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Sunday, 17 March 2013 22:00

Closing Time: Active commercial real estate market shaping up for 2013

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In a commercial real estate market with plenty of success stories, there are still some struggling projects. To wit: The Waters Building in downtown Grand Rapids fell into receivership last year after it appraised at less than half the value of what the former owner bought it for just six years earlier. In a commercial real estate market with plenty of success stories, there are still some struggling projects. To wit: The Waters Building in downtown Grand Rapids fell into receivership last year after it appraised at less than half the value of what the former owner bought it for just six years earlier. PHOTO: STEVEN DEPOLO

If the old saw that “coffee’s for closers” holds true, then brokers in the West Michigan real estate market are filling their cups.

The recent level of activity is getting noticed, too.

Having garnered the No. 4 spot in Site Selection magazine’s list of new major corporate facilities and expansion, Michigan is seeing solid momentum in business attraction as well as improvement of the state’s core industries.

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That has brokers busy doing deals across the spectrum of property types, including commercial and industrial spaces. Even the stubborn office market in West Michigan is getting healthier, having posted four straight quarters of positive absorption, according to data from commercial real estate research firm CoStar Group.

Luckily, the banks are lending again, said industry insiders across the region. The availability of financing has opened the door to pent-up transaction activity, and local governments that have seen their property tax bases erode are very receptive to new development, said Patrick Lennon, partner at Honigman, Miller, Schwartz & Cohn LLP in Kalamazoo and chair of the Urban Land Institute’s Western Michigan region programs committee.

“The deal flow is very strong locally and across the state, in large part driven by tax planning on behalf of sellers,” he said. “In all seriousness, times have been pretty good.”

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But sources also say many investors and developers remain hesitant to close deals. Fear of further tax policy changes from the federal government has many investors nervous, and that nervousness does not benefit activity in the commercial real estate market.

Still, that fear hasn’t stopped intrepid buyers, sellers and developers from putting deals together in better-insulated markets such as the one in greater Grand Rapids.

“What we’re seeing is that lenders have available financing for the right deals,” Lennon said. “We’re busy across the board with sales and purchases. Refinancing and development are all very active.”

Apartments remain active

Spurred on by available incentives such as low-income housing tax credits from the Michigan State Housing Development Authority and Community Revitalization Program grants and loans through the Michigan Economic Development Corp., developers in the Grand Rapids urban core are working on a mix of primarily subsidized housing and some market-rate apartments.

Midland, Mich.-based Brookstone Capital, under the leadership of developer Karl Chew, is embarking on several residential projects including a new construction low-income housing development on the corner Division and Cherry Street. Also in downtown, Westville, Ohio-based developers The Woda Group are set to build a 93-unit riverfront subsidized housing project on the former Ryder Truck facility at 936 Front Street NW. Construction on the $13 million project is expected to start in January 2014.

Elsewhere, Jonathan Bradford, president of the nonprofit Inner City Christian Federation, said his group is also pursuing construction of additional housing options on its property off Division Avenue south of Wealthy Street.

But not all housing developments are tied to the low-income housing tax credits. The development arm of Rockford Construction Co. is gearing up for the renovation of the historic Morton House property downtown, which it is planning as a market-rate residential development.

Additionally, Derek Coppess, president of 616 Development LLC, said his team hopes to move forward on adding about 400 new market-rate units in the downtown area within the next two years. The company is crunching the numbers on four new projects — three existing building redevelopments and one new construction. Each project incorporates some type of ground-floor retail space.

The young firm also has its eyes on opportunities outside of Grand Rapids, but Coppess was mum on the details of where and when those projects will move forward.

All of the units at the company’s 1 and 7 Ionia project above the new Grand Rapids Brewing Co. are leased, and its historic Kendall building project downtown is expected to be completed by the start of ArtPrize. When MiBiz recently spoke with Coppess about the Kendall project, construction firm First Companies was busy installing a new elevator and framing out the four floors.

616 Development is in talks with an existing local restaurant operator to open a bistro concept in street-level retail space at the building, Coppess said. The firm thinks it could capitalize on traffic from the Grand Rapids Children’s Museum next door, but it also wants the restaurant to be accessible for families, perhaps a pizza-and-beer offering.

Attracting outside eyes

Apart from specific central business district trends, the Grand Rapids area has proven attractive to more national retailers along with national real estate investors. Recent additions to the retail sector include Cabela’s and Sky Zone indoor trampoline park, along with restaurants including a downtown Panera Bread, Bagger Dave’s, Five Guys Burgers and Fries, Tim Horton’s and a bevy of others.

