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Sunday, 26 April 2015 22:00

‘Paradigm shift’ has more developers ready to move ahead with new construction

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Developers behind the proposed 12 Weston project — a $23 million, 12-story office tower — expect their plans to go up for a vote May 6 at the Grand Rapids Historic Preservation Committee Developers behind the proposed 12 Weston project — a $23 million, 12-story office tower — expect their plans to go up for a vote May 6 at the Grand Rapids Historic Preservation Committee COURTESY RENDERING

There aren’t many landlords hanging up “For Lease” signs these days in greater Grand Rapids.

The reason: Most of the quality existing properties in the industrial and office markets have already been snapped up by tenants.

That’s led to a situation where quality, Class A industrial buildings and offices in many parts of West Michigan are largely unavailable right now, according to first quarter reports recently released by Colliers International West Michigan.

Colliers already sees a “paradigm shift” toward considering new construction in the area’s industrial market, and commercial real estate brokers say that the office market — at least in the downtown area — is not far behind.

Despite the lack of inventory, developers have been slow to add new construction, particularly in manufacturing where it is most needed.

“We are at a point where we really have no inventory,” said Duke Suwyn, president and CEO of Colliers International’s West Michigan office, referring to the area’s industrial market. “We are at that point where something has to happen. It’s bottled-up.”

The industrial market has an overall vacancy rate of 6.13 percent and the manufacturing sub-market is at 4.86 percent, which Colliers considers as a record low.  

The lack of available industrial inventory has West Michigan construction firms anticipating an acceleration of projects that have been on the drawing boards.

“The inventory is short to non-existent, but you’re going to see pick-up,” said Josh Szymanski, business development director for general contractor Owen-Ames-Kimball Co. in Grand Rapids.

Over the last year or so, Szymanski said that O-A-K would frequently be approached with potential industrial construction projects only to have prospective clients fail to pull the trigger, often because of the perceived high cost of new construction. Instead of starting a project, the clients continue to shop around to attempt to find a better, more cost-effective option, he said.

Generally, Szymanski said customers looking for a new building would wind up figuring out how to make their existing space work, an observation supported by the Colliers’ findings.

“The reality of how to expand is shifting, as the option to simply absorb more space within a building is increasingly less available,” according to the Colliers report. “Some have decided to rearrange existing spaces while others have gotten creative with staffing, adding second and third shifts. Still others have decided to maintain the status quo in hopes of the market producing an option for them eventually.”

But the era of companies being wary of new construction appears to be ending,  Szymanski said. O-A-K’s market forecast for industrial is up approximately 40 percent this year over last year. He was unable to project, however, approximately how much square footage the contractor may have in its pipeline.

“These are serious buyers and builders. They are not kicking the tires anymore,” Szymanski said. “They’re out of space. They’re leasing at multiple locations and their staff is spread out. If they can find the right piece of property and the pro-forma works, usually the cash is there right now and they are ready to go. It’s a pretty healthy environment for these people. When it starts restricting their business and they can’t find the space, it’s a natural next move.”

TURNING TO SPEC

The region is seeing some speculative industrial building, mostly near the Gerald R. Ford International Airport. In mid-April Grand Rapids-based general contractor AJ Veneklasen Inc. announced it would be constructing a 262,000-square-foot, multi-building, speculative industrial development at the corner of Broadmoor Avenue and 52nd Street SE.

The first phase of construction is expected to be completed in July, according to a statement. John Kuiper and Steve Marcusse of Colliers’ Grand Rapids office are the listing brokers for the project.

Speculative development has been very rare in the market coming out of the recession.

The reason: To cover costs associated with new construction, developers need to charge rents above the market rate, sources said. So instead of speculative building, developers have been more likely to invest in build-to-suit projects.

Despite some additional projects coming online, O-A-K’s Szymanski said it will take some time to catch up to the demand and for manufacturers in the market to have a significant amount of options.

One reason behind the slow cycle is that subcontractors are “completely slammed” with the amount of large-scale building projects currently in progress, he said.

According to Colliers’ Suwyn, the manufacturing sector was the first real estate market to emerge from the recession. But the uncertainty on the part of both banks and users meant little building occurred in the years that followed.

However, as manufacturing has continued to recover, there are few options on the table for those looking to expand.

OFFICE PROJECTS NEXT?

The same could prove to be true in the office market in downtown Grand Rapids, which Suwyn expects to be the next sector to heat up.

In the first quarter of 2015, office vacancy in both the suburban and central business district submarkets decreased and the two submarkets combined for a quarter of positive absorption.

The overall office market has a vacancy of 18.26 percent, according to Colliers data. That is the lowest rate the market has seen since 2010. Colliers projects the vacancy rate to continue falling in the second quarter.

In the downtown area, there are a number of Class A office projects at various points of construction or development. Arena Place and 25 Ottawa, both in the downtown’s Arena South district, are under construction and could see tenants later this year. Nearby at 99 Monroe, a property managed by Illinois-based Franklin Partners LLC (the company currently renovating 25 Ottawa), the office space is at near-full capacity, according to a spokesperson at the company.

One anticipated project soon coming up for a “do-or-die” moment is 12 Weston, a proposed $23 million, 12-story, Class A office tower at the corner of Division Avenue and Weston Street. As MiBiz previously reported, members of the Historic Preservation Commission have taken issue with the building’s height, wishing it to be one to two stories shorter.

According to developer Charlie Secchia, a principal at Sibsco LLC, the project will be put to a vote before the Historic Preservation Committee on May 6.

PROVEN CONCEPT

As 12 Weston developers went through the process of planning the building, Secchia said he asked potential tenants what kind of amenities a modern office building should have.

Among the desired features were a gym, a restaurant, on-site parking, storage facilities and a variety of public spaces such as lounges and roof-top decks.

Franklin Partners’ 99 Monroe facility, which it acquired and renovated in 2013, was one of the first buildings in downtown Grand Rapids to offer these types of amenities, as well as market-rate rents, Secchia said.

“99 Monroe was kind of the white elephant,” Secchia said, referring to the rents being asked and whether people would pay them. “Now, it’s filled up.”

David Wiener, an associate at Colliers focused on the office sector, said rents at 12 Weston will be $21 and $22 per square foot, triple net. Those rents are in line with new construction projects such as Arena Place and competitive with existing Class A inventory such as 99 Monroe, Wiener said.

Despite not having final approval for the building, Secchia told MiBiz that he has a lead tenant in place for 12 Weston — although no lease has been signed. Additionally, about half of the 150,000 square feet of office space in the proposed building is already spoken for, he added.

“The Class A availability downtown is really dried up,” Secchia said. “There are some smaller suites, but as a whole, the whole market is pretty much dried up. Office rents are creeping up, and that’s why there isn’t a lot of new product on the market. We found a way to build a quality building by meeting the demands people want.” 

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