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Sunday, 24 November 2013 18:39

Real estate forecasts give early insights to 2014 deal market

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Two new reports on real estate trends point to steady, incremental growth across most Michigan market sectors in 2014.

While the industry expects the commercial real estate market to grow steadily over the next year, the pace of that growth depends on a few factors, not the least of which is political uncertainty, the cost of new construction and outsiders’ perceptions of the local market.

That’s according to a recent statewide report from the Urban Land Institute of Michigan, as well as nationwide research from the national Urban Land Institute in partnership with Pricewaterhouse Coopers.

Rising lease rates, a shortage of quality inventory in some areas and continually low interest rates make the West Michigan market more lucrative for outside investors seeking deals with higher yields, the reports said, while warning that the current conditions aren’t likely to stick around for long.

Uncertainty drives the market

“The biggest thing we run into is flat-out uncertainty in the market,” said Duke Suwyn, president and CEO of the Colliers International office in Grand Rapids. “It’s a tax on business that can’t be calculated, and it’s a heavy factor on the market for us. It has just put a chill on everything.

“It’s truly creating havoc in the market on every scale in every area.”

While that uncertainty is keeping a lot of private capital on the sidelines, transactions continue to keep pace in a number of West Michigan markets, thereby firming up lease rates and property values, sources told MiBiz. At the same time, banks have been cleaning up their balance sheets and say they’re in the market and lending to commercial development again.

Beyond noting shrinking inventories in primarily the industrial and some central business district office markets, both the national and state trend reports highlighted slow job growth as one of the primary issues driving real estate trends.

“It’s not just the lack of inventory that can stifle our growth, … it’s also finding skilled workers,” Suwyn said. “It’s a huge burden for a lot of our local companies to acquire skilled workers, and that’s one of the barriers we have to be ready to handle.”

Even against the economic uncertainty, the West Michigan market boasted a strong third quarter of transactions, Suwyn said. Net absorption in the industrial, office and retail sectors in the Grand Rapids area totaled almost 480,000 square feet, according to Colliers third quarter report.

“Major market-cap rates compressed, so a market like ours is starting to get real attention,” he said. “Typically with deals up to a certain size, there is no shortage of private equity, institutional and REIT funds chasing buildings like ours.

“For us, the local market is active.”

Vacant land sales coming back

Even as interest rates continue to tick upward — a trend that’s expected to continue through 2014, according to both reports — investors continue to be active in the market as they seek stronger yields, Suwyn said.

An active transaction market coupled with little to no new construction over the past six years has led many investors to consider land deals, according to the PwC report.

“It’s something we haven’t seen in a while,” Suwyn said. “There have been more land sales in the last six months than we’ve seen in the last six years. The land component is picking up rather dramatically, the second phase of which is construction on that land.”

The Commercial Alliance of Realtors reports that land sales increased from 39 transactions in 2012 to 51 so far this year. The West Michigan office of Colliers also reports that its industrial group closed or has put under contract more than 150 acres of vacant land for six different buyers.

Nationwide, industrial and distribution sites are expected to be the highest potential property type for development next year, followed by full-service hotels and multi-family apartments, according to PwC. In Michigan, general industrial properties are in full recovery, while bulk/distribution space is leaning toward recovery or growth, according to the ULI Michigan report.

However, the statewide organization ranked new multi-family development as having a higher business prospect than industrial development. All residential rental categories are clearly in recovery and growing, according to the report on the Michigan real estate market.

Cost concerns

But while the reports project pockets of growth both in Michigan and nationally, brokers and developers say they’re concerned that the high cost of construction could stifle new development.

In his 2014 economic forecast for the West Michigan chapter of the Building Owners and Managers Association, Grand Valley State University professor Dr. Paul Isely, chair of the economics department at the Seidman College of Business, said that while demand for construction services is up, materials suppliers are still sitting on excess capacity.

Isely told BOMA members they shouldn’t expect construction prices to ease any time soon.

Ahead of land costs and vacancy rates, construction costs are the number one issue for real estate and development professionals, according to the PwC report. That’s true in Michigan as well, where other top concerns include a lack of alternative modes of transportation and a lack of available project financing, according to ULI Michigan.

The cost discrepancy for new industrial construction has created a gap in the market, said Kurt Kunst, industrial broker with NAI Wisinski of West Michigan. Construction is currently limited to expansions and renovations for industrial properties, he said. That’s meant industrial users are scooping up the available inventory, simultaneously driving up lease rates.

A similar trend is also taking shape in the core office markets, said Mary Anne Wisinski, office manager and broker for NAI Wisinski. Investors who bought downtown Grand Rapids office buildings last year also invested in updates and renovations, which is helping firm up lease rates, she said.

“What we’re finding, especially with buyers, is they can’t find what they are looking for,” Kunst said of industrial clients. “There is still some junk on the market, but the real good quality industrial buildings — we just can’t find them, and I think that’s what’s driving those vacant land purchases.”

The future of the West Michigan market will depend on developers finding a way to build new facilities at equitable prices, but that’s unlikely to occur unless they get comfortable with holding onto facilities for a long time to recoup their investments, Kunst said.

For developers, this is expected to put more pressure on securing adequate project financing, which both the PwC and ULI Michigan reports forecast to strengthen in 2014.

Underwriting standards are expected to remain about the same over the next 18 months for both real estate development and acquisition, according the ULI Michigan report. That said, private companies and individual investors are expected to push up the levels of available equity in 2014.

Respondents to the ULI Michigan survey were optimistic that more capital will be available in 2014 for real estate ventures in all markets, with the exception of government enterprises. The survey showed respondents are also optimistic about available debt capital in the coming year.

Even with all the stigma attached to plight of some cities in Southeast Michigan, the ULI Michigan forecast reports that 50 percent of respondents believe the Detroit-Warren-Livonia area is the most exciting area for real estate in the next five years.

The markets in Grand Rapids and Ann Arbor both tied for second in the ranking of most exciting areas for real estate in the next five years.

“In commercial real estate, the struggle has always been that whenever I go to a national convention, everyone always groups us with Detroit,” Kunst said. “But the people that understand it are definitely looking at Grand Rapids as a place for investment opportunity.”

Read 4553 times Last modified on Friday, 22 November 2013 14:05

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