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Sunday, 07 August 2016 13:05

Global factors could contribute to weakened West Michigan real estate market

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Brookstone Capital’s 14-story apartment tower at 20 E. Fulton St. in Grand Rapids is one of the many projects keeping Pioneer Construction busy for the coming months. While executives say the short-term business prospects look promising, they’re starting to be less certain about what the market will hold in the period 18 months from now. Brookstone Capital’s 14-story apartment tower at 20 E. Fulton St. in Grand Rapids is one of the many projects keeping Pioneer Construction busy for the coming months. While executives say the short-term business prospects look promising, they’re starting to be less certain about what the market will hold in the period 18 months from now. Photo by Joe Boomgaard

Stakeholders in West Michigan’s commercial real estate industry continue to express cautious optimism for the foreseeable future, despite the emergence of some headwinds. 

Construction executives, brokers and developers in the region tout the limited inventory, rising rents and a backlog of projects extending more than a year as proof that even with tumultuous global events, there’s still good times to be had in West Michigan. 

For example, Grand Rapids-based Pioneer Construction Co. remains busy working on a diversity of projects across the market, including Brookstone Capital’s 14-story apartment tower at 20 E. Fulton St., an expansion at Founders Brewing Co. and an off-site production facility, and Third Coast Development’s mixed-used Diamond Place housing and retail development along the Michigan Street corridor. 

However, executives at the general contractor say they’re starting to question what the pipeline will look like after the current crop of projects is completed. 

“It’s difficult to gauge the future with commercial and industrial construction,” said Chris Beckering, vice president of business development at Pioneer Construction. “We have a strong backlog for the next 18 months but not much beyond that.” 

Indeed, Beckering’s sentiments match up with recent industry forecasts from various trade associations. 

In particular, the findings from the American Institute of Architects Consensus Construction Forecast in late July could give pause to West Michigan’s construction and commercial development sectors. 

“Healthy job growth, strong consumer confidence and low interest rates are several positive factors in the economy, which will allow some of the pent-up demand from the last downturn to go forward,” AIA Chief Economist Kermit Baker said in a statement. “But at the same time, the slowing in the overall economy could extend to the construction industry a bit — with the biggest drop off expected in the industrial facility sector over the next year and a half.”

The report noted a number of macroeconomic factors such as the U.K.’s Brexit vote and other international events as having the potential to weaken the U.S. economy. 

Likewise in its construction economic update in early August, the national Associated Builders & Contractors Inc. (ABC) noted that spending in the sector fell by 1 percent in June, its third straight month of contraction. 

For companies tracking the construction sector, the news of further contraction should send some warning signs, but ABC Chief Economist Anirban Basu noted there are some silver linings. 

“Thanks in part to the investment of foreign capital in America, spending related to office space and lodging are up by more than 16 percent year-over-year,” Basu said in a statement. “The global economy is weak, and international investors are searching for yield and stability. U.S. commercial real estate has become a popular destination for foreign capital.”

Moreover, the ABC report backs up Beckering’s point of a healthy optimism for the short term and a murky outlook when looking more than a year out. 

“Though many contractors continue to report extensive backlog, the data suggest that average firm backlog may begin to retrench,” Basu said. “The only significant driver of economic growth in America presently is consumer spending. Corporate profits remain stagnant and business investment remains underwhelming. Public sector spending does not appear positioned to accelerate anytime soon despite the passage of a federal highway bill last year.”

While a backlog of projects in the downtown Grand Rapids multifamily housing market continues to buoy Pioneer Construction’s optimism, the company remains pragmatic in its outlook. 

“We’re optimistic about the next 12 to 18 months,” Beckering said. “Beyond that, we’re cautiously optimistic.” 

His assessment of the current market is also echoed by recent quarterly reports from two of the Grand Rapids area’s largest commercial brokerages. 

“The (report) will sound to many like a broken record,” NAI Wisinski of West Michigan wrote in the industrial section of its second quarter report. “The absorption continues to be positive, rental rates remain strong, current inventory levels continue to drop and satisfying Buyer and Tenant needs continues to be a challenge.”

While referring to the region’s industrial market, the remainder of the NAI Wisinski report — as well as the second quarter survey released by Colliers West Michigan — paints a very similar picture for the area’s retail and office sectors. 

Overall, prime locations with amenities continue to experience the highest demand across all sectors, according to the reports. 

While rents may be on the rise and users struggle to find options across the different commercial real estate sectors, tenants have become picky in how they choose to use space. 

“Many companies are as eager to expand as they’ve been in previous years, however, they are making due with their current situations while searching for the perfect opportunity,” John Kuiper, president of Colliers West Michigan, said in a statement. 

Many commercial real estate sources have cited the cost of new construction as being prohibitive to new projects, leading some users to find ways of using the space they have available. 

But Beckering at Pioneer Construction believes the current cost of construction falls within the market norms. 

“In West Michigan, we became a bit spoiled because the market was so competitive following the last slowdown, buyers came to expect delivery at or near cost,” Beckering told MiBiz. “Contractors are now back to an area where they’re commanding a respectable markup. Coupled with increased labor prices and materials prices … people are seeing a higher cost per square foot.” 

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