Industrial Land Vacancy Rate High

July 26, 2004
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GRAND RAPIDS — S.J. Wisinski & Co. Vice President Stu Kingma had the honors for reporting the metro area's industrial real estate numbers to the Society of Industrial and Office Realtors for the sixth consecutive year in 2003.

His report, released Dec. 31, pegged the vacancy rate at 9.7 percent last year for the market's manufacturing, warehousing, and research and development space — the highest the rate has been since at least 1998.

Nearly 9.1 million square feet was empty and available for lease or purchase last year, the most vacant space the market has had over the past six years.

In fact, the amount of empty industrial space in 2003 was more than double what was available in 1998.

Little has changed overall since Kingma's most recent report made the rounds. At least not for the big boxes, those that stretch for 200,000 square feet and more.

"I don't think on that bigger stuff that we've seen a whole lot of net absorption," said Kingma.

But one segment of the industrial market seems to be doing quite well. Smaller buildings, those that are 20,000 square feet or less, are selling nicely and have been doing so for much of the last two years.

"These remain fairly robust,' said Kingma. "That has been driven by interest rates, pure and simple."

Interest rates were at rock bottom for the past few years, anchored by the fed funds rate that has been under 2 percent since November 2001 and stuck at 1 percent for the past 12 of 13 months.

But with the Federal Reserve Board recently raising the funds figure by a quarter point, will that drain the drive for these smaller industrial buildings?

"I don't believe so, because we're still pretty low historically," said Kingma.

"However, there remains a substantial big-bulk, high-cubed warehousing space in the western Michigan region," he added.

"And that situation, I think, is going to take some time to work itself out of the system — probably another 12 to 24 months."

The difficulty in having a complete rebound is that half the 93.5 million square feet in the market is warehousing space. And, of course, until more of those square feet are filled with some sort of use, such as manufacturing, storage or office, the numbers won't look as good as in past years.

But Kingma does see a few rays of light at the end of this long and dark tunnel.

Good reports from Herman Miller, Steelcase Inc. and the Lacks Corp. have given him some hope that a turnaround may be closer than was thought last year, despite a fair amount of oversupply and capacity in the market.

Still, until activity really picks up, he noted, manufacturers will continue to use the space they having been using and no new absorption will take place in the market.

"Until that happens, they're going to be able to operate, as are their suppliers, within their existing buildings. We call it 'phantom vacancy.' It's buildings that are occupied, but not fully utilized," said Kingma.

Kingma felt that leasing rates wouldn't be coming down any further because doing so would lower the market value of a building. He also said that now is the best time for a tenant to cut a long-term deal.

"I think rates are at the bottom and I think that landlord incentives are at a level that are not sustainable.

"I think as demand picks up, the opportunities that are available in today's market are going to taper off," he said.

The current situation doesn't mean that there isn't any activity in the industrial market. Robert Grooters Development Co. is building (see related story) and First Companies Inc. is buying.

In a deal brokered by Kingma and James Badaluco, executive vice president with S.J. Wisinski, First Companies bought 16 southeast side acres from Autocam Corp. earlier this month. The land is just west of the 40th Street cul-de-sac in Kentwood. First Companies President Jeff Baker plans to extend 40th Street to East Paris Avenue and then divide the land into a series of one- and two-acre lots for sale or lease.

"With over nine million square feet of vacant industrial space in Grand Rapids, it might initially sound like a crazy idea to add more," said Kingma.

"But the one- to two-acre lots that First Companies are planning are a hot commodity in the airport area."

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