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Monday, 21 December 2015 14:25

Active development market in West Michigan leads to growing pains

Written by  Nick Manes and Josh Veal
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Joining MiBiz for a development roundtable were (top row from left) Rick DeKam of Midwest Realty Group LLC, Jonathan Jelks of J.A. Jelks Consulting LLC and Nick Monoyios of The Rapid. (Bottom row from left) Monica Steimle of 616 Development LLC and John Wheeler of Orion Construction Inc. Joining MiBiz for a development roundtable were (top row from left) Rick DeKam of Midwest Realty Group LLC, Jonathan Jelks of J.A. Jelks Consulting LLC and Nick Monoyios of The Rapid. (Bottom row from left) Monica Steimle of 616 Development LLC and John Wheeler of Orion Construction Inc. PHOTOS: Jeff Hage

Stakeholders in West Michigan’s commercial development industry say 2016 will look much like 2015, particularly in the increasingly popular urban multifamily housing market.

But with hundreds of units expected to come online next year, many say it’s time for Grand Rapids to confront some of its growing pains. From greater neighborhood equity and involvement in the development process to further diversifying the city’s transportation and retail options, those in the development community say that 2016 needs to be the year Grand Rapids and its near-neighborhoods start to think like a bigger city.

MiBiz convened some of these stakeholders for its annual Crystal Ball edition development roundtable. Participants in the discussion were:

- Rick DeKam, principal at Midwest Realty Group LLC
- Jonathan Jelks, owner of J.A. Jelks Consulting LLC
- Nick Monoyios, long range planner at The Rapid
- Monica Steimle, director of development for 616 Development LLC
- John Wheeler, director of business development at Orion Construction Inc.

Here are some highlights from the conversation.

How has 2015 shaped your forecast for 2016?

MONOYIOS: 2015 saw a concern as far as transportation funding, clearly at the state level. The Rapid, specifically with transit, is funded by three primary pieces of the pie — it’s farebox recovery, property tax millage that we levy and state operating assistance. State operating assistance now is at about 28 percent. In 1998, it was at 50 percent. One of the limitations, especially concerning development, is that the transit authority is funded by a millage of the six cities (where it operates). Grand Rapids is at the behest of these suburban communities in terms of how far we advance with our mass transportation in the city (due to less support for transit in the other areas).

JELKS: I think that the two key things that informed and inspired my outlook for 2016 were the Forbes article about the state of African-Americans in the city of Grand Rapids — we’re the second-worst metropolitan area in the country for African-Americans — and then the other article that says Grand Rapids is the best place to raise a family. So I’m trying to put those two things together and analyze them and understand that we are in the deindustrialized Midwest.

We have a ton of development going on. It’s an extremely exciting time to be in Grand Rapids, which I think is kind of leading the way in the region as far as business, innovation and development. But then wrestling with how our neighborhoods are impacted by the new boom, the gold rush. I live in East Hills where things have changed. It’s exciting, but frightening at the same time.

WHEELER: 2015 couldn’t have been a better year for development. Interest rates are good. Demand is high. City planning commissions are cooperative. Strong master plans are drawing community. The 35 neighborhoods all have a good coalition of things they want to have completed. (There are) good designers, contractors and subcontractors. It’s been a banner year. This is my 39th year of doing this and it’s the best year we’ve ever had.

Our vision for the next three years is about the same. We’ve done a lot of renovation work in the core. The core is pretty well fixed up now. There was a time when we started in 1987, buying all these buildings for $5 and $10 per square foot, that we thought there’d be an endless supply of them. Now there’s maybe one building left on Division up there right across from the police station. They’re pretty much used up.

STEIMLE: We’re focusing our efforts on becoming housing experts and how we can apply that to our developments, communities and neighborhoods. It has been a great year. It’s been fun to be a part of it, to watch it happen. … So we’ve learned to adjust and understand how we need to develop differently based on the market. (We have) more product online, which is awesome, so we’re seeing a little bit of stabilization in the market but definitely still demand in growth.

