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Sunday, 07 December 2014 22:00

Commercial Construction & Development Roundtable: Amenities, quality trump pricing in companies’ real estate decisions

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Participants in the MiBiz Commercial Construction and Development roundtable were (clockwise, from front) Nick Manes, Mitch Watt, Mike Corby, Ted Lott, Jeff Olsen, Don Shoemaker, Chris Beckering, Josh Szymanski, Mike Novakoski, Charlie Secchia and Mark Mangione. Not pictured is Joe Boomgaard. Participants in the MiBiz Commercial Construction and Development roundtable were (clockwise, from front) Nick Manes, Mitch Watt, Mike Corby, Ted Lott, Jeff Olsen, Don Shoemaker, Chris Beckering, Josh Szymanski, Mike Novakoski, Charlie Secchia and Mark Mangione. Not pictured is Joe Boomgaard. PHOTO: JEFF HAGE

Price is important, but it’s not necessarily the most important factor West Michigan companies consider these days when they’re looking for real estate.

As the economic recovery has taken hold and as West Michigan sees continued absorption of quality industrial, retail and office space, many tenants now pay more attention to amenities than they have in the past.

That was among the common themes that 10 executives from West Michigan-area construction, architecture and development firms shared with MiBiz in a recent roundtable discussion. The conversation focused on topics ranging from talent and training in the construction industry and financing for new projects to how outside investors now view the market in West Michigan.

Participants in the roundtable moderated by this writer and MiBiz Managing Editor Joe Boomgaard included:

  • Chris Beckering, vice president of strategic business operations, Pioneer Construction Co.
  • Mike Corby, executive vice president and design principal, Integrated Architecture LLC
  • Ted Lott, principal, Lott3Metz Architecture LLC
  • Mark Mangione, business manager, financial secretary and treasurer, Plumbers, Fitters and Service Trades Local 174
  • Mike Novakoski, president and CEO, Elzinga & Volkers Inc.
  • Jeff Olsen, project director, 616 Development LLC
  • Charlie Secchia, partner, SIBSCO LLC
  • Don Shoemaker, principal, Franklin Partners LLC
  • Josh Szymanski, business development director, Owen-Ames-Kimball Co.
  • Mitch Watt, president, Triangle Associates Inc.

 

Here are some highlights from the conversation.

What did 2014 mean for your business?

Watt: In 2014, we saw an increase in all the K-12 markets that we serve and higher education funding — not from the state level, but philanthropy-driven. So we’ve seen a lot more projects on the boards for that, and certainly (multifamily) housing. We’re feeling a lot better about the market — as I think everyone is feeling — and where things are going. And I only see that trend just growing continually for at least the next couple of years. National retail accounts also picked up a bit for us this year. While 75-80 percent of our business is in West Michigan, the national accounts we’ve been able to develop relationships with have gone out past West Michigan and gone across the country.

Corby: Our primary sectors are institutional and developer-driven. The institutional work has picked up a little bit. The developer stuff (mixed-use, residential, office) — the money is back in the market. There’s obviously demand that hasn’t been met with supply so those projects are really starting to take off. Developer-driven work has been the biggest growth in 2014.

Shoemaker: We are in the office and industrial sectors predominantly, and our industrial spaces all absorbed very quickly and spent almost no time on the market. Same thing in the suburban office market: We were able to produce some large transactions in large blocks of space due to strong demand and a scarcity of supply. Downtown (in Grand Rapids), we are seeing the same thing. At 99 Monroe, we are a couple leases away from being fully occupied, and we are aggressively going after our next project at 25 Ottawa. So 2014 was a great year to be in commercial real estate.

Beckering: We saw growth in a number of markets (such as) higher ed, hospitality, health care, multifamily housing, the industrial manufacturing sector. Just a great book of work, both from last year and looking forward to next year. And it’s largely with repeat clients, which is always a good thing. We’re really seeing strength across multiple sectors. Most of our work is done right in our backyard here in Grand Rapids, which we appreciate. There’s been a lot of work in downtown Grand Rapids, with office buildouts and historic renovations. The construction industry seems to be thriving in our area.

