown. With so much historically designated property or land in the floodplain, 61 percent of the DDA district is un-developable. Then, there’s the fact that there is plenty of developable land outside the downtown.

“This is not the only game in town,” says Pollay. “There is a lot of wide open space outside the downtown where new office can be and is being constructed.”

And downtown Ann Arbor is not the only game in the region either. The sprawling townships are more than happy to build another suburban office park for new businesses. And, according to President and CEO of Ann Arbor SPARK Paul Krutko, with downtown Ann Arbor demand what it is, his organization is beginning to work with Washtenaw County to place businesses in downtown Ypsi. While these facts may be all well and good for regionalism and the city’s neighbors, it certainly isn’t doing anything to grow Ann Arbor’s tax base or create a more diverse and balanced downtown.

But the challenge that might be the least obvious, even downright surprising to most, is that downtown rent simply isn’t high enough.

Come again? There’s rent in Ann Arbor that isn’t high enough?

Despite what we’re always hearing about downtown rent, it’s true.

“Don’t confuse ground-floor retail space for office space,” says Song, “they are totally different markets, and priced accordingly. A coffee shop on Main St. pays double per square foot what office space on the second floor goes for.”

And in a developer’s calculation for what rent would need to be to justify the cost of constructing a downtown building, rent is simply not high enough here in Ann Arbor.

“The rents are increasing,” Pollay says, “but for future construction, they’re going to have to be higher still.”

While that may sound like a purely market-driven obstacle, there’s a little more to it. It’s a political challenge as well.

“Many of the development sites that are available are owned by the city, and posture of the city council is they just want market rate development to happen to maximize their potential sale price,” says President and CEO of Ann Arbor SPARK Paul Krutko, “and in this marketplace, that will tend to [be] a residential project rather than an office/R&D project.”

What else could they do? Well, because of the potential long-term gains of an office building—a higher tax capture and job creation among them—cities can incentivize developers to build office on properties purchased by the city. Thus far, that hasn’t been the case. Of nine current proposals for the city-owned Library Lot property, for example, six include no office space, two offer one floor of office.

And there’s one other office space obstacle that has political origins.

“The city council, as well as the planning commission, has concern with height and mass of buildings,” Krutko says. “One way for a building is to more affordable per square foot is to have a higher and bigger building.”

With all of these challenges, it seems the amount of new office space in demand over the next five years is unlikely to appear in that timeframe.

“It’s going to require a special set of circumstances, I believe, for us to see a new office constructed in downtown,” says Krutko.

A future for office

That doesn’t mean nothing can be done. In fact, one thing the rising demand for office space has produced are some creative solutions.

“As the demand has grown and supply has stayed stagnant, we’re finding office taking shape in places we might never have thought of about,” says Pollay. “A wonderful example is Menlo’s reuse of the former Tally Hall space…Barracuda is in what was the back part of Jacobson’s. The demand is helping to reveal some of the treasures in our downtown.”

While it would take an awful lot of creative thinking to reach 90,000 to 100,000 square feet more  space, increasing the incentives for companies to come downtown could be another way to attract investment. And in busy downtowns, there are few better amenities for employers than great public transportation.

“One of the most important things we can do is to strengthen our support for our local, and I hope one day, regional transit system,” says Pollay.

With stronger public transit, higher rents for office space and more political will, downtown could avoid the negative impacts Krutko says the rising demand hasn’t quite yet, but soon could, create.

“We don’t feel like we’ve lost a potential transaction because of the lack of space,” says Krutko. “We’ve been able to find locations for companies. I do think we’re getting to the point where there is a lack of capacity, and it may become a real problem over the next year or two.”

So while the challenges to building more office space in downtown are many, time is a-wasting. And for companies like Duo Security to continue to grow here, as well as outside businesses to be attracted to downtown Ann Arbor, demand has spoken: One way or another, it’s time to make room or make way for more office space.

Natalie Burg is a senior writer at Concentrate and IMG project editor.

All photos by Doug Coombe.

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Original Source: http://www.semichiganstartup.com/features/officespaceinAnnArbor0332.aspx

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