Region finds itself in landlord market
Limited vacancies make desirable commercial real estate locations harder to find.
The West Michigan commercial real estate market has been at a standstill recently.
For several years, landlords have been benefiting from limited vacancies within the region, leaving tenants with less commercial space.
“In general, it has been a landlord market since the (stock market crash) recovery really took hold, so probably the last five to seven years,” said Jeffrey Hainer, Colliers International West Michigan senior research analyst.
He said West Michigan recovered quicker and better than most cities because commercial space has become limited, and desirable locations and buildings are difficult to find.
As a result, landlords can dictate lease negotiations by selecting their preferred tenants and offer fewer concessions, according to Hainer.
The landlord-favored market is derived from construction costs.
“Construction costs are so high that new products aren’t being built as much as they should be. Therefore, existing landlords are benefiting from that, as well,” Hainer said. “If construction costs start to come down, it will definitely even things, but we don’t see that happening in the future.”
In 2017, Hainer said Colliers completed 359 leasing transactions, 22 more than 2016.
The commercial market is broken up into different sectors, such as office, industrial and retail.
Hainer said office spaces tend to be located in either suburban areas or downtown.
“Image and parking are two key items with office space,” Hainer said. “If you are a high-profile law firm looking to attract the best young attorneys, then you likely are going to pay a little more for some really cool downtown space.
“Talent attraction and retention are big in the office market right now. If you have a high demand for close parking and/or are a bit more price-conscious, you are likely looking in the suburbs. Amenities are also big for office space, like workout facility, coffee shop/café and bike room.”
Jill Langosch, vice president of research at CBRE Grand Rapids, said the office market is somewhat of a landlord market depending on the submarket in Grand Rapids. She said the average office vacancy rate is 13.9 percent.
According to the first quarter study of 2018 by CBRE Grand Rapids and released April 20, the office market is comprised of nearly 15.8 million square feet of leasable office space separated into five corridors in Grand Rapids: Central Business District, Northeast, Northwest, Southwest and Southeast.
There are about 13.9 million square feet of rentable professional offices in Grand Rapids, but only about 2.02 million square feet are available to lease, per the study. There are approximately 1.9 million square feet of leasable medical offices in the market; however, only 142,248 square feet of medical offices are vacant. Downtown and Southeast submarkets are where most office spaces are located, according to CBRE Grand Rapids.
Haines categorizes industrial space as utility, where location is a little less important. He said that space tends to be close to highways and distribution channels.
“Industrial-specific characteristics include things like dock doors, power, ceiling height, column spacing, etc.,” Hainer said. “The space is for making and/or storing widgets. It doesn’t need to look pretty; it just has to function efficiently for your operation.”
The industrial market in Kent County has over 52.5 million square feet of leasable warehouse and manufacturing space, according to the study.
“Industrial (market) average vacancy is 2.1 percent — clearly a landlord market even though there are a number of speculative buildings under construction,” Langosch said.
Southeast Grand Rapids, home to Steelcase, Gerald R. Ford International Airport, Lacks Enterprises and Roskam Baking Company, is where 45 percent of Kent County’s gross industrial product originates.
There is about 24.2 million square feet of rentable space in the Southeast Grand Rapids market but only 910,745 square feet is available. The least favorable industrial location is Northeast Grand Rapids, where there is 2.1 million square feet of rentable space but no vacant space.
With another HopCat opening at the former Fajita Republic on East Beltline Avenue NE, and the recent opening of the Fowling Warehouse in the former Family Fare location on Cascade Road SE, the availability of rentable retail space has decreased in the first quarter of 2018, per CBRE Grand Rapids. The availability of vacant space has declined from 7.2 percent in the fourth quarter of 2017 to 6.9 percent in the first quarter of 2018.
There is about 13.8 million square feet of rentable retail space available in Grand Rapids, but only about 1.5 million square feet is available for lease. As a result, Haines said retailers are forced to locate to unexpected locations.
“National retailers that want to be in our market almost exclusively desire to locate to that ‘Main and Main’ in the power retail corridors (28th Street SE, Alpine Avenue, Rivertown, etc.),” Hainer said.
“They will pay a premium to locate there (if they can find space). Right now, because it is so tight out there, especially in those corridors, brokers and companies need to get creative. Chick-fil-A just built a store on the corner of East Beltline and 28th on what used to be a parking lot. No one really ever thought to build there, but they were so eager to be located near there that they came up with a creative solution.”