Guest Column

Manufacturing is fueling the real estate market

February 22, 2013
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To those of us from West Michigan, our quality of life has historically been a well-kept secret. As that secret is increasingly shared with the nation, more and more people are looking to West Michigan as a place to call home. Also, we are increasingly seeing money look for a “home” in West Michigan, specifically in commercial real estate. Our marketplace is attracting both debt and capital seeking a secure place to reside.

Why? The fundamentals for West Michigan’s commercial real estate market are solid and we are leading national trends. Supply is tightening with across-the-board increases in absorption and decreasing vacancies. Rental rates are stabilizing and in some areas rising, thereby increasing overall values in commercial properties. Manufacturing has rebounded. Job growth remains intact in West Michigan with unemployment numbers that are ahead of the nation as a whole. The “troubled assets” have, to a great degree, moved off the balance sheets of local lenders. The uncertainty in other market sectors combined with a threat of future inflation are driving demand as more and more investors look to place equity in commercial real estate as a hedge.

West Michigan’s history and strength is in manufacturing and it continues to fuel our economy. What Rust Belt? Manufacturing is a growth sector for our region. More than 20 percent of total employment for Kent County remains based in manufacturing, and that number is nearly 30 percent for Ottawa County as compared to national averages of around 15 percent. Manufacturing employment is the high-octane fuel that accelerates an economy. Manufacturing offers a “job multiplier effect” greater than any other sector, meaning a manufacturing job triggers greater job growth into other sectors.

Our manufacturing community was both downsizing and increasing efficiencies for years before the nation’s economy crashed in 2008. Those who have survived are lean, strong and poised for growth. Additionally, the trend of “off-shoring” production overseas has reversed. Whether  due to quality concerns, patent protection, logistics, the value of the dollar or a combination of these factors, producers now are “on-shoring” and bringing production from overseas back home. This is especially prevalent in the high-tech, high-skilled, lower-volume processes. West Michigan benefits greatly from this trend given the existing infrastructure, supply chain and expertise found here.

The future of manufacturing in Michigan continues to be bright, as recent state-level announcements add more accelerating fuel. As a peninsula, Michigan is often overlooked by suppliers simply due to logistics. The only way to improve logistics to any peninsula is through bridges. Build the bridge! Also, legislative changes allowing workers the freedom to work only increases our appeal to large employers.

This momentum is affecting real estate, as industrial properties see record low availability and record high pricing. In fact, many manufacturers with demand for more space cannot find facilities to suit their needs. This will undoubtedly trigger both land sales and new construction in the industrial sector. Manufacturing continues to fuel other sectors.

Retail also benefits from the manufacturing renaissance. The retail properties in our market have struggled more so than any other sector. The retail market was overbuilt and, unfortunately, remains “under demolished” as many properties aren’t located properly or designed for the needs of today’s retailer. However, the downturn in the market triggered movement as retailers seized the opportunity to “upgrade” their location by leaping to more desirable corridors. More than any other property type, retail properties live and die by the old real estate adage: “location, location, location.” Poorly located properties will remain depressed. Well-located properties are filling up with increasingly strong rents and selling prices. Overall, retail properties are seeing an increase in activity, pricing and value. Interestingly, we are seeing several national retailers looking to start their entry into Michigan right here in West Michigan.

Office properties also are rebounding. The last nine quarters resulted in positive absorption and declining vacancy. That’s an interesting trend when you consider that today’s office users are increasing efficiencies by placing more people in less square footage. Even with office users minimizing space requirements, the market is seeing significant absorption. This growth is resulting in very tight supply in certain areas. Lack of supply triggers new construction. Watch out for cranes around downtown Grand Rapids.

2013 is the year to get things done. Are you a tenant? Lock in long-term lease rates as they are only going to increase. Are you an owner? Lock in long-term debt as the threat of increasing interest rates looms. Investors will be selling and buying — selling because demand and pricing is high; buying as a hedge against looming inflation concerns.

The fundamentals are strong. West Michigan continues to be a great place to live and work and accelerate your success putting money to work right at home.

Derek Hunderman is managing partner at the West Michigan office of Colliers International.

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