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Sunday, 11 June 2017 20:16

Apartment concerns aside, commercial real estate outlook remains strong

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Orion Construction, which is building the Venue Tower project in downtown Grand Rapids, shown here, continues to find opportunities with mixed-use, urban housing projects. However, many firms are beginning to wonder if the current cycle for apartment developments could be coming to an end. Orion Construction, which is building the Venue Tower project in downtown Grand Rapids, shown here, continues to find opportunities with mixed-use, urban housing projects. However, many firms are beginning to wonder if the current cycle for apartment developments could be coming to an end. PHOTO BY NICK MANES

Stakeholders in West Michigan’s commercial real estate and construction industries remain generally upbeat as they look toward the second half of the year. 

However, they share concerns about one of the region’s key sectors: urban multifamily apartments. 

With minimal inventory and high occupancy, downtown Grand Rapids and its surrounding neighborhoods still have more than a thousand units under construction or in various stages of development.

Apartment developers like John Wheeler contend that while their projects continue to garner significant interest from renters, they may encounter a different situation six months or a year down the road.

“Really, we’re filling a need and a void that’s been there for four or five years,” said Wheeler, the president of Orion Real Estate Solutions, a division of Orion Construction Co. Inc.

 Wheeler contends the volume of apartments coming online in the next six months to a year could reshape the market in Grand Rapids. 

“I’d say a year from now, I wouldn’t want to be bringing a whole lot of apartments on,” he said. “There’s going to be a whole bunch of them. A year out from now, I think there’s going to be cause for concern. There’s a lot of units coming on.”

The Grand Rapids-based development and general contracting firm has three apartment projects opening this summer, including Venue Tower in downtown Grand Rapids, The Gateway at Belknap just north of downtown and Fulton Square in the Fulton Heights neighborhood. 

Wheeler said that all the projects Orion has opened in recent months have met or exceeded leasing expectations and are renting at desired rates, generally between $1.40-$1.90 per square foot. 

Additionally, the company has started construction on a 32-unit, high-end apartment project known as River’s Edge along North Monroe Avenue and will break ground on another in the Heritage Hill neighborhood later this summer. 

Despite his concerns, Wheeler contends the two new projects scheduled for delivery next year are small enough and designed for niche tenants. As such, they won’t be difficult to fill, he said.

“We’re cautious about doing any more apartments right down in the (downtown Grand Rapids) core, I can tell you that,” Wheeler said. “It’s going to take a while to absorb all those. I don’t have the crystal ball to tell me when that absorption is going to be.”

Later this month, Orion Construction plans to break ground downtown on a twin-tower, mixed-use project at the northeast corner of Pearl Street and Lyon Avenue. The project will include a new headquarters for law firm Warner Norcross & Judd LLP, and a regional headquarters for Chemical Bank. As MiBiz previously reported, the company decided to cut a residential component from the plans in favor of adding a hotel, citing concerns over absorption of the units. 

Other active apartment developers in Grand Rapids share Wheeler’s skepticism about how much longer the current real estate cycle can last. 

Derek Coppess, founder and CEO of Grand Rapids-based 616 Development LLC, also noted that he believes the growth period is in its late innings. 

“I think we’re at the top end of this market cycle now,” said Coppess, whose firm just completed a joint venture with a Mid-Michigan property management group (see page 1). “I don’t say that out of fear. You just have to know where you’re at. I think we’re ready to look at some different development opportunities and just be prepared for a downturn.”

NEW PROJECT BOOM

Despite the concerns about overbuilding with apartments, sources contacted for this report said they’re still experiencing demand for a variety of different housing types and price points, including townhouses and some condominium units. 

“I think there’s a market for lower-income housing — that can meet a need,” said Greg Metz, principal with Grand Rapids-based architecture firm Lott3Metz LLC. “And if your location is right, you can do condos. I’ve been hearing some whispers about condos, but I haven’t seen it yet.”

Metz said his firm also has noticed a bit of a pullback from mixed-use apartment development. Otherwise, the company’s workload remains strong with unspecified projects in a variety of sectors ranging from medical to manufacturing to hospitality. 

“Things are booming right now,” he said. 

Metz’s sentiments seem to align with the most recent findings of the Architecture Billings Index (ABI), a forward-looking economic indicator for construction activity released monthly by Washington, D.C.-based American Institute of Architects (AIA). 

Metz is a member of the AIA’s national committee. 

The ABI for April was 50.9, according to data released in late May. The index reflects a small increase in architectural billings — any reading more than 50 indicates expansion — and points to further construction work in the next nine to 12 months. However, the index showed signs of softening, as the previous index had a reading of 54.3. 

“Probably even better news for the construction outlook is that new project work coming into architecture firms has seen exceptionally strong growth so far this year,” AIA Chief Economist Kermit Baker said in a statement. “In fact, new project activity has pushed up project backlogs at architecture firms to their highest level since the design market began its recovery earlier this decade.”

TAKING A BREATHER?

To that end, Triangle Associates Inc., a Grand Rapids-based general contracting firm with a national presence, also boasts a strong backlog of work as executives look at the second half of the year and into 2018. 

“The (school) market continues to improve (and) we see industrial demand remaining strong from our traditional manufacturing clients,” said Paul Lemley, senior vice president at Triangle Associates. 

For Triangle, the backlog of work currently stretches out about 12 to 18 months, he said. 

Lemley and Wheeler said separately that their main concern in the months ahead is related to the workforce, particularly within the subcontractor market. 

Given some of the skepticism and pullback from apartments, the construction executives note that may free up some workers for other projects. 

“I like the idea that there’s cautious optimism in the market,” Wheeler said. “It will slow down risky ventures. None of us wants anything to fail, so a little slowdown would not be a bad thing in some areas and it would give the subcontractors a break. They’ve been going hard for three or four years since the recession ended.”

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Nick Manes

Staff writer

nmanes@mibiz.com

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