Not Quite Spaced Out

December 8, 2005
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GRAND RAPIDS — Some of the warehouse and distribution space that was empty at the beginning of this year has been filled. And it’s more likely that tenants will lease more vacant square feet rather than buy space next year.

The former Bosch plant in Kentwood is a prime case in point of space dropping off the available listing. The building at 4700 Broadmoor Ave. SE had 915,000 unoccupied square feet when Franklin Partners LLC bought the massive plant in 2003, but today less than 200,000 square feet remains to be absorbed.

“At this point there are a couple of large manufacturing facilities, the Bosch building for example, that came out of the market and put direct pressure on the rest of the warehouse and distribution-type buildings. But some of those have been absorbed,” said John Kuiper, a vice president and industrial specialist with Grubb & Ellis/Paramount of Grand Rapids.

Not all 700,000 square feet that came off the market from the Bosch plant were leased or sold. A section was demolished when the plant was split into two buildings. Still, filling that building with tenants is a good omen for the entire market.

“The market for the warehouse-distribution type of space seems to be coming back. However, it is coming back slowly. There are still ample options for tenants looking to lease space, and it’s still a tenant’s market,” said Kuiper.

And lease is what tenants are likely to do.

The cost of construction coupled with the cost of land — and then tying both to higher commercial mortgage rates — makes buying space too expensive a proposition for some companies now.

Kuiper said the cost to build has risen the past few years, likely the result of higher-priced materials and of contractors being busy with construction in areas other than industrial. He also pointed out that property prices have remained stable the last five years, even for land that has been vacant over that time.

“It’s kind of a coin toss, to lease or build. The uncertainty is where interest rates and the cost of construction will end up by the time the building is built. If you can lock those in today, it’s kind of a neutral item. But as these continue to increase, it’s going to shift back to the leasing side,” said Kuiper.

“And a big part of that is the fact that the major warehouse-distribution property holders in this market have secured longer-term financing at historically low interest rates. Their cost of capital might be lower than what someone can achieve today.”

Kuiper also felt the incentives owners have offered tenants the last few years to lure them into their buildings will fade away soon. He said fewer perks have been offered the past few months because space has been absorbed and little in the way of new construction has occurred, so the market hasn’t seen a lot of new square footage pop up this year.

“There have been built-to-suit type projects,” he said. “But from a speculative construction point, less inventory hitting the market is a positive at this point in time.”

Warehouse & Distribution Space


About 4.6 million square feet of warehousing space was added to the metro market from the end of 2002 to the end of 2004. The good news is the vacancy rate fell by 7 percent over those years, while the rental rate remained steady.


The following chart lists the total amount of square feet dedicated to warehousing for the most recent three years, along with the vacancy and rental rates and the annual changes in percentages for both rates.

Year

End

Total Square

Footage

Vacancy

Rate

Percent

Change

Rental Rate Per

Square Foot/
Triple Net

Percent

Change

2004

18,169,000

12.8%

-3.4%

$3.27

-4.9%

2003

18,282,000

16.2%

-3.6%

$3.44

+5.8%

2002

13,504,516

19.8%

3.25

Source: Grubb & Ellis/Paramount Properties Real Estate Forecasts for 2003, 2004 & 2005     

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