Would you agree that there’s a dearth of available, quality space right now?

Shoemaker: There is a scarcity of large blocks of contiguous space, not just downtown but in the suburban markets also. If you need 10,000 square feet of space by the airport, you have multiple options. If you need 30,000 square feet, you’re down to a couple choices. And it’s the same thing downtown. Small tenants will continue to have a lot more options. There’s just a scarcity of large blocks of contiguous space.

Beckering: Industrial buildings are a good example. There was a building boom in Grand Rapids for a long time where we were building distribution facilities that people happened to do a little bit of manufacturing in. But (those buildings) have 22-foot ceilings, they don’t have a lot of parking, and they didn’t have heavy power. Those (buildings) really can’t be repurposed for today’s manufacturing. You need 30-foot interior clear heights and heavy power. If you want to find over 50,000 square feet of quality industrial space to buy or lease, you are going to be pretty hard-pressed to find it anywhere in our market right now. There is a demand for quality contiguous space across (the retail, office and industrial) markets. There is going to be new construction as a result. We are starting to see speculative building in the industrial sector again.

In downtown Grand Rapids, in particular, we seem to be having a lot of Class A space coming online as many existing facilities are renovated. What’s driving some of that growth?

Shoemaker: The thing that’s happened is that you can get rental rates now to support doing these types of renovations. With 99 Monroe (a Class A office building in downtown Grand Rapids), there was a lot of skepticism that we would be able to get rental rates that would support the kind of investment we made. It’s 97-percent leased now and it’s worked. We are taking the same kind of approach to 25 Ottawa now. It is going to be a similar quality investment. Some of these companies are willing to pay more for these types of facilities.

Secchia: It’s not all based on price anymore. It’s more services and getting the job done properly. If (architects and contractors) get their job done, (developers and landlords) look better for our tenants. Where (building decisions) used to be about cost per square foot, now it’s about some of the amenities the building has to offer. The first question used to be, ‘What’s my rent?’ Today, it’s about ‘labor is 70 percent of my overhead and rent may be 5 percent. So I’ll pay a little more in rent, but what do I get for it? Is there a conference room for the building? Is there a gym onsite? A deli, covered parking?’ Some of the older buildings don’t have these. So do we retrofit them? Do you build new?

Are there other examples where amenities played a role in landing a tenant?

Shoemaker: We were able to do a lease from Kellogg. They are hiring 630 people at the former Zondervan facility. That’s a high-density operations center, and one of the keys to getting that transaction was to put a fitness center in the building with showers and locker rooms on site. (It was the same thing) with Booking.com at 4147 Eastern Avenue SE. We just did a renovation adding those amenities. Same thing with a Stryker Medical facility in Kalamazoo. People are focusing more on the environment than the rate per square foot.

We’ve reported recently that modern office trends seem to favor substantially smaller offices than in the past. How has that played out in practice?

Secchia: There (is a) scarcity of tenants that need all that space. Tenants that used to be 60,000-square-foot tenants where they had maybe two or three (spaces) in a big building are just reducing the amount of square feet. … The square foot per employee from the 80s to the 90s to today (is dropping).

Since companies are dealing with smaller spaces, how does that change what they’re demanding from their real estate?

Lott: One of the metrics we are working with is how much of a premium are tenants or owners willing to pay for flexibility.There’s kind of an assumption of flexibility (as a) baseline. There’s an array of things that you can design into your product that can ensure future flexibility. So you wind up having a discussion with your client about what does the flexibility really mean to your product looking down the road. A lot of times, you wind up with more of an open solution just by nature of that. They are happy to make changes as the building ages or as the tenant evolves.

Szymanski: It’s cross-cultural across all industries, though. Schools are having more common space and turning three classrooms into two. Industrial spaces are becoming more flexible.

How does a focus on quality versus price compare to historical behaviors in West Michigan?

Lott: I think (price) is a big kind of cultural issue that we are all coming to terms with. That is not the way the Grand Rapids market has worked. I think a lot of folks are still coming to terms with that. In a bid situation, for example, (they’re asking) what does that low bid really mean? That’s the question as we move ahead — how some of these cultural issues and how work gets done. What are we really buying for that low bid?

