Industrial real estate demand high
Despite appeal, rising construction costs make new builds without a secured tenant too risky.
Industrial real estate demand in West Michigan shows no signs of slowing down, but construction costs still constrain development.
Colliers International West Michigan recently finished leasing of the first phase of a speculative development at 5300 Broadmoor Ave. SE, but Colliers Industrial Associate Vice President Trent Wieringa noted how tight the industrial market is because of a shrinking inventory and the lack of speculative development.
Despite the prime time to build new space, construction costs are too high to make new builds without a secured tenant too risky, Wieringa said.
“It’s a market where subcontractors are putting high bids on these proposals and getting them,” Wieringa said. “They’re so busy, and it’s pushing the prices up. To a developer, that affects their bottom line and they need to have a certain return rate.”
Wieringa did note there are many build-to-suit and company expansions occurring.
The 5300 Broadmoor developer is a partnership called Broadmoor Ventures, which includes contractor a.j. Veneklasen. The first phase was a $2.6-million, 50,000-square-foot project, and the overall project is expected to be $15 million and 260,000 square feet on the 17.6-acre site, according to a previous Business Journal report.
Vacancy has fallen dramatically since 2013, according to the real estate firm JLL. In the JLL Spring 2017 market report, West Michigan industrial vacancy has fallen from 10.1 percent in 2013 to 5.4 percent earlier this year.
Vacancy in Metro Detroit, according to JLL, is at 6.4 percent with more than 4 million square feet under development.
JLL also indicated out-of-state and international capital is flowing into the West Michigan industrial market.
JLL noted a $16.7-billion acquisition of Mead Johnson Nutrition by London-based Reckitt Benckiser and a $32 million sale-leaseback of a 340,000-square-foot FedEx building by New Jersey-based Monmouth Real Estate Investment Group.
Rents are increasing with vacancies low, and low inventory is keeping leasing velocity low.
The rising lease rates eventually will help push speculative construction, Wieringa said, with more the past 12 months than the prior few years. A more common sight too, he expects, will be a potential buyer forgoing the purchase of a 20,000-square-foot building and building a 50,000-square-foot building and leasing the available 30,000 square feet.
Like Wieringa’s anecdotal evidence, the JLL report also found construction costs are constraining speculative development and keeping inventory low.
Wieringa said developers aside from Robert Grooters Development Co. (RGDC) haven’t really built industrial on speculation of future tenant demand.
RGDC owner Robert Grooters said it’s the world he plays in and accepts the risks, the same way apartment developers take on the risk for those projects.
“We have great, great growth in West Michigan; it’s like an industrial revolution,” Grooters said. “The supply and demand is driving it. You have to go back to the market and with as strong as it is, the demand is so tremendous.”
RGDC isn’t slowing down, either. In the past three years, RGDC has completed and fully leased the 100,000-square-foot building at 4577 Patterson Ave. SE, a 337,000-square-foot building at 5005 Kraft Ave. SE and a 150,000-square-foot building at 1124 E. Pontaluna Road in Norton Shores.
Additionally, RGD is in the midst of building a 300,000-square-foot building for Hearthside Food Solutions, 2975 Radcliff Ave. SE.
Also currently under construction for RDGC is a 333,950-square-foot building at 5357 52nd St. SE in Cascade.
In the pipeline for RGDC is a 200,000-square-foot building in Norton Shores, and two more buildings on 52nd Street, at 200,000 square feet and 150,000 square feet, respectively.
The second Norton Shores building will break ground as soon as a tenant can be secured, Grooters said.
JLL’s report found there to be 821,696 square feet of industrial development under construction earlier this year with net absorption at 1,429,608 square feet.
Demand for industrial real estate hasn’t been at these levels since the Great Recession, Wieringa said. Despite the high levels, the growth has begun to plateau, he said.
“The growth rate certainly has tapered off from where it was, because when we came out of the recession, demand was growing more steadily than now,” he said. “It’s more stabilized the past year or two, but it’s still growing; it hasn’t leveled off, but that’s a function of it growing so fast.”
The West Michigan industrial real estate market isn’t likely to slow down anytime soon, Grooters said.
“You look at the companies and you get a heartbeat from them and get a sense of the market,” he said. “I don’t see it in the companies here. We have a lot of good companies, and they have sharp pencils. They’ve gone through the bad times.”
Grooters said the high times of the past few years were a long time coming following the Great Recession.
“We’ve waited since 2008 for something good to happen and it’s now,” he said. “We’re not renting our buildings for much more than we did 20 years ago and cars and groceries have doubled. It’s great.”