Creative use of space
With viable industrial options in short supply, building may soon be the only solution.
Brokers who have clients looking for industrial space in West Michigan may need to consider some creative options.
That’s the attitude Stu Kingma, an associate broker with NAI Wisinski of West Michigan, has toward meeting the challenges of finding industrial spaces in the West Michigan market.
In a nutshell, here’s the issue: Brokers are running into inventory problems, he said. There are clients and companies that have demand for industrial and manufacturing facilities, but those facilities simply aren’t in the pipeline any longer because so much of it already has been sold.
“Last year at this time when we did strategic planning, one of the comments I made was this: Going into 2015, we will have inventory demand that we will not be able to satisfy,” he said.
“Did I sell my way out of a job? In some respects and at some level, the answer is unequivocally yes. Now, that being said, what it has required is a re-thinking of how we’re solving clients’ problems.”
West Michigan’s industrial real estate market was soft from 2007-2010, but it kicked back in from 2011-2013, he said. In the last 24 to 30 months, the market has tightened up, forcing brokers like Kingma to migrate toward deals that require a little more imagination.
“If you’ve got a client that has a need for space and you don’t have an existing option, then options become more creative,” he said.
A perfect example of this was the old injection-mold facility at 5041 68th St. SE in Caledonia. Cougar Development LLC sold the building to Koch George Sons LLC, connected to George Koch Sons LLC of Evansville, Indiana, for $1,965,000 on Feb. 18 this year.
When Kingma took a look at it, the 85,400-square-foot, heavy-industrial building had a front end with low ceilings and walls that chopped up the space. It just was not suitable for today’s environment, he said, even though the back end of the building was in excellent condition.
“Over time, we reduced the price down to $1,750,000. It was then off the market for a period of time, and we were ultimately able to get the tenant that we put in the back section … to buy it, and they paid $1,950,000, which was $200,000 more than at one point we were asking,” he said.
“Beyond that, here’s what they did: (The back of the building) is wonderful manufacturing space. (The front) stinks. … It was an injection molding company which … grew in increments and then they grew big. So when we were working with the tenant, the tenants said, ‘I really like the back; I hate the front. We don’t want to buy the building because we have no use for it.’”
Kingma got creative and offered a new concept: Tear down the 38,000 unwanted square feet of the building.
“This is what we proposed they do and this is what they actually did. If you drive by that building today, they’re building it now — there’s a construction fence around it. All of (the front) is gone and they’re going to add on to the building going forward (making it like the back-end space),” he said.
“That company was willing to go through the pain of buying a building for more money than at one point the seller was willing to accept, go through the expense of taking what they just paid almost $2 million for, and tearing down 38,000 square feet and then adding back on … simply because they couldn’t find another building in the market that made sense.”
That building project at 5041 68th St. in many ways is a symbol to Kingma of the current state of the market. Although there aren’t a lot of options for space, the spaces that are available are being re-imagined in ways never before considered.
“If you can’t find what you need to build or buy, do you look at building? Do you look at potentially leasing with an option to buy? Do you look at an outright lease instead of a purchase — because those opportunities still exist — or do you look at a hybrid approach, like what happened with 5041 68th Street?” he said.
“Outside of that, what’s going to keep me from selling myself out of a job is, as companies continue to demand space, at some point they are going to have to go out and satisfy that need by either leasing or building, if they can’t find what they want to buy. And when either of those takes place, they’re going to migrate over to the new space, and that’s going to leave a hole. That hole is what we can go to market with and find another user for.”
The industrial market doesn’t need to freak out just yet, Kingma assured. There is still land available. The greatest concentration of property zoned for industrial is in the Cascade Township area near Kentwood — an area Kingma refers to as the “Southeast industrial airport area,” or simply “the Southeast.”
The other area where there’s still space for industrial development is in Walker because “it’s got properly zoned land — large masses of it that can be industrial,” he said.
And don’t forget about Wyoming.
“Currently, the city of Wyoming has the largest square footage concentration of industrial property in the area,” he said.
“The issue with Wyoming is … they don’t have a lot of land left. There is industrial land available in Wyoming, still, but not as much compared to Caledonia and Walker that is vacant today … but that doesn’t mean you couldn’t get a deal done in Wyoming.”
After a recession and a renaissance comes resistance: Right now, West Michigan’s industrial real estate market is in an adjustment period, economically, Kingma said. This is leading to a phase of new construction, but supply and demand have made the prices go up, and that’s slowing the process, he said.
“We’re just now getting to the stage when we’ve ‘run out’ of inventory, so now we’re in that business cycle where people are saying, ‘I can’t find it; I’m going to have to build it.’ That’s not an overnight decision. That takes time and money because land and construction prices are high,” he said.
Another issue slowing the process is the area’s contractors cannot meet the racing speed of the market’s demand to build.
“There’s also simply a constraint on what can get built. The contractors are all really, really busy,” he said. “If you talk to any general contractor, ask them if they’re busy, and they’ll look at you like, ‘I’m buried!’”
Sooner or later, the only option for some companies seeking industrial real estate will have to be new construction, Kingma said. That’s ultimately the next step — and one that’s probably long overdue.
The return of companies to West Michigan that left during the Great Recession, coupled with a strong economy, has created a pinch in building space because the area hasn’t been adding to its supply.
“We haven’t built new buildings in Grand Rapids in many, many years in mass. For a time, manufacturing was going out of the country … and every time that happened, it created excess space,” he said. “Now you’ve got a strong economy where people are buying buildings and you no longer have this migration from Michigan to other places. They’re coming back.
“There was always a building next door we could buy. The building next door is no longer available. New construction is where we have to go.”