Banking & Finance, Construction, and Real Estate

Real estate experts expect more steady growth

Reports indicate heightened demand and shrinking supply have increased asking rates.

February 8, 2019
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West Michigan may experience a short recession later on down the road. But local real estate experts are asserting 2019 is all clear, and the slow, steady growth witnessed across all sectors in 2018 indicates more of the same for the new year.

Duke Suwyn, CEO of Colliers International West Michigan, said the regional economy, by most accounts, remains strong. Although growth across all sectors is positive, it has begun to slow down.

“Slower growth does not necessarily mean there won’t be opportunities,” Suwyn said. “Functional obsolescence and the desire for amenities are likely to lead to the need for new space demand to meet changing office desires. Additional housing options will likely be met by repurposing old buildings.”

Grand Rapids’ industrial market is a fine example of the real estate market tightening up. The sector was marked by a “historically” low vacancy rate of 5 percent, and the Grand Rapids-Wyoming metropolitan area had an unemployment rate across all sectors of 2.6 percent by the end of 2018, the Colliers report said.

According to Colliers’ report, tight numbers mean companies are operating at near-maximum capacity, while labor still is in high demand.

NAI Wisinski of West Michigan’s year-end market reports closely mirror Colliers’ findings. The industrial report noted an overall vacancy rate of 1.7 percent in the last quarter of 2018, along with an unemployment rate across all sectors of 3.3 percent in the Grand Rapids-Wyoming area.

Kurt Kunst, partner and industrial specialist for NAIWWM, said high demand and limited supply was the prevailing narrative of the industrial sector.

“In 2018, new construction helped ease some of the demand in our market, but there is a long road ahead before all the demand is met,” Kunst said. “We will continue to see new construction in 2019, both build-to-suit and speculative.”

Vacant land sales continue to rise, which NAIWWM took to mean business owners are opting to build new rather than find an existing building. Rising construction costs also continue to impact the local real estate market. The rising costs, based on overall demand in the market, material costs, labor shortages and new energy code requirements, also translate to higher lease rates for tenants.

“In some cases, the cost to construct a new industrial building has doubled in the past five years,” Kunst said.

According to Bradley Company West Michigan’s state of the market report, which it released late in January, the industrial market hovered around a 1.5 percent vacancy in 2018. As echoed by both the Colliers and NAIWWM reports, heightened demand and shrinking supply have increased asking rates by roughly 2.7 percent over a 12-month period to $4.03 per square foot.

Industrial flex space is asking the highest rates of any industrial property type at $10.59 per square foot while asking rates for warehouse space are around $3.72, according to Bradley Company.

West Michigan’s office market also was marked by slow, positive growth. As the region overall continues to cast its nets wide to catch and retain talent, many companies are re-examining their office space.

A growing office trend Colliers noted in 2018 was the demand for flexibility, either the flexibility of working from the office or from home or the flexibility of the office itself. Many spaces are coming equipped with amenities like exercise rooms, small conference rooms, cafés and dry cleaning to cater to a multitasking workforce.

There has been some movement in 2018, Colliers noted, particularly Chemical Bank and Van Wyk Risk Solutions joining the law firm Warner Norcross + Judd at the soon-to-be-completed Warner Building at 150 Ottawa Ave. NW.

According to NAIWWM, between Q4 2017 and Q4 2018, the overall vacancy rate in the West Michigan office market dropped by less than a percent, going from 6.2 to 5.6 percent.

The downtown, southwest, and southeast submarkets each experienced a decline in vacancy while the northeast submarket remained flat and the northwest submarket experienced a slight increase in vacancy.

“There continues to be a shortage in available office buildings for purchase in the suburban submarkets,” said Jason Makowski, partner and office advisor for NAIWWM. “This has driven sale prices up in some areas and has also created additional leasing competition amongst landlords, as vacancy rates remain at historic lows.”

Makowski predicted vacancy and asking prices would remain relatively constant in 2019.

According to Bradley Company, lease rates for newly constructed office space have begun to level off as new product comes online. Since 2016, more than 1.6 million square feet of office space have been added to the market, with 9.84 percent of it occurring in 2018.

But as Colliers also argued, new construction still comes at a higher price. Currently, newly constructed Class A office space in downtown Grand Rapids is averaging between $24 and $32 per square foot, compared to renovated Class A space, which is leasing between roughly $20 to $22 per square foot, according to Bradley Company’s numbers.

Bradley Company also reported Class A office space in the lakeshore region ranges between $16 to $19 per square foot.

In the Kalamazoo market, lease rates for Class A office space in downtown Kalamazoo range between $18 to $22 per square foot, while rates in Portage range between $22 to $25 per square foot, according to the Bradley Company analysis.

The retail landscape continues to evolve. Even with the rampant closure of big-box retailers and the increased popularity of e-commerce, retail vacancy in West Michigan has dropped below 8 percent, according to Colliers.

An omnichannel approach to retail is becoming vital. According to the International Council of Shopping Centers, when a company opens a new physical store, it equates to a 37 percent increase in online traffic for the brand within the market.

While the e-commerce-only route with less physical overhead is attractive, several brands are realizing the necessity of having a physical presence. Colliers’ retail advisor Chris Prins said brick and mortar retail still is viable, even vital in 2019.

“A lot of people can sell a product online,” Prins said. “’Brands are built by being able to touch and feel and experience. It’s about identity.”

According to NAIWWM, the overall vacancy rate in West Michigan’s retail market dropped from 7.5 at the end of 2017 to 5.4 at the end of 2018.

“All eyes will continue to be on the remodeling and expansion happening at Woodland Mall where new tenants will open for business,” said Rod Alderink, retail specialist for NAIWWM. “The fast-casual dining segment continues to grow, and relocations and new sites for fast food will continue. With the positive buzz and economic strength of West Michigan, we will continue to see new restaurants and retailers desiring to come to our area.”

According to Bradley Company, the West Michigan region is experiencing heightened investments at shopping malls and grocery-anchored developments. In Grand Rapids, the availability of parking combined with a walkable environment have been drivers of growth in neighborhoods that link to the central business district, where asking rates have jumped from $16 to $22 per square foot.

Bradley Company also noted the Knapps Corner area along East Beltline is among the most desirable areas in the Grand Rapids market, where new retailers such as T.J. Maxx, Chow Hound, Orangetheory Fitness and HopCat are leasing space.

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