Crystal Ball 2019 Real Estate & Development Outlook: Despite talent crunch for contractors, development firms expect strong 2019

BY Sunday, December 23, 2018 06:35pm

Even with a number of large-scale projects being built, West Michigan developers say they’re still thinking big for 2019. 

Multiple real estate and construction executives say they see no sign of the industry slowing down in the new year, although many believe companies’ focus could shift away from market-rate housing in downtown Grand Rapids. 

John Wheeler COURTESY PHOTO

That’s particularly as 300 housing units downtown have come online in 2018, according to Downtown Grand Rapids Inc. Developers have about 622 more units in the pipeline.

At the same time, concerns over rising interest rates, higher construction costs and an escalating talent shortage still remain. 

“We’re in an environment where the interest rates have risen substantially in the last 18 months, so that’s starting to put pressure on returns,” said John Wheeler, director of business development at Orion Real Estate Services. “It seems like the supply and the demand of most of the market segments of real estate are starting to balance out. It seems like there’s plenty of apartments now, when three years ago there wasn’t.” 

Orion is in the process of concluding several large projects, including its Warner Building office and hotel project in the middle of Grand Rapids’ central business district. 

With a large backlog of projects, large-scale development will continue in 2019 and could make for another busy year, said Norm Brady, president and CEO of the Associated Builders and Contractors (ABC) Western Michigan chapter.

“We already know what we have in the pipeline, we already know what the backlog is,” he said. “I can say with confidence we’re going to have more of the same in 2019.”

The American Institute of Architects reported growth in its Architectural Billings Index for October, although expansion this year has ebbed and flowed. However, the organization reported a positive outlook, as “inquiries into new work remain strong, and the value of new signed design contracts remains relatively strong.”

Still short on talent

According to Brady, the top challenge for contractors has remained their inability to find talent, particularly amid a very low 3.9 percent statewide unemployment rate, according to October data. In Kent County, unemployment stood at 2.6 percent.

“(ABC members) have to be more careful about what they bid and how much they bid in order to meet the schedules and commitments,” he said. “I think members are going to have to be realistic about the amount of talent in the pipeline, and only bite off as much as they can chew.”

Rising interest rates also remain a concern, as do construction costs because of tariffs on imported material, labor costs and increased costs to comply with energy-efficiency requirements for HVAC and other items.

Regarding the legalization of marijuana, multiple industry sources told MiBiz weed has no place in the construction industry, but it could provide some unique development opportunities.

“(ABC) did not support legalization, but it is a reality that we have,” Brady said. “While it’s bad for employers, there’s a little bit of a silver lining for contractors. There will be a number of opportunities for our members to build grow houses and other things that might come.”

Focusing away from downtown

At Franklin Partners LLC, a Grand Rapids- and Oak Brook, Ill.-based real estate development and property management firm that primarily focuses on office and industrial properties, a shortage of buildings poses some challenges for 2019, said Don Shoemaker, partner at the firm.

“With the right buildings in this healthy market in Grand Rapids, I’d be very bullish if I just had more buildings to fill up,” Shoemaker said. “We just don’t have a lot of buildings.” 

In October, Franklin Partners cited low demand as it backed away from plans to build a 100,000-square-foot office project downtown as part of the Studio Park development. The plans for the site didn’t follow the trend of large suburban companies in areas like Chicago seeking out urban office space, Shoemaker said.

In 2019, Franklin Partners will focus on its partnership with the city of Wyoming to develop the former General Motors site on 36th Street, as well as the former site of Sunshine Community Church on the East Beltline Avenue. The 72-acre property was rezoned for multi-family development, and Franklin Partners is looking to partner with residential developers on the site.

Meanwhile, Orion’s focus in 2019 will be on four suburban townhome projects, mostly outside of Grand Rapids in Caledonia, Ada Township and Spring Lake. Wheeler said demand for housing is still high in those areas.

“As long as you can build them affordable, as long as interest rates stay there, it’s a segment that still has some room and some demand,” Wheeler said.

As focus shifts from downtown, Mitch Watt, senior vice president and partner at Triangle Associates Inc., said office building projects in the urban core also could slow down for the next couple years.

The slowing of the market could spur more focus on publicly-funded projects, which typically do not see slowdowns until a “real significant” impact hits the broader economy, Watt added. A bulk of Triangle’s work is in the K-12 and higher education sectors.

“The minute (privately-funded) projects slow, then other people start to focus on publicly-funded projects, and then you have more competition and less work,” he said.

River restoration picks up

Downtown, the total number of homes (apartments and condos) stands at about 4,700. The goal from DGRI was to hit the 10,000-home mark while maintaining 30 percent of the total for low-wage earners. Still, some developers say the need for more market-rate housing downtown is slowing.

“The supply has definitely caught up with the demand in most of the market segments around Grand Rapids,” Wheeler said. “There will still be some developments in industrial, some small pocket markets, neighborhood developments.”

The restoration of the city’s namesake rapids will kick off in 2019 as well, according to Matt Chapman, director and project coordinator for Grand Rapids Whitewater, with the first phase focusing on the area of I-196 to Fulton Street as long as the organization can secure the needed permits. The aim is to create more recreational opportunities and ecological restoration of the Grand River.

Along with that came the “River for All” project, revealed in November by the city of Grand Rapids, the main idea of which is to connect the river to the city’s neighborhoods via a river trail system. In 2019, the city will refine costs and identify sources of funding for the six opportunity sites revealed with the project, said Jay Steffen, assistant planning director for the city of Grand Rapids.

Beyond 2019

While next year looks to be stable for the real estate and construction industry, executives are already turning their attention to 2020 and beyond. 

In part, that’s because the West Michigan region continues to grow. Kent County was among the fastest-growing counties in Michigan with a 7.63 percent growth rate in 2017, according to the U.S. Census Bureau.

Grand Rapids was number two on real estate listing website Trulia’s top 10 markets to watch in 2019, based on job growth in the last year, vacancy rates, starter-home affordability and inbound versus outbound searches on the site, as well as a large share of the adult population being under age 35.

Watt said rising interest rates could cause a slowdown in certain sectors of the economy, possibly prompting a “small recession” later in 2019. 

“I think it will only be a continuation of the slowdown we’ve seen in the commercial and retail markets,” he said. 

For Wheeler, interest rates also will be critical to watch.

“In the real estate business, interest rates are the number one demand driver, other than supply and demand imbalances,” he said. “If the rates get too high, you just can’t make any money. And why do it if you can’t make money?” 

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