Industrial Market Starts Picking Up

July 26, 2004
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GRAND RAPIDS — In 1999, the industrial real estate forecast compiled by Grubb & Ellis/Paramount reported a vacancy rate of just 4 percent in the West Michigan market.

The firm’s most recent forecast, released at its annual breakfast meeting last winter, marked the rate of empty space at 6.5 percent and its amount at 7.8 million square feet.

The Grubb & Ellis/Paramount annual forecast includes owner-occupied space.

But Paramount President and CEO Duke Suwyn said activity has started to pick up since then.

He told the Business Journal that his firm is holding more showings and seeing more industrial lease deals being closed.

“It will be a little bit before the statistics probably show it, but the market has picked up at an accelerated pace,” he said.

“Is it back to what it was four years ago? No.”

Suwyn offered that his company’s showings of industrial properties have doubled over each of the past six months. He said June and July have been the busiest months and represent a dramatic increase in interest over the activity that took place in December and January.

“I can tell you that we have completed some deals this year that are larger than we have completed in the last couple of years on lease deals,” he said.

“There is no question that the acceleration is coming. People are examining all their options.

“They’re still a little hesitant on pulling the trigger,” he added, “but they’re getting to the point where they’re going to be forced to because the market is requiring it of them.”

Suwyn said sales of smaller buildings — those less than 30,000 square feet — are hot. Some are going for top dollar, even setting record prices, and he said demand for these structures remains strong for three reasons.

First, West Michigan is an owner’s market. Second, interest rates are a sliver of what they were a decade ago. Third, the supply of smaller buildings is short.

Suwyn felt that interest rates would rise this year and could put a dent in some of the demand. But the two other factors aren’t likely to change, meaning the need and desire for these buildings would still be there.

“But the big stuff is still the one that is languishing, the 100,000 foot and above. That hasn’t changed dramatically,” he said.

John Kuiper, a partner at Grubb & Ellis/Paramount and an industrial specialist, said lease rates for industrial space probably wouldn’t change for the rest of this year. However, he did note that landlords would almost certainly begin to pull some of their incentives to tenants — like six months of free rent — from the bargaining table yet this year.

“I really think we’re at a point in the market where the best package with the shortest term available to a tenant is available for a very short window yet. These are starting to come off the table,” he said.

“It’s pretty interesting because there are a handful of pretty large tenants that are looking around. If they’re in a position to find a new home, now is a great time to do it,” he added.

Suwyn said local tenants with a national connection have been told by the home office to negotiate a lease extension, regardless if they have years remaining on their current contract.

“We’re also seeing that on the local level. Some know they’re going to be in the building for longer than the balance of their term and they’re negotiating right now,” he said.

Suwyn remarked that the goal for the market is to absorb some of the big box space just sitting out there from the decline in manufacturing across the region, rather than having new construction add more square footage to an already large inventory.

“That is a key for us. Every 100,000-foot-chunk of building that gets leased takes some competitive product off the market.”

Another option is for some of these buildings to be used for purposes other than producing products and storage.

Over the last few years, some have been renovated into offices, retail and housing. Suwyn felt that a few of the older versions of these buildings, along with those not in ideal manufacturing locations, would continue to be converted to different uses.

More often than not, however, what he thinks will happen is that most empty warehouses will be divided into a number of smaller sections and leased to a handful of firms that have a connection to manufacturing.

That is what Suwyn saw slowly happening to the Atwood Building in Lowell, a 280,000-square-footer that previously was occupied by Steelcase and then Brunswick.

“We have just about got that thing leased up with a series of five tenants,” he said.

“That building is, for all practical purposes, full today.”

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