Construction and Real Estate

Realtors predict high demand for 2018

Inconsistent construction cycles challenge availability of space.

December 22, 2017
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Woodland Mall
Woodland Mall is called a “shining diamond” among retail locations for 2018. Courtesy NAI Wisinski West Michigan

(As seen on WZZM TV 13) A high demand for space has been one of the main trends for real estate in 2017, and industry experts expect the same going into 2018, with the main concern being product shortage facilitated by the heightened costs of construction.

Stuart Kingma, broker with NAI Wisinski West Michigan, said significant market activity in the industrial sector has been the trend for at least the past three years.

“Dating back three, four or five years, it’s really been pretty active,” Kingma said. “The biggest challenge I’ve seen in 2017 is product availability.”

Kurt Kunst, partner and broker at NAI Wisinski, said realtors still are recovering from the 2009 crash. After the crash, clients stopped putting speculative developments out on the market.

“Just this year, there’s a lot more build-to-suit, a lot more (speculative development) coming online,” he said.

Kingma said one of his concerns for the coming year is what the activity level is going to be. Because clients are just now beginning more speculative builds, new inventory won’t immediately appear.

“You don’t just put a building up overnight, it takes planning, time and certainly a lot of effort,” he said. “I think I’m saying the same thing about 2018 going forward. It’s going to be an inventory concern, but we do see a few more developers walking out on the speculative type of approach to the market.”

Speculative building may be more realistic for smaller spaces, where rental rates have traditionally been high enough to support the cost of new construction. Kingma added the cost to build larger spaces has been too high to be offset by rental rates, though that gap may close eventually.

Kingma said he expects the gap between rental rates and the cost of construction to eventually narrow to the point that clients will weigh the costs and benefits, whether they want to pay a certain amount to rent or pay a little bit more and have a space that is built-to-suit.

Another problem facing speculative builders are appraisals, which Kunst said, sometimes, come up short by about 30 or 40 percent of the actual cost of construction.

Kingma explained the appraisals often are based on market activity over the past six months, which can be problematic in an inconsistent construction cycle.

“What activity has taken place? Well, if they compare that to a bunch of existing buildings’ sales and then you go to finance a new building, appraisals may come up short on new construction.”

Kunst added, because of inventory shortages, he has seen more off-market deals, or deals that were never publicized in 2017 than in any given year.

“Somebody heard that a building was going up for sale, they got a hold of some brokers and we said, ‘Hey, let’s not hit the general public with them; I’ve got a buyer.’ I think this is by far the most off-market deals in a given year,” Kunst said.

“It takes a consistent construction cycle to have a more balanced supply-and-demand market,” Kingma said.

In the office sector, the demand for space is less of an issue when clients are leasing. Mary Anne Wisinski-Rosely, office advisor with NAI Wisinski, said the supply-demand curve hits harder for clients who want to own office space.

“On the lease side, you can pretty much find something,” she said. “It might not be exactly what you’re looking for.”

Office space size is significantly smaller compared to the size of industrial spaces. The average office lease is 5,000 square feet and under.

Retail is one sector of the real estate industry that has seen many sales in 2017 because most sales in retail are to investment groups rather than actual users. Rod Alderink, associate broker with NAI Wisinski, predicted retail would remain strong heading into 2018.

“I think we’re up to six or eight different retail centers,” Alderink said. “The retail investment sector is very strong, and the food component of our business continues to be very strong.”

Alderink added he thinks Woodland Mall, near the corner of 28th Street and East Beltline Avenue, has come through as a “shining star” for retail with the removal of Sears and the inclusion of Von Maur, as well as other yet-unnamed tenants arriving next year.

For 2018, Alderink said people can expect to hear about more big-box retailers shutting their doors, explaining that, since the recession, retailers have had to reconcile with redundant space and inventory or risk filing for bankruptcy.

Brick-and-mortar retail did well on Black Friday, but Alderink added online retail also did well on Cyber Monday. He said the weak players who may eventually fall out of the game will continue to be big-box retailers like Sears, although it won’t be a problem for realtors to repurpose the space left behind for smaller tenants.

“The economy here is so good and the space demands are so strong that we can absorb those boxes if they close,” he said. “Specialty retailers are doing well. If you have a unique product or add some kind of hometown spin to it — the made in Michigan thing — they’re under 5,000 square feet, typically.”

Kingma added he doesn’t expect the real estate market to plateau anytime soon. He said the availability of land and capital will not be a problem, and in 2017, his firm was able to devise ways to accommodate tenants. But the main concern will continue to be the cost of construction and the shortage of skilled workers.

“It really boils down to the availability of labor, both on the construction side and the manufacturing side,” Kingma said.

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