New construction addresses space shortages
‘Drumbeat of demand’ is increasing in all real estate sectors.
Grand Rapids needs more space.
At least that’s what the latest market trends analysis from Colliers International West Michigan says.
The real estate firm released its third-quarter report last week, revealing that available retail, office and industrial real estate space is shrinking despite a positive growth outlook in all sectors.
According to the Colliers report, West Michigan’s real estate market has vacancy rates lower than the best times before the Great Recession, leading to the following conclusion: “New construction may be the key to resolving space shortage and is, in some sectors, finally starting to happen.”
The industrial market vacancy rate is approximately 6 percent, according to Colliers. The report said the shortage of space could “stifle the sustainability of the industrial sector’s growth.” Growth in the manufacturing industry has been strong, the report reads, largely fueled by diverse companies and a strong economy.
The unemployment rate in the Grand Rapids-Wyoming MSA decreased from 4.2 percent to 3.4 percent during the past three months, continuing a downward trend since mid-2009. That was helped by a 1 percent manufacturing growth in West Michigan, according to the Upjohn Institute.
According to the Bureau of Labor Statistics, Michigan has an unemployment rate of 5 percent, just below the national average of 5.1 percent.
Tool and die manufacturers are needed, according to the Center for Automotive Research, which is why Colliers made note of MBL Tool & Die, which was started earlier in 2015 and signed a lease for 14,400 square feet of space at 3650 Broadmoor Ave. SE.
The report also said the cost of new construction is keeping “shovels out of the ground,” except for build-to-suit projects and adding to existing buildings.
“Grand Rapids’ industrial market is running out of places to grow, inventory is lower than it’s been in recent memory and new construction may be one way to release some pent-up demand going forward,” said Matt Abraham, Colliers industrial advisor and principal, in the report.
“We’re at a crossroads, and we need new construction to meet continued demand across West Michigan, which has always had a robust industrial sector and will continue into the future.
“The 6 percent vacancy rate is a threshold that we’ve finally broken through, and that means making some decisions about how to cope with future growth — and companies that are creative in their approach will be successful in meeting their growth needs.”
Some industrial real estate developers are working on the space shortage. Last week, Robert Grooters Development Co. broke ground at a 50-acre industrial site called Area 52 at 5005 Kraft Ave. SE near the Gerald R. Ford International Airport.
The site has the potential to hold nearly a million square feet of industrial space.
Robert Grooters said, for a long time, the market wasn’t in need of new space, but that has changed.
“It’s clear now that industrial space has again become scarce and as a result we’re building more,” Grooters said. “We develop high-quality buildings at high volumes, which keeps rental rates low. We pass the savings on to our tenants so they can be competitive.
“This is going to be a large development. In fact, the site currently under construction has been mistaken as a second airport runway. That gives you a sense of the size planned for this development.”
As for the retail sector, new construction is adding to the supply as many mixed-used developments are in the planning stages, under construction, or in the process of finishing up.
The retail market’s vacancy rate is at 9.1 percent. Alpine Avenue has just 3.7 percent vacancy; East Beltline Avenue is close behind with a 3.8 percent rate. On 28th Street SW, however, the vacancy rate sits at about 21.2 percent.
“Local, regional and national retailers have eaten up whatever prime real estate is left in the market — and are hungry for more,” the Colliers retail report reads.
Since the second quarter, Colliers found transaction activity increased, with leasing activity up 68 percent and sales activity up 12 percent.
The quarter also saw a large jump in absorption, especially on 28th Street SE, which added 35,928 square feet of new net occupancy.
Currently, there are 261,925 square feet of retail space under construction, according to Colliers’ report, with much of that space on East Beltline Avenue.
Colliers noted the demand for residential space downtown is driving retail opportunities, as well. The report indicates the city has a market potential for 6,250 new residential units during the next five years, with approximately 3,000 rental units. Those findings were by the Great Housing Strategies project by Zimmerman/Volk Associates.
Colliers made mention of CWD Real Estate Development’s The Rowe and Orion Construction’s Eastown Flats and Arena Place.
“Retailers are turning to a creative mix of solutions to meet demand and satisfy specific needs,” said Mark Ansara, Colliers retail advisor. “Businesses continue to move into existing spaces, making the availability of quality spaces shrink fast.
“At the same time, new construction is starting to finally happen and, in some notable instances, residential is driving retail — and these diverse options are promising for the retail market going forward.”
The report states Grand Rapids’ west side appears to be the next significant area for expansion, especially in retail.
The office market continued its positive absorption streak to 19 consecutive quarters, according to the report. Downtown contributed 40,445 square feet of that growth, with another 15,962 square feet of growth coming on the East Paris Avenue corridor.
Colliers again cited a lack of quality office space inventory as a possible negative moving forward.
Colliers found lease activity in the office sector was down 5.6 percent and sales activity was down 16.66 percent in the third quarter, compared to the second quarter. The spaces that were leased were smaller than average, the report stated.
The suburban office market is at 22.6 percent vacancy. Downtown Grand Rapids has an office vacancy rate of 11.24 percent, with the Central Business District at 10.33 percent.
“Even with steady demand and a shortage of quality available space, the office market in the Grand Rapids area still has a wait-and-see attitude about new construction,” said David Wiener, a Colliers office advisor and principal.
“Conditions all point toward expansion of the office market. New construction may be one key solution to keeping up with the drumbeat of demand as companies continue to focus on physical office space as a tool for talent attraction and retention.”