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Sunday, 13 October 2013 22:00

Speculators Wanted: More industrial facilities needed across West Michigan as manufacturers continue growth

Written by  Elijah Brumback and Joe Boomgaard
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Speculative construction could make its way back to West Michigan soon because of the highest occupancy rates in years for industrial properties.

Manufacturers in the automotive supply chain and the office furniture industry find themselves cramped for space as orders, production and hiring are all on the upswing.

That’s why it’s curious that most of the region’s vacant industrial land remains unturned, with the exception of a handful of build-to-suit projects. Manufacturers seem mostly averse to locking up their capital in facilities assets, while developers have focused mainly on projects for which they’ve already lined up tenants, not speculative developments. Manufacturers that need space to grow have with few options.

As the need for more industrial space remains high, local real estate professionals and economic developers are left to wonder: Where are the risk takers?

“If we want to retain and capture growth in our market, we need more product,” Randy Thelen, president of Lakeshore Advantage, said of the industrial facility market. “That’s not to say spec building is easy or without risk, but we’ve done it before in the early ’90s and 2000s and it worked.

“It’s time to get back on the horse and get it done again.”

High industrial occupancy rates in West Michigan have driven local vacancies well below the national average of 8.2 percent, but developers still can’t wrap their arms around the risk profile of spec building projects, Thelen said. That same risk profile is also keeping financing on the sidelines for speculative developments.

“There’s no question that there’ll be construction of new manufacturing space this year. [But] as to whether some will be speculative, that’s still difficult to finance,” said Don Shoemaker, president of Chicago-based Franklin Partners LLC that owns industrial facilities in West Michgan. “It’s possible we’ll see some smaller spec buildings go up, but it’s hard to say the same for any larger-scale buildings.”

Shoemaker’s company doesn’t build speculative projects simply because it’s hard to build new and offer the same rates as what’s possible through renovated buildings, but he said he sees more build-to-suit projects on the way. Many developers and banks don’t want to stick their necks out after the hit the real estate markets took during the recession, Thelen said. That’s left West Michigan lagging behind other markets around the Midwest, where there’s been an uptick in the construction of speculative industrial projects.

Last month, reported 10 speculative projects currently in process in the metro Chicago area will bring on 1.4 million square feet of new space. Other spec building projects are sprouting up in Memphis, Indianapolis, Minneapolis and Cincinnati, according to trade publications.

But sources told MiBiz that speculative industrial development in West Michigan remains nonexistent — for now.

While spec building is risky, the high occupancy and escalating lease rates of industrial properties are creating an environment where the practice makes sense, Thelen said.

“Otherwise, we run the risk of watching companies expand outside our market,” he said.

Nearly across the board, industry statistics and anecdotal observations confirm just how little vacant industrial space is available in West Michigan.

In Battle Creek at the sprawling Fort Custer Industrial Park, there’s just 4.4 percent vacancy at the park’s estimated 6 million square feet of industrial space. The low single-digit vacancy rate there now is down from around 14 percent a year and a half ago, said Karl Dehn, president and CEO of Battle Creek Unlimited, which markets the park.

He attributed that “sharp decline” to two major manufacturers, Janesville Acoustics and Cosma Castings Michigan, moving to the park and scooping up nearly 600,000 square feet of facilities. Battle Creek’s industrial property outside of Fort Custer is stable since most of it is under long-term ownership by the city’s legacy cereal and packaging industries, Dehn said.

In the Holland area, Colliers International reported the industrial vacancy rate was between 5.5 percent and 6.5 percent in the second quarter.

That’s even tighter than the Grand Rapids industrial market, which had 7 percent vacancy, according to Colliers’ reports.

Brokers in Kalamazoo say they face a similar situation with few options for Class A or Class B industrial space. Other remaining properties are tired and would require significant investment to bring them up to the requirements of modern manufacturers, sources said.

The combination of tight inventory across the West Michigan market and higher demand has pushed rents sharply higher, according to the Collier’s report.