Beckering: We are also seeing clients that are looking based on technological competence. They want to see budgets and estimates. They want to see a new level of transparency, unlike many of us have had to provide in the past. Now the technology exists to provide those things. We can find platforms that are cross-compatible, from the architecture contractors to the general contractors to the trade contractors.

Turning to financing, where are developers going in search of capital for new projects?

Olsen: Just because the capital is available, I don’t think it makes it any easier. I think there’s a new level of oversight and regulation that others in my group are having to deal with. But again, there is access and there is opportunity there. We’ve had reasonable success finding equity and investors to move forward with our projects.

Shoemaker: The banks are definitely back. I’d mirror comments that the money is still difficult, but it’s available. They’re out there letting you know they are looking to lend. Getting through a credit committee is probably harder than it should be. We closed on every acquisition for the last four years with all cash, and then put financing on afterwards for speed and ease of doing the transaction. But there’s definitely capital in the market. The banks are coming back. We are starting to see some institutional capital come into the market, looking to make investments on stabilized assets, which for Michigan is kind of a big hurdle to get over.

Are you still finding gaps in financing?

Shoemaker: I think the pre-recession levels of lending probably won’t come back, at least for a while. I think banks are requiring more equity and stronger financial statements.

Secchia: It’s easy to borrow money if you have money. We’re starting to get over that a little bit, but I have seen quite a bit of bureaucracy with getting loans.

Lott: To me, the whole conversation about financing is critical. If you’ve got money, you can get a loan. A lot of our clientele is probably what a banker would refer to as ‘mom and pop’ shops. They are organizations that want to start a business or renovate a building, startups or entrepreneurs who want to attach themselves to a piece of real estate as part of their business ventures. That portion of the market is still struggling. … It is still hard to get a valuation on a property that any of us are working on. As that relates to financing, that to me is still the biggest problem. Interest rates are low, but the money still isn’t flowing as freely as it should be.

Are developers finding state or local incentives for their projects?

Secchia: We’ve never used an incentive. I plan to, but we just have never had to. With the hurdles to jump through and the bureaucracy involved, we just decided to do it ourselves.

Shoemaker: I mirror those sentiments exactly. Not that we wouldn’t look at incentives to make a project viable, but we’ve never really used them, (although) we did get some brownfield credits in 2009. We like to be able to execute our deals and not be held with the red tape that sometimes comes with incentives.

Much of the activity continued to focus on urban housing over the last year, but what activity did your companies see in the suburban or exurban markets?

Watt: We’re not really seeing anything in the suburbs. For multifamily, everything is in the urban core, either downtown or immediately near.

Olsen: Part of what we’re seeing is a focus on neighborhoods, with the Wealthy and Cherry Street corridors. We made our first announcement in the Creston neighborhood a few weeks ago. That concept of neighborhood butchers, bakers and candlestick makers is coming back.

What have your companies done to attract skilled trades workers?

Novakoski: I think it’s a race to see who gets the best people. We are having these discussions about the environments we create for both recruitment and retention. We are seeing a little bit of people jumping from one good conversation to something they deem to be a little bit of a better conversation. It’s not always about the paycheck. Sometimes it’s about the culture and the feel. That is probably the number one restriction for many of us to grow — really having the right execution team. People are getting a little bit picky about what they’re willing to do, how far they’re willing to drive.

Szymanski: That is our number one challenge in the industry: finding the right employees for what we need. We are looking to hire in just about every area of the business, from accounting to superintendents to project managers. I think we’re all also building our training modules as well. We are going back to hiring young people and training them.

Mangione: Being around the construction business, everyone here has experienced it where you have this big letdown of work, and then all of a sudden it comes roaring back. And in construction, it is very easy to get a job somewhere else. So it’s not just the area, it’s people moving around in other states. Here in West Michigan, we are trying to reel them back to the area. Maybe they moved away or found another job. It’s not that easy to train people to do construction, as everybody here knows. Some people think it’s pretty easy, but it’s a challenge, especially when you talk about project managers and safety professionals or (quality control) people. They are really hard to find. There is a lot of opportunity out there. Training is huge, and unfortunately, we are all trying to do it at the last minute while things are picking up.