DEKAM: Midwest Realty has typically worked across the states in the Midwest region: primarily corporate-buyer, tenant-rep and in our spare time, development. … We’re seeing rates — office, retail and industrial — creeping up. You can see the influence almost quarterly, which I haven’t seen in my career. Everyone’s adjusting. They’re anticipating absorption, what else is out there and where it’s going. They’re pricing above market now. There’s just not that many options if you’re a user anymore, which is driving new construction. I’m excited about 2016. 2015 was a banner year for us, and even though we’re still primarily focused in the greater Kalamazoo area, I suspect that with demand and where it’s going, that will change as well.


How will the raising of interest rates — expected before the end of the year — impact the commercial development business?

WHEELER: From my standpoint, we buy forwards on all our projects. So I lock everything between seven and twelve years. I tried to get through two of those little weird bubble waves of financing. I write all my leases that are subject to a fixed-rate dollar amount at the time we lock. So if I’m quoting a deal and it’s eight months to bring it to market, we’ll make an assumption with the rate inside of that and they’ll pay more if it goes up and less if it goes down. That is the sensitivity.

DEKAM: Everybody’s talking about interest rates (and) where are they going to go. That’s a problem for most developers because a lot of these projects are one to three years in the making. When you predicate things at 3-percent and 4-percent interest rates but end up with 10-percent interest rates, it can have a really devastating effect. I think as long as market product continues to be absorbed at the rate it’s being absorbed, which is ferocious right now, (the market will work itself out).


Rick, you do a lot of work in the Kalamazoo area. How do you view the different markets?

DEKAM: Kalamazoo is in a different place. I think Grand Rapids is actually responding to the market conditions much faster. Kalamazoo is really lagging behind. We’re not anywhere close to approaching an oversupply. We’re so far behind the curve it’s not even funny. People keep asking, ‘How come there aren’t spec projects that are going up like you see in Grand Rapids everywhere?’ And nobody’s got the answer. We’ve got talent and demand coming out our ears. We’ve got great interest rates and lenders wanting to do the projects, but nothing coming out of the ground. … It’s like we’re too conservative.

WHEELER: You can become your own worst enemy. You do have to take a risk in this business.


There have been a handful of downtown apartment projects announced in the Kalamazoo market. How many units does the city need?

DEKAM: You know, they just did a study. Everybody’s saying the study’s wrong. For the first time, they’re saying the study is underestimating the actual demand. We’re seeing 5,000-unit demand currently. That’s right now. That’s how far behind (we are). If you look at downtown multifamily and condo occupancy, we’re at 100 percent. Somebody moves out, somebody moves in, literally on their heels. It’s a very unique situation.


And what about downtown Grand Rapids?

WHEELER: We’ve got to be very cautious as downtown developers not to price ourselves out of the market or we’re going to watch this thing slide back to the ’burbs. That is not what we’ve worked 20 years to do. We’re trying to magnetize people to live in an urban environment and really enjoy everything it has to offer. But the price point is sensitive.

STEIMLE: We’re not there yet. We don’t have the downtown retail to make it worth it. I live up the hill on Belknap, practically downtown, but I still have the benefits of a neighborhood and don’t have to pay what it costs to live in an apartment or condo downtown. But I do see that rents are starting to stabilize with the future projects, going from $2.10 to $1.75 (per square foot). From this year to next year, the amount of product (coming) online is huge, it’s ridiculous.


What trends have you noticed in how people are renting all these apartments?

WHEELER: When we did Eastown Flats (on Wealthy Street), our studios and one-bedrooms were gone online before we finished the project. Our two-bedrooms, we almost had to give them away for the price of one-bedrooms. I don’t know what it is. People don’t want roommates anymore.

STEIMLE: They don’t mind the small spaces, either. They’d rather stay in a lower price-point for a smaller space. We always do 70 percent of our buildings as studios and one (bedrooms). … Now we’re looking at micro-apartments. A lot of people are (considering micro-apartments) to really hit a different price-point where we can fill the gap we’re seeing in the market with the rent in the $600 to $900 range. We have a lot of the same housing that’s on the market right now — the market-rate standard apartments and rentals. I think we’re going to start seeing new product like micros and more condo development, just so that we can keep a balance and grow with our city.

