Construction, Real Estate, and Retail

Growth expected among real estate sectors

Lack of skilled labor, high demand for inventory will be prominent in 2018, according to Colliers International West Michigan forecast.

January 19, 2018
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Lack of skilled labor and a high demand for inventory continue to be key players in the real estate industry in 2018. The real estate professionals at Colliers International West Michigan and Grand Valley State University’s Seidman College of Business predicted the new year will feature continued growth across the industrial, office, residential and retail sectors, as well as the continued challenge to meet customers’ needs for space.

Colliers International held its annual real estate forecast this past week, featuring a presentation by Paul Isely, associate dean of the Seidman College of Business. Isely said the real estate market in 2018 largely will be affected by economic factors including employment, automation, interest rates and the recent tax law change.

“Right now, we’re seeing (2018) in many ways stronger than (2017),” Isely said. “As we went into ’17, there was still a lot of residual uncertainty left from the presidential election. There was a lot of capital sitting on the side waiting for what was going to happen.”

Seidman sent a survey in 2017 to 1,200 businesses in Kent, Ottawa, Muskegon and Allegan counties, and received 250 respondents. The results indicated employment growth in 2018 will slow to about half of what it was in 2017. Comparatively, sales growth is expected to increase 50 percent.

“So (businesses) are going to be building more stuff with fewer people,” Isely said, “and part of that’s out of necessity. We’re out of people.”

Isely said while automation is part of the trend, he explained the data showed automation still is in the development phase and is not currently being deployed into manufacturing. Businesses certainly are spending money on automated technology and holding it in reserve.

“What we’re expecting is they’re going to do the same thing they’ve done with every recession since 1991,” he said. “They’re going to learn how to use the technology, then a recession comes along and it makes it easier. … Nobody likes to fire anyone, but if you have to let someone go because there’s a recession…”

Right now signs are pointing to what Isely termed a “weak recession” in either 2019 or 2020 depending on the amount of stimulus in the recent Republican tax bill. He also predicted it would not be a broad-based recession but rather specific to certain industries.

“We’re not expecting it to affect residential real estate as much,” he said. “The tax law will have a much bigger interest rate increase on residential than the recession. There’s just too many millennials that want houses.”

Between the tax law change and interest rate changes for 2018, Isely expects costs for multifamily real estate will go up. 

“If you are going to buy a $200,000 house at the beginning of the year versus buying a $200,000 house at the end of the year, we expect your cost will go up by $350 a month,” he said.

The likely tradeoff, he added, is millennials will want to stay in rentals a year longer, boosting the rates of rental properties.

Interest rates are expected to flatten in 2018, with more pressure on short-term interest rates than long-term. Isely said, over the last year, the one-year interest rate rose 0.75 percent, and the 10-year rate didn’t go up.

“Part of that is the influx of millennials and young generation X-ers,” Isely said. “They were not adults the last time we had any inflation of any measurable level; they don’t have a concept of interest rates running at 4, 5, 6, 7 percent. Their expectations are lower.”

Based on Colliers’ predictions, real estate is going to remain tight across all sectors. The industrial real estate market in 2017 was marked with the continued absorption of present space, as well as a small number of new builds. Inventory continues to be in high demand, and it’s predicted 2018 will see a higher number of off-market deals.

“We have a lot of demand, which is a good thing, but we’re facing some headwinds,” said Jeff Hainer, senior research analyst for Colliers International West Michigan. “Manufacturing continues to be a staple in West Michigan … automotive industry is strong; plateauing, but still strong.”

Colliers expects the automotive industry to be a major player in the industrial market in 2018. West Michigan has a number of original equipment manufacturers and tier one, two and three part suppliers working with the auto industry in Detroit.

Access to skilled labor continues to be a challenge to most manufacturers, including automotive, and the demand is affecting real estate decisions. In 2017, demand was so high that many companies were paying individuals for training and apprenticeships.

Construction costs may continue to discourage speculative building, though some projects were introduced into the market in 2017. A building at 5300 Broadmoor Ave. SE was built as a 50,000-square-foot Class A facility and was leased to two 25,000-square-foot tenants. Robert Grooters Development Co. also has been working on a speculative build named “Area 52” and is working on speculative warehouse space.

In the retail world, space also is tight, casting doubt the predicted “retail apocalypse” is approaching anytime soon.

“The supply out there keeps us up at night,” said Mike Murray, retail broker and senior vice president of Colliers International West Michigan. “If you’re on 28th Street SE, Alpine, by Rivertown Mall, the Lakeshore, Kalamazoo; they’re all full.”

Murray said while the tightness is a good sign that business owners want to be here, the combination of construction costs and lack of space in the large retail corridors make it a challenge to find space for tenants.

Hainer added the demand for space also has led to higher scrutiny among property owners. If a tenant is behind on their payment schedule, the property owners aren’t afraid to kick them out and make room for another business.

“There’s such a high demand for retail space, especially in the good retail centers, that they’re not afraid to let a tenant go, because they know there’s a lot of tenants in line waiting for that space.”

Murray cited statistics from the U.S. Census Bureau tracking the influence of e-commerce in the retail market. He said in the third quarter of 2017, online retail sales made up 8.3 percent of all sales in the U.S.

The retail landscape certainly is evolving in West Michigan, with the closing of MC Sports, Family Christian Bookstores and Sears, but Murray said new players in the market have been quick to absorb the space left behind.

“MC couldn’t get the last basketball out of the building, and Ashley Furniture was already starting renovations on 28th Street there,” he said.

Grand Rapids’ West Side also is something to consider in 2018, the Bridge Street Market development on the corner of Bridge Street and Stocking Avenue is continuing to make progress. Parts of the project are expected to be complete in 2018, and the full building is slated for completion in 2019.

Colliers also expects national brands to consider West Michigan and find ways to enter the market.

In the office sector, the attraction and retention of talent continue to be a major factor in real estate decisions by local employers.

Colliers has seen positive office absorption and steadily rising rental rates every quarter for the past seven years. In 2018, land acquisitions for new office developments are expected to increase, but like all other sectors, construction costs and lack of labor will challenge new builds.

Despite this, Orion Construction still is undergoing development of the Warner building on 150 Ottawa Ave. NW, and Rockford Construction is set to complete the mixed-use property at 234 Market St. SW.

The downtown office market continues to be constrained by tight inventory and limited parking, which may limit the ability of existing companies to attract and retain talent. 

“Some people don’t like to talk about it,” Hainer said. “I think the city is doing what it can, but there’s more that needs to be done, and I think we’ll see in 2018 as to where the city takes things with that.”

The downtown office vacancy currently sits at 5 percent, compared to the suburban market’s 14 percent vacancy. Suburban office buildings predictably will see more attention in 2018.

Some noteworthy properties are 1925 Breton Road SE, which currently is under renovation and has attracted a new tenant; the former Klingman’s Furniture building on 28th Street SW, which will welcome 400 employees from Advantage Sales and Marketing; and the Atrium Building at 3315 Claystone St. SE, which was renovated in 2017 to make room for SalesPad.

Many tenants have decided to renew their leases rather than relocate, facing discouragement from increases in market rates. With the high cost of construction and demand for modern spaces, rental rates may level off in the near term.

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