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Sunday, 03 April 2016 15:43

Developers, brokers find opportunity in West Michigan commercial real estate, despite concerns of overheating

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Despite some fears the West Michigan commercial real estate boom could come to an end, executives at developer Franklin Partners LLC believe there’s still room for growth. The firm has announced early plans to renovate the interior of the long-vacant Keeler Building at 56 N. Division Ave. in downtown Grand Rapids, where it hopes to attract ground-floor retail tenants and office users with up to 1,200 workers. Despite some fears the West Michigan commercial real estate boom could come to an end, executives at developer Franklin Partners LLC believe there’s still room for growth. The firm has announced early plans to renovate the interior of the long-vacant Keeler Building at 56 N. Division Ave. in downtown Grand Rapids, where it hopes to attract ground-floor retail tenants and office users with up to 1,200 workers. COURTESY PHOTO

Despite a global economic slowdown and fears of overheating in major markets, stakeholders in West Michigan’s commercial real estate industry say current regional indicators continue to show signs of a healthy market. 

Brokers, developers and economists in the region insist the industry’s good fortunes can continue for the foreseeable future. Despite the general tone of confidence, those sources say they constantly are surveying the landscape and evaluating where the current market falls in the broader business cycle. 

“It’s the most important question,” said Don Shoemaker, a principal at Franklin Partners LLC, a Naperville, Ill.-based property management and development firm with holdings in Grand Rapids and Kalamazoo. 

“I think we’re in the fourth inning,” he said when asked about the current market. “Demand remains strong and there’s not much supply. With interest rates low and no indication that will change, I think there’s slow, sustained growth. I don’t see anything like speculative building that will cause an issue.”

Shoemaker and Franklin Partners continue to double-down on the Grand Rapids market. In January, the firm signed an option to acquire the long-vacant Keeler building at 56 N. Division Ave. in downtown Grand Rapids. Once the deal is finalized, the developer plans a complete internal renovation of the 102-year-old facility, where it hopes to attract ground-floor retail tenants and office users with up to 1,200 workers.

While Shoemaker believes there’s still upward opportunity left in the region’s real estate industry given the current cycle, some economists take a more measured view. 

Dr. Paul Isely, associate dean of undergraduate programs in the Seidman College of Business at Grand Valley State University, offers annual forecasts for the regional economy. While Isely told MiBiz he’s much more concerned about the local impact of a plateauing automotive industry, he remains confident that the West Michigan commercial real estate sector has already peaked.

“I think people getting in now are late to the game,” Isely said. “If you look at the backlog right now, the things that are coming are after the peak.” 

One particular negative trend Isely points to: The retail sector remains flat in the commercial real estate industry. Beyond the Class A corridors, including Rivertown Parkway, 28th Street, East Beltline Avenue and Alpine Avenue, the West Michigan retail segment continues to be sluggish, particularly as more consumers shift their buying habits to online stores.

“I imagine that will weaken over time,” he said of the market for bricks-and-mortar retail stores.

However, brokers in the region say the commercial retail segment hasn’t shown signs of crumbling any time soon. 

Rod Alderink, a partner focused on retail at NAI Wisinski of West Michigan, said that activity has been picking up in areas such as South Division Avenue in Grand Rapids, particularly among smaller, independent businesses looking for space. 

“We’ve been seeing a nice, slow absorption,” Alderink said. 

VALUES ON THE RISE

By and large, all sectors of the region’s commercial real estate sector tell a story of high demand with minimal inventory. That dynamic has created an environment where asking prices for all types of commercial real estate have risen significantly in recent years. 

However, multiple real estate sources noted the Grand Rapids area has traditionally experienced significantly lower rents and buying prices than other comparable markets. They said the increasing prices in the region are a result of the market catching up, particularly as investors flock to West Michigan as a smart investment. 

“From a high level standpoint, West Michigan shows up on the radar of a lot of folks,” said David Rapp, an investment associate in the Grand Rapids office of Colliers International, a commercial brokerage firm. “You see all these outside investors looking at the data, the low unemployment rate and the returns they can get here. Frankly, with the lack of inventory, there’s a pent-up demand here.”

As an investor with Franklin Partners, Shoemaker serves as a first-hand example of Rapp’s observations on the market. 

Despite still having large holdings in the Chicagoland area, Franklin Partners remains steadfast in the view that West Michigan offers a far better investment market for commercial real estate,  Shoemaker said.

“We appreciate West Michigan where there has been growth, compared to Illinois, which has been flat,” he said. 

The commercial office brokers he’s spoken to in Chicago — particularly in the suburban markets — say they’ve never seen such a lack of active potential tenants, which stands in stark contrast to the West Michigan market where “companies are growing, moving in and acquiring.”

“They’re completely different markets,” Shoemaker said. 

According to a 2016 investment market forecast from Colliers, the Grand Rapids area should remain desirable for investors, but an overall lack of building inventory in all sectors could pose challenges. 

Multi-family housing continues to be a growth driver in West Michigan, particularly in downtown Grand Rapids and its near neighborhoods where developers have scrambled to bring new units online. In a previous report from last April, MiBiz determined the development pipeline in the city included some 1,400 apartment units. Some of those units have already come online, but developers have added more projects to the pipeline since then. 

As apartment units have slowly become available, rental rates have largely stayed around $2 per square foot. Many more units with asking rents in that range are expected to come on the market in the next several months. 

The rising rents serve as a sign to Isely that the Grand Rapids market isn’t overbuilt in terms of apartments.  

“The prices continue to build, so in the short term, we’re not overbuilt. But in five years, that’s unknown,” he said. 

STAYING AGGRESSIVE

Most active developers in Grand Rapids say they’re not worried about overbuilding given the current demand, but they’re still paying attention to external forces that could shake up their businesses. 

Like a lot of investors and developers who survived the Great Recession, Shoemaker has good reason to keep an eye on those external forces. The executive told MiBiz that he didn’t see the last downturn coming, and when it hit, he was left with about 2 million square feet of empty real estate holdings in West Michigan and Chicago, mostly in the office and industrial sector. 

Since then, Shoemaker and many other commercial property owners have experienced real estate values come back to pre-recession levels, if not higher. 

While the impact of the recession is a fresh memory, Shoemaker’s acquisition and development strategy remains consistent: Franklin Partners continues to be aggressive, particularly in the office and industrial sectors. 

The firm recently sold two downtown Grand Rapids office holdings, 99 Monroe Ave. NW and 25 Ottawa Ave., at least partially to support its proposed redevelopment of 56 N. Division Ave. The company also owns an industrial building north of downtown at 1340 Monroe Ave. that’s currently occupied by Display Pack Inc. When the primary tenant moves out — most likely next year — the site could be converted to housing or office uses, as MiBiz previously reported. 

While some firms might balk given the uncertainty in the broader market, Franklin Partners continues to make bets on challenging projects. 

“We’re a risk-taking company,” Shoemaker said. “We’re always up at night worrying about our next project, but no more than usual.” 

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