Guest Column

West Michigan’s 2013 economy and what’s next

December 20, 2013
| By Rob Dwortz |
TAGS 2013 / 2014 / Economy
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Walking with my kids to church last week, my 10-year-old daughter was talking about a writing assignment she had at school, so I asked if she’d help me write this article.

She immediately broke into her "grown-up voice" and rattled off that people would buy more cars this year and home prices would continue to rise, but then the economy might come crashing down (a true story).

Apparently, I bring my work home.

The environment is such that a 10-year-old can figure out how many feel within the business community. Sales of cars and homes have been on the rise, but we all are a little leery about what might be lurking around the corner.

Looking back at 2013, here’s what we saw:

Commercial construction: Much of this was affordable housing, except for the Downtown Market, which has been a welcome addition to the region. I literally have to take three detours on my commute to work. Beautiful.

Residential construction: Last year, we referred to this as the “convergence” of residential real estate as the rise in existing home prices has made new construction more attractive. Existing home inventory levels remain low, and September marked the fourth consecutive drop in existing sales nationwide. Things feel better locally, particularly in specific markets (Grandville/Byron Center, Allendale, Cascade, Caledonia and others) where we see increasing construction activity with custom homes and some development. Our residential construction loan business is up more than 50 percent through the third quarter but we see this slowing in 2014 due to higher interest rates.

Manufacturing: This continued to be a strong sector in the region, particularly auto, and drove strong job growth in Kent and Ottawa counties. These counties reported August unemployment of 6.4 percent and 6.5 percent compared to the national and state levels of 7.3 percent and 8.7 percent, respectively. Many of our manufacturers have begun to see leveling of revenues but earnings remained strong this year.

Talent shortages: Related to employment strength, our loudest complaint from clients was again the scarcity of highly skilled talent, whether labor, trades, IT or engineering. The top complaint may be changing hands for 2014, however, as the many battles in Washington are having material unintended consequences.

Looking ahead

Slightly less obvious is that industrial real estate has become quite scarce in West Michigan. Numerous manufacturers are in the process of expanding existing facilities to meet client demand. We also are seeing early signs of speculative industrial projects returning to the market.

So, now the race is on to lock in or take chips off the table. Why? Because most of what goes up must come down in a cyclical economy. Cap and interest rates have been artificially low in 2013 while occupancy rates remain high for many forms of commercial real estate. As a result, owners have either locked in long-term low rates (mainly apartments and owner-occupied industrial) or have sold for strong valuations at what many believe to be the peak of the cycle.

Agribusiness also has been on a tear. Coming off a difficult 2012, crop yields and property values have improved substantially for area growers. Our business with this sector has more than doubled over the past 12 months.

Is it possible that we have a condo shortage? Unheard of just a few short years ago, condos are selling again in Grand Rapids and along the lakeshore.

We expect significantly more market-rate apartments to become available in 2014 and 2015. Several projects are on the drawing table or negotiating their financing. They are spread broadly throughout the region with concentrations in downtown Grand Rapids (Central Business District, Arena District, the Hill, North Monroe, Eastown/East Hills), Cascade and Allendale. Many are mixed-use developments with the apartments serving to anchor the financing.

Call it West Michigan conservatism or call it realism, but for all the good news and statistics surrounding our communities, many have chosen to keep their powder dry. These funds could fuel growth or remain a rainy-day fund. We’re not sure which yet.

So what does this all mean? It means that West Michigan is full of smart people (including my daughter). Real estate owners have taken the opportunity to reduce their risk or cash in. Business owners and consumers have taken advantage of recent prosperity to deleverage versus double down. People know that interest rates are being kept artificially low, which means more opportunity for asset bubbles to develop. Rates can only go in one direction from here. The effect of increasing rates on operating costs and real estate values is a cause for concern, but not for inaction when local demand is present (which it is).

Like my daughter, many of us feel like the other shoe has to drop with erratic global markets, interest rates set to rise and constant gridlock in Washington. Despite some of these concerns, West Michigan continues to operate in a healthy environment. We expect to see our downtowns continue to flourish, and our businesses remain well positioned to withstand anything the economy may throw at us.

Rob Dwortz is president and CEO of The Bank of Holland.

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