New construction fuels retail surge
But without more development, the office and industrial markets are lagging.
The local retail real estate sector is humming, but office and industrial are lagging, according to recent quarterly reports from Colliers International | West Michigan.
The report notes the retail sector was “red hot,” while a “wait-and-see attitude” has stymied office and industrial availability.
Colliers also reported for the foreseeable future the retail sector will see positive absorption rates, as it has in the first quarter. The first quarter saw openings of retailers at Shops at CenterPoint and Breton South Village, while the upcoming absorption will be highlighted in new retail establishments at Knapp’s Crossing.
“We saw that the best way to keep growing, offering our products and creating opportunities in the community was to build new facilities for our businesses,” said Chris Brochert, partner and owner of Knapp’s Crossing developer Lormax Stern.
“We weighed the long-term potential for further growth and decided that building new was the way forward, knowing that if we had sat on the sidelines, we could have missed many opportunities.”
The key to the retail surge has been new construction, according to Colliers, which cites a lack of new construction as a reason the office and industrial sector haven’t surged similarly. The industrial sector lost occupancy, according to the report.
Construction costs, and therefore new building lease rates, are high, leaving developers wary of building and tenants thinking about a new, less expensive home, which likely doesn’t exist.
Speculative building isn’t about to start happening in downtown Grand Rapids, said Sam Cummings, managing partner of CWD Real Estate Investment.
Cummings said there’s a lot of shifting — and shrinking — of current downtown businesses, meaning there is still space to be renovated into office space. He said the high cost of new office space may be prohibitive for many, but there is a way to combat that stigma.
“The greatest thing in the world would be to have a big corporation step up and say they want extra office space or corporate headquarters downtown,” Cummings said. “If they say they’re willing to pay downtown Detroit prices and build without incentives, that justifies downtown construction and long-term sustainability.”
Colliers said the only way to sustain growth in 2016 will be to satisfy demand with new construction, which, for the most part, has not occurred in the industrial market.
Some new construction has occurred. Robert Grooters Development Co. is building a new site on Kraft Avenue off 52nd Street SE. The first two phases of the development — totaling 337,500 square feet — are nearly filled, including office furniture systems and parts manufacturer Compatico. One suite remains available.
The third and fourth phases will begin soon, and tenants already are showing interest. The total planned size of the industrial park is 1.1 million square feet.
“We’re building new because it’s what the community needs,” RGDC representative Kyle Grooters said. “We go to work in the community daily, surveying the demand, cultivating leads and getting deals done. Building new has its risks, but we’re willing to take them to give West Michigan businesses the room they need to grow.”
Other industrial projects noted in the Colliers report include Swedish furniture company ROL USA, which is investing $19.8 million in a 140,000-square-foot facility in Holland, and Western Logistics, which is building a 30,000-square-foot facility in Zeeland.
The report also noted Arizona’s Knight Transportation’s new location on Fourth Street, and Founders Brewing Co.’s purchase of a warehouse on Hynes Avenue, both in Grand Rapids.
The Colliers report said tenants that hope to find new office space must settle for less-than-desirable accommodations, rehab existing space or build new. Several new office developments being finished or are in the works, but office space is largely claimed by tenants prior to construction.
A lack of speculative construction could lead to slowing of the city’s growth, said Jeff Hainer, Colliers senior research analyst.
“The only way we can continue growing in West Michigan across all three sectors — retail, industrial and office — is by building, and that’s not happening at the pace we predicted and which the region really needs,” Hainer said. “To sustain the economic momentum we have built over the past few years, companies and developers need to start looking at the long term. As long as businesses and developers sit on the sidelines and decide not to address demand, growth will start to become a question mark.”
Cummings said, ultimately, the market decides the growth of the downtown, and there is still vacant office space downtown with quality amenities and rents that are lower than downtown Detroit and Ann Arbor.
“There’s not a whole lot of speculative office space that’s going to be built — the price doesn’t justify it,” he said. “We are bullish on the long-term prospects of the city of Grand Rapids. It’s a long game, and we’re confident we’ll get there.”