Perhaps the most visible evidence of out-of-state investor action is the recent purchase of Bridgewater Place, one of few Class A office buildings in Grand Rapids. The company that purchased the property, California-based Hertz Investment Group, focuses almost exclusively on buying properties like Bridgewater in so-called second-tier markets.

A handful of local factors are driving interest from outside groups, brokers told MiBiz. West Michigan has a relatively insular local market, and investors can also get slightly better capitalization rates at properties across the region, they said, indicating those market traits are what’s drawing new investors like Hertz to the market.

With interest rates remaining low and lenders open to deals with healthier underwriting standards, the market is transitioning back from a period where finding financing was a major bottleneck, sources said.

“We’re seeing properties come available, prominent properties that haven’t come to market in a number of years,” said John Mundell, principal and vice president of Signature Associates in Grand Rapids. “More buildings have traded hands in the last 12 to 24 months than in the last 10 years.”

With cheap debt available, buyers sitting on cash reserves are emerging and sellers are realizing improved property values for quality products, he said.

Leasing activity in most markets is also coming to life.

“Our leasing activity is probably at an all-time high since the downturn,” said Rick DeKam, president of Kalamazoo-based Midwest Realty Group. “For the first time in the last 12 months, we’ve had people competing for vacant space and bidding the price up.”

The company recently closed on a lease with TraumaSoft LLC, a software developer for the first responder and ambulance industry, for a building located at 2314 Helen Avenue in Portage.

Cash is key

Midwest Realty Group also recently purchased a portfolio of four properties, DeKam said. However, he cautioned that his firm isn’t buying property unless there is a very good reason to do so.

“I think we’ve seen behind the curtain and enough people have swore and made promises to themselves never to over-leverage again,” he said. “Cash is king right now, and you need some to survive.”

And not everyone survived.

The historic Waters Building in downtown Grand Rapids fell into receivership after Ann Arbor-based Three Oaks Group LLC purchased the facility for $27 million in 2006, but turned it over when the building appraised for just $12 million in 2012. In January, Farmington Hills, Mich.-based Friedman Real Estate Solution Inc. took over the management of the 280,000-square-foot building.

Among the companies that have cash to invest is CWD Real Estate Investment. CWD’s recent acquisitions in the central business district of Grand Rapids include the Trade Center at 50 Louis – the home of Start Garden, the Ledyard building and the Trust building.

In a previous report for MiBiz, Sam Cummings, partner with CWD, said the firm is poised to benefit as companies have made a flight to quality office spaces to meet the needs and demands of their workforce. Now CWD wants to leverage the concentration of its properties in the core downtown area to serve those needs.

“What our vision is with our product is how can we maximize the efficiency of the buildings we own,” Cummings said. “We’re looking to make sure they are synergistic and make sure they have all the amenities.”

The market is so used to selling on price that coming out of the economic downturn, it was hard to convince potential tenants to sign leases based on the value of spaces, but that’s starting to change, he said.

As companies look to downsize the office space they have per employee, CWD and other brokerages in West Michigan have been helping them upgrade to a newer, greener, more technology-enhanced settings within the urban cores.

LEED and other green building initiatives are increasingly attractive to employers looking to draw and retain talent, sources said. With many of the colleges and universities serving as leaders in sustainable design, others are taking note and following suit.

Industrial uptick

Meanwhile, the region’s industrial market continues to perform at a healthy clip.

Ninety new manufacturers moved into Michigan last year, and another 160 manufacturers announced major expansions, according to data in a recent Site Selector report.

With that level of activity, the challenge now becomes the dwindling supply of available buildings, which has started to squeeze deal volume, brokers said.

Kris DePree, president of Colliers International’s Holland office, said the situation is much the same along the lakeshore.

“The industrial market has been by far the best market generally speaking and where we’ve seen most of the activity,” DePree said. “Looking to the future, we’ll probably see more industrial land sales and eventually some new construction.”

In greater Grand Rapids, rates for industrial property near the airport, along the Gezon Parkway corridor and off 3 Mile Road in Walker are hovering around $4.00 to $4.50 per square foot, brokers at Signature Associates told MiBiz. Rates for less active or poorly inventoried segments of the market around the area are less, around $2.75 to $3.25 per square foot, they said.

Increasing rates for industrial property are happening in large part because of the auto industry recovery. Moreover, manufacturers of all kinds are purchasing new equipment, adding capacity and diversifying their product base. Three years in a row of double-digit growth in North American vehicle production has the supply base near capacity and thinking about adding new capacity.

