Is there a spec office rebirth?
Spec office projects might not be coming back to Madison in droves, but there's ample support for the right projects.
From the pages of In Business magazine.
When the Great Recession hit during the tail end of 2007 and continued well into 2009, construction and development projects largely ground to a halt.
With the housing bubble popped, municipalities were reluctant to grant approval for new building projects, lenders were holding tight to funds they’d normally invest as new regulations hit banks and credit unions hard, and builders just weren’t building. Speculative office projects became a casualty of the environment, even if they largely weren’t to blame for causing the economic downturn.
However, within the past 18 months, more and more residential developments, particularly multifamily projects, have begun springing up around Madison again. Trailing behind are commercial developments, which are poised for a comeback of their own. Just don’t expect a new commercial boom, say local developers. The support for new spec office projects is there, as long as it’s the right kind of project.
Bringing back spec
One of the biggest barriers to new spec office development in Madison is that there isn’t much, if any, undeveloped available land within 3 miles of the Isthmus, says Bradley Hutter, president/CEO of MIG Commercial Real Estate. “There is a fair amount of redevelopment opportunity, but it’s always more expensive to acquire and clean up a site already built on.”
That’s one of the reasons Hutter says MIG is so excited about its upcoming project at Landmark Oaks, which sits above its current Central Beltline Campus. “This is the site at the termination of Landmark Place, on the former Jackson-Williams homestead, overlooking the entire City of Madison,” Hutter says.
It comprises nearly seven acres of commercially zoned land centrally located directly off of Todd Drive. “It’s 5 minutes to downtown, and 10 minutes to Middleton, Verona, Stoughton, or Sun Prairie. With spec office, the key words will always be location, location, location.”
Hutter says the size of the building was reconsidered due to the dearth of available office space in the Madison market. MIG is planning to break ground in the spring of what could be a 60,000 to 120,000-square-foot development.
In addition, Hutter says MIG is in the design phase of a project called Parmenter Place in Middleton, which originally was intended to just be multifamily and retail, but is getting a significant spec office component added on, as well. The office component will be no less than 40,000 additional square feet and may evolve to nearly 80,000 square feet of space.
One major spec office project that’s embracing the redevelopment route is the Anchor Bank project on the Capitol Square, which is helmed by Urban Land Interests. The Anchor Bank project totals 130,000 square feet of unleased spec office space.
Mark Binkowski, a development associate with Urban Land Interests, says local demand for new office space has reached a point where new projects practically had to start back up if anyone wanted to keep businesses in the area.
“Our vacancy rates are at a point now where we’re comfortable and confident in bringing new office space into the market,” Binkowski explains. “What we’re seeing with the way this market has changed is a lot of the individuals who are coming to this area for jobs with organizations like Epic, or UW Health and UW–Madison, are staying in Madison and starting businesses here.”
An example would be Zendesk, which is one of Urban Land Interests newer tenants. The company began with four employees and 1,000 square feet in a basement space. When its San Francisco-based CEO came to Madison, Binkowski says he was so impressed with the quality of life and the level of talent coming out of the UW, he decided to focus on Madison instead of opening a regional office in Boston or Austin. “They now lease 20,000 square feet in the U.S. Bank building and anticipate growing in the future,” Binkowski notes.
Binkowski also references the recently approved Judge Doyle Square project that could see the headquarters of Exact Sciences move downtown as an example of companies eager to locate in close proximity to the Capitol Square.
“These companies are looking to come downtown and there’s no new supply of office space to meet that demand,” Binkowski notes.
While spec office may not have caused the recession, developers still have their work cut out to convince lenders and municipalities that these projects are a good bet.
It helps to have a project that checks all the boxes.
MIG Commercial Real Estate's Landmark Oaks development, which sits above its current Central Beltline Campus and comprises nearly seven acres of commercially zoned land centrally located directly off of Todd Drive.
“Lenders are just recently identifying and understanding that there is a need for spec office again,” Hutter says. “We show our bankers that we have a dozen showings on a single open space in a week, and they grasp that there is a need out there which is not being met. Tenants need predictability and something they can see and feel themselves working and living in as far as office space.
“Very often you need to be in the ground and building and be able to show that CEO the foundation of an office before that executive will risk their life’s work and their employee’s futures by committing to something more than vaporware.”
Lenders are still cautious, but for the right product and in the right market they can get on board, notes Binkowski. “I think lenders are looking for those type of deals where obviously there’s no such thing as a safe bet, but they feel as though it’s a good project for them to invest in.”
Binkowski says one of the things he’s noticed in working with the City of Madison on the Anchor Bank project is city officials are excited about adaptive reuse projects — taking underutilized properties and sites and putting them to a greater and better use.
“The last major undeveloped corner of the Square was Anchor Bank, and that was a building that had sat underutilized for decades,” Binkowski says. “What we found in our approval process and working with the city was that was really the kind of project they could get excited about. A combination of underground parking with expanded office space and apartments — that sort of density is really what the city is looking for downtown.”
Aiding the recovery
While economists say the economy has recovered from the Great Recession, many people still feel the pinch brought on by the extended downturn. With the return of spec office developments, however, jobs and money are once again making their way back into the local economic stream.
“In the short term, spec office development provides hundreds if not thousands of full- and part-time design, engineering, construction, banking, accounting, legal, and finishing/interiors type jobs,” notes Hutter. “More significantly, long-term it creates land value which translates to property tax base which supports our schools and local colleges and community resources, services, and safety. By providing employers with options as to where they create, build, and grow their professional enterprises, we allow new and better jobs to be created which creates the famous tide that raises all ships.”
Binkowski says Urban Land Interests is all-in on the Anchor Bank project, which totals about $115 million in redevelopment of a big chunk of the southwestern quadrant of the Capitol Square. That cost includes a $75 million construction contract and 24-month long construction duration, which provides a lot of solid jobs for area construction workers.
“For us, we’re really excited to see the impact these kinds of projects have on Madison,” Binkowski says. “At Urban Land Interests, our goal has been revitalizing downtown. Obviously Block 89 was kind of the lynchpin of transforming downtown Madison into a place where you had the quality of life people were looking for and bringing businesses back downtown. For us, it’s a testament to Madison and all of the benefits that people have enjoyed from living here for so long.”
“I dream of a time when the central Beltline is a vibrant economic corridor that balances the isthmus and downtown,” adds Hutter. “That’s what it should be. I welcome other developers in a shared vision to not just build in cornfields but re-energize at-risk areas of our community and build by rebuilding in the key transportation corridors of our city. You see it happening on East Washington Avenue as well as the central Beltline, and it will and should continue.”
Click here to sign up for the free IB ezine – your twice-weekly resource for local business news, analysis, voices, and the names you need to know. If you are not already a subscriber to In Business magazine, be sure to sign up for our monthly print edition here.