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Sunday, 12 October 2014 22:00

Tight industrial inventory pushes developers to consider build-to-suit projects

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Developers say Class A industrial space remains at a premium across West Michigan as expanding manufacturers have nearly exhausted the supply of modern manufacturing buildings such as Franklin Partners’ facility at 5565 Broadmoor in Grand Rapids (pictured). Developers say Class A industrial space remains at a premium across West Michigan as expanding manufacturers have nearly exhausted the supply of modern manufacturing buildings such as Franklin Partners’ facility at 5565 Broadmoor in Grand Rapids (pictured). COURTESY PHOTO

A resurgence among West Michigan manufacturers, particularly for automotive suppliers, has Class A industrial space at a premium — if not scarce — in the region.

Case in point: The 700,000-square-foot Avastar Park in Walker is now fully leased after first being marketed for redevelopment in 2006.

In August, Grand Rapids-based Profile Industrial Packaging Corp. signed a lease for approximately 200,000 square feet at Avastar Park, effectively filling the space, said Stuart Kingma, an associate broker with NAI Wisinski of West Michigan, who brokered the deal.

It may have taken a few starts and stops and eight years to complete, but Avastar Park on Alpine Avenue mirrors much of the industrial real estate sector in West Michigan, Kingma added.

“The market is very active and we are actually experiencing a lack of good inventory in certain sectors,” Kingma said.

However, despite the lack of inventory, speculative building or build-to-suit projects have been slow to materialize, largely because of heightened lending standards for developments, sources said.

“Developers are going to have to come with more equity to lower the bank’s risk,” said Don Shoemaker, principal of Oak Park, Ill.-based Franklin Partners LLC.

Another area that’s been active of late includes industrial properties south of Grand Rapids near the Gerald R. Ford International Airport. Oak Brook, Ill.-based Franklin Partners LLC has been a major developer in the area, acquiring approximately 1.5 million square feet of industrial space previously owned by office furniture manufacturer Steelcase Inc.

Now the space — split between two buildings in the vicinity of Patterson and Broadmoor — is fully leased to food processor Roskam Baking Co. of Cascade Township, Shoemaker confirmed to MiBiz.

The firm also has 35 acres of land that Shoemaker said is ready for build-to-suit industrial projects.

“We’re starting to get quite a bit of interest (in that land) based on the lack of available buildings,” Shoemaker said, noting some of the inventory is functionally obsolete. “If someone out there needs 100,000 square feet that has good infrastructure — heavy power, high (ceiling) heights and good access to highways — there’s virtually no product on the market.”

That lack of product has also been detailed by brokerage firms in recent market reports on Grand Rapids.

“Kent County industrial space has continued its aggressive trend of tightening over (the first half of) 2014, and the market recorded its seventh consecutive period of positive absorption, lowering the average vacancy rate by 120 basis points for gross space and 260 basis points for leased space,” stated a September report by the Grand Rapids office of CBRE Inc.


These days, the only way new inventory comes online is when a manufacturer vacates a building to move to another space, whether that new space is a speculative building or build-to-suit property, sources said.

However, those vacated sites are generally leased before the current tenant even leaves.

“Nothing is going to sit (empty) right now,” said Ron Kitchens, president and CEO of Southwest Michigan First, a Kalamazoo-based economic development organization.

The market dynamics have pushed companies and developers to consider new construction as a viable option more frequently than they have in the last five years, sources said.

“That is forcing the discussion that ‘we should build,’” said Kingma of NAI Wisinski. “The hurdle there, at least up to some level, is cost. The market got so used to buying used that it made no sense to buy new, so to speak.”

At Avastar Park, a former General Motors plant, developers split the site into seven industrial condominium units with modern utility connections and ceilings as high as 40 feet, all amenities modern manufacturers require from their space, Kingma said. The park currently houses Gill Industries Inc., Haviland Enterprises Inc., Profile Industrial Packaging and others.

The high cost of new construction has led most manufacturers to stay in their current buildings and find ways of making the space work — all while hoping for a used building to come on the market, Kingma said.

“(It’s) not going to be a sustainable model long term,” he said. “Provided the economy continues to (improve), you’re going to see more shovels need to go in the ground. … It’s got to happen.”