While the general contractors seem to have had a good year in 2014, has that translated to the subcontractors?

Watt: I think they’re all very busy. I think the challenges for them are similar to what we’re talking about: finding people.

Beckering: These are all good problems. You don’t see any of us frowning. (Laughs.)

Corby: The other thing I’ve noticed, back in 2009 or 2010, the unemployment rate for architects was almost 30 percent in the state of Michigan. A lot of architects are now working for contractors. I’ve never seen so many architects working for the contractors, and doing a lot of things like business development, project management, you name it. I think for a lot of the people we are looking for, now that the markets are better, we are having to look outside. Of the last 10 people we have hired, I would say eight of them are from out of the area.

How are the construction and general trades addressing these talent issues?

Szymanski: If you’re a young individual and you’re making an investment in your future, (you’re asking whether) you want to get into an industry that is super volatile like construction or design. We have started competing with manufacturers. The (wages) aren’t that different right now, and they can work inside in a consistent environment. All of a sudden, we are competing with these folks for labor.

Mangione: I think there’s been a stigma of construction workers for many, many years. Some of us here may be a product of that.

Novakoski: I (recently) was at an advisory committee meeting at Ferris State. They have a very reputable program and they’ve had 100-percent placement within two months of graduation the last couple of years. Five years ago, those (graduates) would move to Chicago or St. Louis or wherever. Now there’s viable options here, so that’s very encouraging. At least the kids are beginning to see it. We have people in need of training. We are finding less mature talent, so it takes patience on the part of the owners as we help to develop them.

Are we seeing more outside interest from real estate investment trusts (REITs) and other out-of-area investors?

Shoemaker: If there were enough exposure to what’s going on in West Michigan, then I think you’d see a lot faster pace of growth from the institutional investors. It’s still a challenge to get them into Michigan. But as yields continue to get compressed in major markets, I think you’ll see more. It’s not at as fast a pace as the market deserves if we were exposed better. There is still a large percentage of institutional investors who have a big “X” across Michigan.

Many of the people at the table have business outside of West Michigan. How does this market compare to other regions?

Shoemaker: The Chicago market is not going through the growth pattern like Grand Rapids is, and these conversations aren’t taking place in Chicago. As a firm that is heavily invested in both markets, the great thing about Grand Rapids is the quality of the contractors. Gary Tamminga, our facilities manager, always says it’s really hard to make a bad decision on a contractor in West Michigan. … Even in light of all these issues that you guys are addressing, we have had really good experiences. For me, I’m still in counseling to get over the recession. It’s kind of a healthy thing to sit around and talk about how good things are going because it’s such a stark contrast. … (As a result) West Michigan is definitely starting to catch the radar of some of the East Coast investors that want a bigger yield than New York, San Francisco or Chicago.

Secchia: The last couple months we’ve been working with out-of-state institutional lenders. We have access to capital at rates we couldn’t get locally. They have access to returns they couldn’t get, so it seems to be a good mix. That’s good for West Michigan.

Is it safe to say that West Michigan is doing pretty well, comparatively?

Shoemaker: We have sold buildings — once they were finished and stabilized — to groups out of New York and Chicago. It’s a slow process, but I think there is becoming more and more awareness differentiating West Michigan from the rest of the state. For my investors, when I bring them a project in metropolitan Chicago, the whole investment team scrutinizes (the deal). When I bring them a project in Grand Rapids, they usually say ‘great,’ because it’s a growth market. Metropolitan Chicago has been flat (with) almost no rent growth, no absorption in the office markets. … (It’s) nothing like you’ve seen in Grand Rapids. This is a great market to do business in and these are really high-class problems to have.

Corby: I think one thing we have here that you don’t find around the country is the (ease of working with local) government. The planning (department) is just a very supportive group. They want good stuff but they encourage development. They tend to not be barriers — they tend to be celebrators. We tend to take it for granted here, but try going to Ann Arbor or Chicago. I think that’s part of why we’ve done so well.

Read 5545 times Last modified on Sunday, 07 December 2014 23:06

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