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Sunday, 04 August 2013 22:00

Back to Normal? Cautious optimism rules the day, but positive signs abound in West Michigan real estate market

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Zondervan building, 5300 Patterson Ave., Grand Rapids Zondervan building, 5300 Patterson Ave., Grand Rapids COURTESY PHOTO

The lessons learned from pre-recession deal making are still fresh in the minds of those working in commercial real estate, but brokers say activity across market segments in West Michigan is starting to heat up.

Although he’d like to have a better descriptor for how the market is performing, real estate attorney Patrick Lennon said it’s hard to get away from the term “cautious optimism.”

After all, many industry professionals, including himself, are just on the other side of tremendously difficult time, he said.

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“I think there might be less restraint and greater optimism had we not just been through a really terrible time,” said Lennon, partner at the Kalamazoo office of Honigman Miller Schwartz and Cohn LLP and director of the West Michigan chapter of the Urban Land Institute. “When things happen far away in some distant capital market, it can in fact rapidly impact commercial real estate in local areas. I think there was a blind spot in the market to that possibility prior to the 2008/2009 crisis.”

For the most part, the trends in smaller regional markets can vary dramatically, Lennon said. The product that moves in Lansing might not be the same as in Grand Rapids, but when available capital dries up across the board, the typically insular and well-performing niches aren’t immune to the downturn, he said.

“I think everyone is now at least prepared for a lot of the unknowns people hadn’t seen previously,” Lennon said. “There is always a reluctance for risk, and that’s why the optimism is still considered cautious. If it were 2007, I don’t think we’d characterize it in that way.”

Given all the repositioning of assets, rightsizing and property owners spending on building makeovers, Lennon said the industry is now at a place where there aren’t as many obstacles to completing transactions.

“Right now, conditions are still very favorable. The volume from the end of last year continued to carry forward into the first six months of this year,” he said. “The larger banks had limitations on lending money and they strengthened their underwriting standards, but now more capital is out there and that’s really freed up what might have been some pent-up demand.”

POSITIVE MOMENTUM

In the wake of all the activity in sectors like multi-family, industrial and Class-A office and retail space, the Michigan market is looking more desirable to national users and investors who may not have been here before, Lennon said.

In particular, medical office and retail development is again returning along major corridors, as evidenced by a new project encompassing both uses at the former Miller Zeilstra property at 833 Michigan Street NE in Grand Rapids.

According to Colliers International’s second quarter market report, medical and institutional tenants made up 48 percent of the total square footage leased. New out-of-state investors also made their way into the medical market. For example, American Realty Capital Healthcare Trust paid $16.4 million for a 53,000-square-foot medical office building in Wyoming that is triple net leased to Spectrum Health for nine years.

As a whole, absorption numbers in the Grand Rapids retail and office markets hit pre-recession highs in the second quarter of 2013. The market absorbed roughly 120,000 square feet, the most since before 2007, according to the Collier’s report.

On top of all the leasing and investment activity, developers released plans for a handful of new construction in the residential market.

Orion Construction recently announced the tenants for its $28 million, 200,000-square-foot residential and office building in the Grand Rapids Arena District. In Battle Creek, 616 Development of Grand Rapids purchased the historic Heritage Tower with plans to renovate the property into new residences. Developer Karl Chew also announced two new projects in Grand Rapids, one of which is a 14-story high-rise on a vacant lot at the corner of Fulton Street and Sheldon Avenue.

Industrial expansions also continued to march forward particularly in Battle Creek, where Post Foods and Kellogg and auto-suppliers Cosma Castings, TRMI and others announced multi-million dollar investments into their facilities.

Some major industrial portfolios also traded hands since the beginning of the year. Franklin Partners purchased the former Zondervan Publishing headquarters at 5300 Patterson Avenue SE. The company plans to split the property into one 200,000-square-foot industrial facility and one 100,000-square-foot office building. A Chicago-based REIT also purchased a 1.5 million-square-foot portfolio of properties for $29.2 million. The majority of the properties were in Grand Rapids, Norton Shores and Walker.

GOOD SIGNS ACROSS SEGMENTS

With a number of deals already in the pipeline, Colliers is forecasting a strong third quarter for 2013.