New construction has started to take place, but mostly just in small pockets across West Michigan. Northwest of Grand Rapids in Walker, for instance, construction and development company Visser Brothers Inc. has built a 214,000-square-foot industrial building for anchor tenant Van’s Delivery Service Inc., as MiBiz previously reported. The trucking company will occupy 89,000 square feet in the building, Van’s COO John Nieuwenhuis said at the time.

The developer also has a 120,000-square-foot speculative building going up near the airport, said Greg Bol, a sales associate at Visser Brothers.

Further south, the I-94 corridor between Kalamazoo and Battle Creek is also seeing some new construction, said Kitchens of Southwest Michigan First.

While he was unable to announce new tenants yet, Kitchens said there are currently three parcels of land under contract just off the highway near Portage. All of the buildings will be new construction for manufacturers in a variety of sectors, he said.

“In terms of available space, particularly for manufacturing and distribution, there absolutely continues to be a shortage,” said Kitchens, adding that the neighboring states of Indiana and Ohio are experiencing a similar situation. “We are getting calls from companies in those other states saying, ‘Hey, any chance you’ve got 200,000 square feet of good, fairly modern industrial space? If you do, we want to come look at it right now.’”

Kitchens can point to only 200,000 square feet of available modern manufacturing space in the Kalamazoo area, all of it located at the Midlink Business Park. A portion of that space came online as Mann+Hummel USA Inc. moved some of its functions and expanded next to its existing facility on South Sprinkle Road.

At least six different companies have toured the newly vacant space at Midlink and are “actively in negotiations,” Kitchens said.

There is also some space in the Benton Harbor-St. Joseph area, but the buildings have fairly low ceilings for the needs of modern manufacturers, Kitchens said.

“That is just about it,” he said. “There’s no free-standing, 15- to 20-year-old buildings with 25-foot ceiling heights. There’s nothing that I’m aware of in the region available.”

The tightening industrial market speaks to Kingma’s point that the market as it stands will not be sustainable for much longer. That means developers will need to start looking at more build-to-suit projects and speculative construction, sources said.


While companies are interested in those options, lending remains the pinch point.

“That finance piece just isn’t there right now,” Kitchens said. “The economic collapse we went through created different criteria. We just don’t see a lot of ability for speculative builders to build things.”

The economic developer shared a story of recently attending a conference in Washington, D.C. with peers from around the country. The demand for commercial real estate was strong all over the U.S., as was the lack of available capital for construction projects, he said.

Franklin Partners’ Shoemaker generally concurred with Kitchens’ analysis but still thinks there are good opportunities for developers looking at speculative building in this market.

“The lending market is coming back at a pretty rapid pace, but the underwriting is still more strict,” Shoemaker said. “Financing is tough, but I think if somebody has a good amount of equity to bring to the table, there is potential to get some debt. It’s not going to be like the pre-recession era where you get a bank to put up 80 or 85 percent of your capital. It’s going to be lower debt levels.”

Recent data point to a resurgence of lending by financial institutions for commercial real estate, particularly for industrial projects.

In a report from early October, the national arm of CBRE released data showing that lending for industrial construction was up more than 50 percent year-to-date from the same time a year ago. That compares to lending for retail, which was up just 20 percent. Lending for office projects was also up more than 50 percent.

Regional banks are working to get more capital into the hands of developers, particularly for build-to-suit projects, said Dennis Roudi, a senior vice president from the commercial real estate division of Fifth Third Bancorp (Nasdaq: FITB) in Grand Rapids.

“We’re interested in supporting the needs of the market,” Roudi told MiBiz. “In terms of capital available, there is a lot right now for business.”

Another encouraging sign is the number of manufacturers coming from outside West Michigan and choosing to locate here, Kingma said. In one case, NAI Wisinski has seen business come from as far away as California, he added.

The activity even extends to international customers such as Chinese auto supplier Citic Dicastal Co. Ltd., which last month purchased the former Uni-Solar plant in Greenville and the surrounding 98-acre parcel in a deal brokered by Signature Associates | Cushman & Wakefield.

“The local growth is probably the bread and butter, but we still do see and are seeing more companies recognizing the potential of West Michigan,” Kingma said. “The growth is local but it’s also coming in from the outside.”

Read 5167 times Last modified on Sunday, 12 October 2014 22:56

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