“It’s really a shift from a tenant’s market to a landlord’s market,” said Drew Miller, the managing director of CBRE Grand Rapids. “There’s not been much in the speculative market. We haven’t seen (banks) with a real appetite for spec projects.

“The rates have been low and it’s been so competitive that it’s not made economic sense to do it. But that’s shifted. As rates trend upward and demand continues, we will see some construction in the near term.”

Against the backdrop of declining industrial vacancy rates in West Michigan, the region’s manufacturers continue to grow.

The latest Institute for Supply Management survey of business conditions in greater Grand Rapids and Kalamazoo in late September reported the indexes for new orders, production and hiring were all up. A recent report by Michael A. Dunlap & Associates LLC showed the furniture industry was “climbing” as both sales and orders improved. The Original Equipment Suppliers Association’s Automotive Supplier Sentiment Index was the highest it’s been since January 2012, and the group reported capacity utilization has remained around 80 percent for nearly a year.

Manufacturers in the region are looking at how to add capacity and grow production to meet demand now — not commission a project and wait nine to 12 months at the least, said Kris DePree, president of the Colliers International office in Holland. Waiting to add capacity just isn’t something manufacturers can afford to do, he said.

“Companies don’t want to tie resources up in real estate,” DePree said. “They want to buy equipment. Not having available space to move into is holding them back.”

That’s led to a rise in companies adding on to their existing facilities, if possible, or looking for available space elsewhere, according to sources.

In July, ADAC Automotive had just completed an $18 million expansion in Muskegon to add a new paint line when it announced in September that it planned another $7.8 million expansion at its plant. Elsewhere, DENSO Manufacturing Michigan Inc., a supplier of air conditioning and engine cooling components, is in year one of a three-year, more than $100 million expansion of its plant in the Fort Custer Industrial Park.

“When companies have come to Battle Creek and located in Fort Custer, we encourage them to acquire substantially more acreage than they need initially and to think long term so they will not have their site restrict their future growth,” said Dehn of BCU.

Franklin Partners is currently wrapping up a 110,000-square-foot build-to-suit addition for ABC Automotive Group’s Undercar Division in Wyoming. It’s at the same site where the developer raised a building’s roof to accommodate the supplier initially.

“All the warehouse space was pushed out of the building to make room for equipment and jobs,” said Shoemaker of Franklin Partners. “They have two times the machines in the space than they originally planned.”

CBRE’s Miller said many manufacturers that consolidated their footprint during the recession are again looking to move out some functions to make room for new equipment.

“We’re starting to see users constrained in their manufacturing processes,” he said. “A lot of them took in warehousing and distribution internally through the downturn. As they need more capacity, they’re putting that out to a leased space. They’re filling out that inventory and creating more room for production, as a general trend.”

It’s when companies have to look beyond their facilities that the difficulty increases because there’s just not much left in the existing inventory, Miller said.

At Fort Custer, prospect companies are increasingly factoring in construction costs when considering a move to the area, said Dehn of BCU.

“There’s a recognition, as buildings have been filled, that there’s not as many available, and they have a willingness to look at new construction. That’s kept us in the game in a couple of deals,” he said.

Deals these days are also more complex and involve more partners, often including a municipality, said Matt Callander, vice president at Callander Commercial in Kalamazoo. That’s adding more delays to project timelines.

“If we have a nine- to 18-month timeline, that is usually adequate to go through all the phases of the deal,” he said. “What we find a challenge is when the need arises and the tenant timeline is significantly shorter.”

That challenge is why Thelen of Lakeshore Advantage worries that some local companies might be forced to grow outside of West Michigan. If they can’t find an existing facility or commission a new building quickly enough, they may be forced to look to other areas of the country.

Any delay caused by a lack of local construction capacity will just add to manufacturers’ frustrations, and it highlights the need for speculative development to provide companies with local options when they need to expand, Thelen said.

“It’s an awfully tight market from a building standpoint,” he said. “With low vacancy and high demand, it certainly seems like it’s the right time to look at spec building.”

Read 14810 times Last modified on Sunday, 13 October 2013 22:08

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