This post is about the state of the office market in Downtown and its issues. You can read about the future demand for office space and the market’s potential, here.
CURRENT TENANT MIX
Downtown Fresno has a high concentration of government offices located in the Civic Center. The large presence of the government agencies creates a stable base for office employment. Most government agencies occupy publicly-owned buildings. This results in little opportunities for real estate investors to capitalize on long-term leases.
This reliable source of employment creates a demand for businesses like restaurants. But, is this demand sufficient enough when employees are known to immediately leave Downtown after 5pm?
Downtown employs around 30,000 people. This qualifies the area as a major job center. It, however, does not compete well for office space with other major job centers (North Fresno East, Shaw Central, North Fresno West, Shaw West, and Blackstone North). Downtown Fresno was the only job center that did not grow between 2002-2008.
In the first quarter of 2010, the average asking rent for Class A (highest quality) space was $2.07 per square foot per month. The highest asking rent was $2.53 in North Fresno. I looked at more updated information and found that this increased to $2.33 in the first quarter of 2012. Class A office space is on the high end. The highest average asking rent I could find as in Northwest Fresno at $2.39. The latest market report I looked at was missing figures for several markets. The two figures are conflicting, however SE concludes that the rent for new development is low, compared to North Fresno.
The data for Class B office space follows a more consistent trend. In the first quarter of 2010, the average asking rent for Class B office space was $1.34 per square foot per month. Class B office space was $1.39 in the first quarter of 2012. This shows an increasing trend. However, Class B space in Downtown has the lowest asking rent in Fresno. Other areas are charging as high as $200 per square foot. A landlord will most likely not view Downtown Fresno as a good place to buy, because they can charge more for rent in another area.
Each parking spot might cost around $50 to $65 per month on top of the monthly rent. Locations in North Fresno typically don’t charge for a parking spot. The cost of parking might not make up for the money renters are saving in rent.
The vacancy rate in Downtown is consistent with the overall vacancy rate in Fresno and Clovis. The most recent vacancy rate in Downtown, according to this market trend report, is 12.6%. The average vacancy rate for suburban areas in Fresno and Clovis is 15.5%. Some areas have experienced significantly higher vacancy rates, like in Clovis (19.8%) and Palm Bluffs (18.5%). Those markets have been unable to absorb the new construction that took place before the economic downturn. Downtown Fresno has seen very little development in office space in recent years.
Historic buildings face high vacancy rates. The Fulton Mall has a vacancy rate of over 50% in its office buildings. The seven largest historic office buildings, totaling 745,000 square feet of office space, are 71% vacant. Six historic buildings adjacent to the Mall, totaling 573,000 square feet. of office space, is 35% vacant.
Why do historic buildings have a high vacancy rate?
- Inefficient Layout: Large tenants find the floor plans of historic buildings too small for their operational needs. They would need more floors to compensate for the small space.
- Cost of Rehabilitation: Property owners are not motivated to rehabilitate a historic building to attract large businesses because of Downtown’s low asking rents.
- Access and Parking: There is plenty of parking in Downtown Fresno. There’s not however, plenty of convenient parking. Convenient parking, to Fresnans, means parking spots are right in front of a business. There is a parking garage on Van Ness and Inyo and the Club One/Holiday Inn has underground parking. There are now on-street parking at the Fulton Mall. Downtown parking could very well be safer. But, that doesn’t matter if clients have a harder time accessing and finding offices than they would in the suburban areas.
- Uncertain Plans: There has been a jump in sales activity, in the past few years. Real estate investors have purchased at least six large, historic buildings. There are plans to convert these buildings into mixed-use. The ground floor will be reserved for retail while office and residential spaces will be located on the upper floors. Few projects have been completed and most of the buildings still remain vacant during the planning process. This uncertainty will drives a lot of potential tenants away.
The following issues need to be addressed before Downtown Fresno’s office market can improve:
- Low Rent: Low rents are good when it comes to attracting tenants, but developers will not see investing in Downtown profitable. Downtown has the potential to see rising rents as more buildings are being rehabilitated. Perhaps private construction will follow.
- Parking Costs and Access: Parking is perceived as an unnecccessary added expense and inconvenient. It’s easier to create more accessible parking than convincing Fresnans to walk a bit more.
- Filling High Inventory of Vacant Spaces: There is about 730,000 square feet of vacant historic office space in Downtown. These historic buildings often represent the health of Downtown. If these buildings are not being marketed properly and are not filling in space, then it will be difficult to attract other investors and businesses.
- Distance from Job Centers: Downtown Fresno employs over 30,000 people. Most of these employees travel from the Bullard, Clovis and, Roosevelt Areas. The office market does not attract a lot of people from great distances as the industrial market does.
Read more about the real estate market in Downtown Fresno:
Have a lovely day in Fresno!
Veronica Stumpf, Co-Broker
DRE Lic. #01906952