WHEELER: If you believe the Zimmerman Volk (housing) study that updated in August, you’d think we could do this forever. I read the lines very carefully — where are you going to get all those people that are in that study? … This would be the first time ever that we delivered this many units, so let’s just wait and see. I could be totally off base. Probably a bunch of people do want to come here.


With all this growth in urban apartments and many of them getting built on surface parking lots, how do we address transportation?

MONOYIOS: As city builders, from an urban policy standpoint, the latter half of the 20th century was strictly built around the speed and scale of cars. We’re starting to rethink that in terms of how cities are planned. That’s encouraging this kind of development we’re talking about, to make mobility and accessibility that much faster. No longer are we making these islands of cars next to every active-use building. We’re starting to create a vibrancy. We’re taking that mall culture, turning it inside-out and putting it in neighborhoods and cities.


How do you think different modes of transportation affect neighborhood business districts?

MONOYIOS: The Green Well was the first new restaurant in East Hills, and the comment was always, ‘Well, where are people going to park? It’s going to fail because people can’t park there.’ But that level of thinking is changing. Especially in the West Side, it’s exciting to see what’s going to happen there and no longer is parking that trump card. We’re building better cities because of that.


If all of a sudden, you don’t have to build one-and-a-half parking spaces per unit, how does that impact what developers build and the cost?

STEIMLE: Parking is expensive. It’s very expensive. So no, we don’t want to build it. But also, we want to support the alternative transportation options. We’ve spent a ton of time educating people on the other options. We don’t want to have a ton of parking. We’re still a city and neighborhood that needs it. We’re not quite there yet, but we’re getting there. I think people don’t want to use their car. They want to have walkable neighborhoods.


Jonathan, you’ve worked a lot at the neighborhood level around issues of equity and inclusion. What are you hearing?

JELKS: I know commerce is going to happen — this is a capitalistic society — but it has to be compassionate. There has to be a plan with the residents who are already there. The indigenous population needs to be at the table to some degree with business before development happens. Those are some of the issues that people from my constituency would be focused on. You can’t just come in and do anything you want. It’s not going to be acceptable in 2016 and beyond for you to come in and develop and alter the entire fabric of the community and people that are living there as well.


How have you seen it play out in the past?

JELKS: I used to live on the other side in the Baxter community. Wealthy Street has completely changed. Some of the businesses that were there in my childhood are no longer there. Some of the neighbors who have been there for a long time weren’t able to afford to stay in those communities. … When you talk about Franklin and Eastern and some of these other neighborhoods, these walkable business districts that are filled with potential, different organizations I work with are going to be looking at how to have development happen but have the indigenous population there be a part of that newfound prosperity. I think it’s unacceptable in 2016 to have development but have no people from the community that surrounds it working in the businesses or on the projects. That’s not a soapbox, it’s just real.


As developers build in neighborhoods with long histories, how do you address these concerns?

STEIMLE: From our perspective in Creston, during the process, we had conversations with the neighborhood and businesses early on. Knowing the impact that this amount of development would have on a single corridor, we don’t want to develop something that we just build and walk away from. We have to develop the right thing. We’ve worked with the neighborhoods, the business associations, the commissioners for each neighborhood, the city — we start the process before we ever even buy something just to understand what the neighborhood feel is. … I appreciate your comments, Jonathan. It’s never our intention to bulldoze a neighborhood.

WHEELER: You can’t go into a neighborhood and expect to change it. You have to work with it. That’s what we do. I grew up in the Belknap neighborhood. We got involved and I bought Coit school years ago and fixed it up. That neighborhood has been really close to me. We got up and we’re doing development where we’ll be the first commercial enterprise up there. We’re doing a restaurant — we’re going to hire a bunch of neighborhood kids.