For example, ADAC Automotive recently added a new facility in Muskegon to make way for a new paint line and new equipment, but President Jim Teets told MiBiz last month that space was already getting tight. The company may be looking for an additional 50,000 to 75,000 square feet of space within the next year, he said.  

The food processing industry has also been on a growth spurt, even as the recession decimated sectors such as the automotive industry. For a recent report, The Right Place Inc. said that since 2003, the food processing industry in West Michigan has grown 18 percent.

That’s also led to a need for new capacity and new construction.

Expanding food processors include Herbruck’s Poultry Ranch, which recently announced a $17.5 million expansion to increase its egg-producing capacity in Ionia County; Request Foods, which plans another an addition to its newest plant in Holland; and fruit wholesaler Heeren Brothers Inc., which is building a new 150,000-square-foot headquarters and processing facility in Alpine Township.

“The dynamic is changing some with people we work with,” he said. “The project doesn’t just have to be successful, it has to be cool, too.” 

 

Sidebar: Notable Developments in Grand Rapids

  • While the Downtown Market will not fill the grocery store void in the core business district, the project will serve as a meeting ground for the community to engage in food-related topics ranging from education to farming. The site will also feature boutique retailers, restaurants and farm-fresh produce providers.
    Why it matters: The $30 million development served as a catalyst for nearly $340 million in real estate investment in the adjacent areas, much of it focused on new residential options.

  • The $28 million Baker Lofts project will renovate a 125,000-square-foot vacant building diagonally across from Downtown Market into 87 apartments and about 12,500 square feet of office and retail space.
    Why it matters: The project is typical of many downtown Grand Rapids developments in that it leveraged Low-Income Housing Tax Credits to get off the ground. However, many in the community are starting to question whether the city really needs $148 million in low-income housing developments.

  • Tapestry Square, the Wealthy-Jefferson Development Initiative developed by the Inner City Christian Federation, is part of a potential six-phase, more than $60 million revitalization project to transform a key city neighborhood over the next five years. 
    Why it matters: The ICCF project, coupled with the nearby Downtown Market and Herkimer Hotel project as well as the new Grand Rapids Public Schools University Preparatory Academy, is extending what’s typically thought of as downtown Grand Rapids to the south along Division Avenue, where developers are pouring millions into renovation and new construction projects.

  • 616 Development LLC invested $7.5 million into renovating the Hawkins and Gunn buildings at 1 and 7 Ionia in downtown Grand Rapids for a new mixed-use development, complete with market-rate apartments and street-level retail. 
    Why it matters: The project not only will offer unsubsidized market-rate apartments, but it also is home to the revival of Grand Rapids Brewing Co., now owned by BarFly Ventures LLC. Grand Rapids also has the honors of being named Beer City USA thanks to the continued growth in craft and micro breweries.

  • CWD Real Estate Investment redeveloped the former X-Rite headquarters in Grandville into the new Bucktown Shopping Center, securing its second anchor tenant, Cabela’s, last year.
    Why it matters: Sportsmen and outdoors enthusiasts who had been hoping for years to have a Cabela’s store in their own backyards can finally rejoice. More importantly, the chain’s entry into the Grand Rapids market signifies more national retail interest in West Michigan.

  • The Class A office high-rise Bridgewater Place has a new owner after GMAC decided to sell the facility. The transaction marked the second time in four years that the facility had new owners. GMAC bought it out of foreclosure in 2011.
    Why it matters: Many point to the sale of Bridgewater Place to Hertz Investment Group of Santa Monica, Calif. as an example that a strong second-tier market like Grand Rapids is finally getting on the national radar for commercial real estate investment.

  • Even though the historic Trade Center Building at 50 Louis Street NW was only 35 percent occupied at the time, CWD Real Estate Investment took the plunge and is in the process of renovating the century-old building. The company plans to relocate its headquarters there later this year.
    Why it matters: Signing $15 million pre-seed fund Start Garden to anchor the street-level space got CWD thinking of ways to create spaces in the building that support entrepreneurship and innovation, similar to what’s been achieved at the GRid70 space.

  • Crews knocked down the former General Motors stamping plant in Wyoming to make way for a new industrial park, dubbed Site36, that’s being pitched domestically and internationally as a hub for potential users in life sciences, advanced manufacturing, food processing and alternative energy.
    Why it matters: Economic developers plan to be picky in developing the site because they want to encourage major industrial users to locate there. Having a blank sheet isn’t attractive to all industrial users, but advanced manufacturers might be better suited with new construction and not having the constraints of an existing facility. Expect the first user to be announced in the first half of 2013.

— Joe Boomgaard, MiBiz

 

 

Read 4639 times Last modified on Monday, 18 March 2013 08:19

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