The market conditions also have brokers doing more prospecting than they’ve been doing in the last five years, said John Kuiper, principal at Colliers International in Grand Rapids specializing in industrial real estate.

“If you go back to ’06, ’07 and ’08, we’d go out and talk to people and say, ‘I know your building’s not on the market, but do you have any interest in selling?’ Then we had a period where we had plenty of inventory to fit most needs,” he said. “(That we’re having to prospect) is a good sign, but it takes longer to get a transaction done when you don’t have the vacancies and you have to move machinery from one site to the next.”

Colliers is also seeing positive absorption with leasing of industrial properties, Kuiper added.

“We’re headed in the right direction,” he said.

There’s little industrial inventory on the market where a tenant has a short-term lease, although there’s “a fair amount” of space with month-to-month leases, he said. Often, that kind of situation comes up where there’s a 75,000-square-foot facility on the market, but a neighboring company may be using 50,000 square feet of it because the company didn’t have room to expand in its own facility, Kuiper said.

“We’ve gone through a period of being really extremely focused on it being a tenants’ market. I don’t think the tables have turned, but the playing field is a lot more level now,” Kuiper said. “You just have to be realistic on a sale or lease and look at what is the underlying value.”

Kuiper said Colliers continues to talk with a number of companies who are right on the cusp of signing off on new construction in the industrial segment.

“We think we will start to see quite a bit of (new construction) right around the corner. I’m surprised we’ve not see some already,” he said. “You’ve got to remember: This is a pretty conservative market. And the companies who are looking at new construction today, probably 90 percent of them had to weather a horrible storm. That’s fresh in their minds and they do not want to spend a lot of extra capital that they don’t have to, but it’s getting to the point where they have to.”

The story is similar in the retail market, where brokers and industry professionals are singing the same tune. Economic stability in the main retail corridors continues to contract vacancies, and rental rates are ticking upward, according to the Colliers report.

Like the industrial segment, the retail conditions are leading to a limited amount of new construction.

For example, a new 13,000-square-foot retail strip center on Alpine Avenue is set to begin construction next quarter. The space will house a new Verizon Wireless store as well as a Sherwin Williams Paint center.

Net absorption came in four times higher than the first quarter’s 22,159 square feet, with nearly 90,000 square feet getting leased or sold, the Colliers report stated. Rental rates for top-quality spaces were in some cases more than $25 per square foot.

REASON FOR OPTIMISM

Bob Lotzar, vice president of retail brokerage with CBRE, and Chris Muller, owner of M Retail Solutions in Grand Rapids, said the main retail corridors are in demand right now.

“The funnel has widened, allowing people to explore opening a second store or buying a piece of dirt for their first,” Lotzar said. “Retail piggybacks the housing market, which is a good forecaster for what’s occurring in the retail world. They go hand in hand.”

With increased density downtown, Muller is keen on the growth of the Downtown Market in Grand Rapids as a good catalyst for activity.

“The region overall is fairly healthy, and we’re seeing new users from different markets,” he said. “I’ve been spending a lot of time outside of the state and within other Midwest states with people contemplating coming into the market.”

Many of the discussions are with fast-food and casual food operators, soft goods retailers as well as sit-down style restaurants, he said.

In the suburban market, Muller is working on a piece of new construction with two tenants at Celebration Village just off the East Beltline. The project consists of a soft goods retail tenant with a lead office tenant.

No leases are signed yet, but the project is progressing and Muller expects to have a deal signed by next month, he said.

Sources MiBiz spoke with said they see the momentum from the first half of the year rolling into the final half of 2013. With rentals rates ticking up in most markets, property owners are more able to sign leases based on value instead of the bargain-basement rates they charged during the downturn in an effort to keep space occupied.

“We were at a place where tenants were reducing rents and getting rent releases. At the same time, tenants were also going bankrupt,” Lennon said. “These conditions were impacting the ability for landowners to move forward on deals with their assets. Now you see investors getting back in because there is opportunity for rates to increase now. More and more projects that were shelved in 2009 are also starting to get into the ground now.”

MiBiz Managing Editor Joe Boomgaard contributed to this report.

Read 2421 times Last modified on Sunday, 04 August 2013 13:55

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