All of this growth should eventually support retail like a downtown grocery store of some sort. How do you see this playing out?

MONOYIOS: There has to be some risk on the retail end of the development. We’re almost to that threshold where retail’s going to suddenly explode downtown.

WHEELER: I think the real canvas for our future as developers, whether it’s residential or commercial or neighborhood, is we’ve got to get that one missing link downtown. Actually, it’s two. One is getting more people to live downtown. Now we’ve got enough (units) coming online, it appears, if everything gets built that they say is going to get built.


What’s the other?

WHEELER: I’m going to work my ass off to get us a department store. There are a lot of cities our size that have these urban Targets popping up all over (with) 20,000 to 30,000 square feet. They capture the market — people love them. I’m going to work super, super hard to try to get that. They also have a pharmacy in those so you don’t have to have an independent CVS with a drive-through. … We need a little more entertainment than just sitting at a bar stool. That would be theater, gaming, Dave & Busters, bowling. I just hope (Celebration Cinema) pulls (its proposed downtown movie theater) together. We need a little bit more entertainment.

JELKS: We need a lot more entertainment.


Are there other cities Grand Rapids could look to for best practices to achieve this?

DEKAM: My son is an engineer and moved to Denver a year and a half ago, so I’ve been spending some time in Denver. The interesting thing: You want to see where Grand Rapids is going, go to Denver. It’s a little larger, but what’s interesting is that the millennials own that town. They’ve solved a lot of the issues you’re talking about already. The demand is so much greater and there’s so many people infusing into Denver every month. They’ve got this new bullet train going from Denver to the airport. I go there and it’s like being in Disneyland and I’m 5-years-old.

WHEELER: Minneapolis has done the same thing. Indianapolis has done the same thing. We just have to go there and steal some of their ideas. I mean how can downtown Rockford, Michigan have a 20,000-square-foot department store and they have 1,800 people there and (Grand Rapids) doesn’t have even one of those. What is it?


What keeps you up at night heading into 2016?

MONOYIOS: To me, it’s process and sequencing. Being involved with GR Forward and (Downtown Grand Rapids Inc.), with all of the transportation, what are the outcomes and implementation? It’s easy to talk about all this stuff, but how can this all be obtained in the most effective way? Sequencing has a big part to do with that. It comes down to communication. What is development doing that the transportation people need to know about and vice versa? What are some of the issues the neighborhoods are having?

DEKAM: I am concerned about interest rates. We’ve printed a lot of money and we’ve held back inflation, but some people are calling that the next wave. It’s going to wipe out anybody who hasn’t got back on their feet after the recession here, which is just going to create more opportunity for those that plan and are fairly well-rooted. Those things concern us and shade the risk we’re willing to take. That said, I remain very optimistic and positive, but anybody that’s telling you they got both feet on the gas probably didn’t learn enough from the last recession.

WHEELER: My biggest concern, and it has been as an investor and developer in Grand Rapids, is that we still don’t have a corporate commitment in our community to make a stake in downtown Grand Rapids. We have been blessed with some of the best companies in the country who have never put a toe in the water of downtown Grand Rapids because they don’t want to pay the 1-percent income tax or they can’t see their car outside the window of their office.

JELKS: Grand Rapids is a city of silos. That’s what keeps me up at night — the fact that these conversations don’t happen in my neck of the woods enough. There’s a lot of expertise at this table and I think city government has to be part of that conversation, too, because they have the pull and the reach to bring different rules together. I would love to see more leadership from the city government endorsing that. But particularly, clearly, I started off with that Forbes article and that’s something we’re not going to let go.


What do you think that says about the city?

JELKS: It’s egregious in my mind to have a city that’s this prosperous and not have development in the core city neighborhoods where black and brown people live, quite frankly. We need that to happen. We need partnerships with developers. We need African-American and Latino developers. How to create that and get that pipeline going is definitely at the forefront of black people’s minds.

Read 7175 times Last modified on Monday, 28 December 2015 10:26

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