Indy Market Picking Up
David Czurak

	Kuiper

GRAND RAPIDS — The industrial real estate market began the year with a vacancy rate of 9.5 percent, down three-tenths of a point from the start of last year.

That drop provided enough proof to show those in the business that the market was going through a slow but steady turnaround, and might even be headed back to the 7 percent vacancy rate the industrial sector had in 2005.

Halfway through this year, there is evidence that the turnaround is continuing.

"Things have been turning around slowly but nicely in the last few months. We'll have to see how the statistics keep moving throughout the rest of the year, but our hope and our gut feeling is the industrial market was at its bottom at the end of last year," said John Kuiper, vice president at Grubb & Ellis|Paramount Commerce and a specialist in industrial real estate.

Kuiper said one subtle reason the market is doing better is that a fair amount of existing tenants have expanded their spaces over the past year because of growth. For instance, Grand Rapids Plastics is adding 27,000 square feet this summer to its 80,000-square-foot building in Wyoming. Work is expected to be completed in the fall.

One not-so-subtle reason for the optimism in the market is due to Ashley Capital's success with redeveloping the 206 acres that the New Jersey-based real estate developer bought from Steelcase Inc.

Ashley Capital has sold three former Steelcase plants to a trio of manufacturers, and filled a total of 1.96 million square feet of previously vacant space in the Grand Rapids Commerce Center at Eastern Avenue and 44th Street on the city's southeast side.

Kuiper said one manufacturer, Bata Plastics, moved from 100th Street to the Commerce Center and doubled its space to 120,000 square feet in the process. Another, Amstore Inc., bought 895,000 square feet on the Ashley Capital property. But Kuiper said the company is likely to move from Walker, Norton Shores and Coopersville to its new building. Both are seen by Kuiper as significant moves. Neither, however, qualifies in the tabulation of total new absorption because both firms had a presence in the region before going to the center.

It was the third — Diversified Distribution Systems — that made the single biggest change to the market. DDS consolidated its operations at two facilities in Detroit and one in Chicago with a move to the center, buying 950,000 square feet in a market that has a total of roughly 115 million square feet of industrial space.

"That was all new space — new occupancy that we hadn't had in our market. That was probably the most significant boost from a statistics standpoint. That's almost a full percentage point change in vacancy," said Kuiper.

"Think about how many 25,000-square-foot buildings would have to be leased, or now occupied to change the statistics that quickly. … So the DDS transaction was a huge positive for the market, our statistics and the Grand Rapids Commerce Center." 

Regardless of the absorption rate, Kuiper felt that having Amstore and DDS purchase that much combined space — 1.8 million square feet in all — within the first six months of this year was a "phenomenal" achievement for the market.

"I can't recall two firms coming in and taking down that much size without an operating entity attached. I just don't," he said

GE|PC brokered the three Commerce Center transactions.

Kuiper said he doesn't expect much in the way of speculative construction this year with the amount of square footage that remains available.

He does, however, see more existing spaces being redeveloped, even if some vacant buildings will have to be divided and then repositioned as smaller units with new identities.

Of course, the financial market will have a say as to which way the occupancy rate will go in the region. Kuiper noted that credit remains tight for building owners, potential buyers and current users. A tight money policy will likely mean fewer buildings will change hands, but the demand for leased space could rise.

Kuiper pointed out that another outcome of the same policy could result in landlords not getting such favorable rates and terms when they have to renew their existing loans, which means they may not be able to be as generous as they are now with handing out concessions to tenants.

"We'll see how it plays out. I really don't know. We're in a period of time when we've never had such a tightening up of the availability of debt. Nobody is really speculating on that now. But I'll go out on a limb and say it's probably going to increase the leasing activity and decrease the sales activity for a period of time," he said.

"If your regional bank used to allow you buy a building with 15 percent equity going into the deal, today they may want 20 or 25 percent. Well, on a million-dollar deal, you've just bumped the number up $100,000 — and that's a lot of money."

But Kuiper said landlords are still open to putting a deal together, as they have been for the past few years in what has clearly been a tenant market.

That scenario, though, could change someday and possibly sooner than many might think.

"Over the last couple of years, the concessions have definitely increased. The landlords are as friendly as they'll ever be right now, meaning they are open to more concessions and to trying to help people get in and get operating," he said.

"But I think landlords will probably begin pulling things off the table sooner than later. There has been exciting tenant growth (and) new companies have moved into the market, and when you start to weigh the options, it's all in supply and demand. If the supply starts to be absorbed and the demand increases, the rates are going to go up and the concessions are going to go down." BJX