Warehouse Distribution Vacancy Rate Still High

December 10, 2007
| By Pete Daly |
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GRAND RAPIDS — The industrial property vacancy rate in greater Grand Rapids showed an increase of one-tenth of one percent in the second quarter: from 9.4 percent to 9.5 percent. The warehouse/distribution segment of that real estate had a vacancy rate of 11.6 percent.

That's not good — but John Kuiper is optimistic.

"We are probably coming down to around 10 percent" in warehouse/distribution vacancies by the end of the year, said Kuiper, a vice president at Grubb & Ellis|Paramount Commerce real estate in Grand Rapids.

At the end of 2006 the industrial vacancy rate here was 9.8 percent, so the latest measurement of 9.5 percent shows it is dropping.

User sales of industrial property (as opposed to sales to real estate investors) slowed during the first half of 2007, compared to 2006, but even so, user sales in the first six months of 2007 equaled all of the 2005 user sales of 50,000-plus-square-foot properties. Investment sales of industrial property throughout West Michigan in general are currently "red hot," according to GE|PC.

Kuiper said the vacancies are gradually being filled due to "existing tenant growth," which is mainly "companies that are doing well and expanding. You don't read about them in the paper," he said, because it is "quiet growth." He added that public attention is usually focused on employers that go out of business. "Nobody wants to talk about it when they grow and add five or 10 jobs. That doesn't hit anyone's radar screen. But people have been working really hard to add those five or 10 jobs, here and there. It slowly adds up," he said.

"A year ago, if I were out touring properties (with a potential tenant), most of them were vacant. Today, probably half have tenants in some of the spaces," said Kuiper.

While GE|PC tries to keep tabs on all vacancies, the firm is not always aware of all new occupancies when tenants are able to get very short-term leases, as is the case lately. It is a result of high vacancy rates forcing landlords to be more willing to accept short-term leases, whereas when vacancy rates are low, landlords hold out for leases of at least a year — sometimes several years.

According to the latest GE|PC report, there is a total of 112,378,838 square feet of industrial space in greater Grand Rapids. The general industrial segment of that is 87,016,102 square feet, while the warehouse/distribution category accounts for 21,140,524 feet. The small remainder of the industrial space is classed "incubator" and "R&D/flex."

The supply of warehouse/distribution space is directly related to the supply of manufacturing space: Much unused manufacturing space can be converted to warehouse/distribution space.

The GE|PC report breaks the greater Grand Rapids region down into five areas: downtown, northeast, northwest, southeast and southwest. The southeast region has the largest amount of general industrial space — almost 49 million square feet — and it has the highest vacancy rate: 13.4 percent. The lowest vacancy rate is downtown: 2.7 percent of 12,863,156 square feet.

GE|PC also has a second quarter report on industrial real estate market trends for all of North America. Out of 77 cities — including a few in Canada and Mexico — Detroit and Kalamazoo have the third and fourth highest industrial vacancy rates: 13.5 percent and 13.1 percent, respectively. Grand Rapids is listed 17th at 9.5 percent.

A major company in the warehouse/distribution business is Total Logistics Control, headquartered in Zeeland but one of the largest 3PL companies, active throughout the United States. 3PL stands for third-party logistics, which mainly revolves around the transportation and storage of products between the producer and the companies that buy the products. TLC is different in that it also offers contract packaging services — and then some. A couple of years ago, TLC was hired by Guinness, the giant brewing company, to set up a brewing facility for the company in Allentown, Pa., and start production of Smirnoff Ice.

TLC has about 500 semi tractors and about 800 trailers operating throughout the nation. In West Michigan the company operates six warehouse/distribution centers with combined space of about 1.3 million square feet, plus others around the country. It employs about 500 people in West Michigan: about 100 drivers, 200 warehouse employees and the 200 office employees that cover all TLC activities nationwide.

Bob Koerner, president/CEO of TLC, said West Michigan is indeed suffering from a high rate of vacancies among industrial properties. He said it drives down the rates TLC can charge for use of its warehouses. Low rent rates for empty warehouses and factories and short term lease opportunities also encourage some companies to "do it themselves, versus outsource" their warehousing/distribution needs.

Koerner said the problem began in West Michigan a few years ago when furniture companies in particular started closing and downsizing, which "opened up a lot of warehouse" space. TLC lost some business when a company that was a customer did some downsizing and soon found it "had a warehouse, and no one was in it."

He said West Michigan is not a central distribution hub, unlike Chicago, Boston or Atlanta. Users of warehouses here are local companies, and the products are generally used here. In the central hubs, however, many of the warehouse/distribution customers will be located far from that region.

"We're just having a tough time in West Michigan," Koerner said.

Kuiper also mentioned that West Michigan's troubles began a few years ago when the local office furniture and automotive parts manufacturers began shrinking or closing. Before that began happening, industrial vacancy rates here were between 4 and 5 percent, he said.

For years before that downturn, Kuiper said, "We had been in a really solid manufacturing growth pattern for quite a period of time."

He has seen some creative solutions in the industrial real estate market, such as splitting up very large parcels — even the buildings on them — into two or more smaller ones. And he is confident that the manufacturers here are slowly beginning a comeback.

"Our largest advantage is flexibility and agility," said Kuiper. While lower labor costs may have lured much furniture production offshore, the U.S. is not out of the picture, he said.

"If somebody wants high-quality furniture and they need it in two and a half weeks, it's going to be made somewhere in the U.S.," he said.

"I remain optimistic about our West Michigan industrial market, because we're a market that has historically proven it will find ways to be competitive in a global marketplace by finding ways to do things better, quicker and cheaper. We just have to find the niche."

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