By and large, 2016 made for a record year for many in West Michigan’s commercial real estate and construction sectors.
From a nonstop deluge of new, mixed-use apartment buildings to a proposed 40-story downtown Grand Rapids tower, to the return of some speculative building in the industrial space, the year has been marked by high occupancy rates and steep demand. As a result, industry stakeholders have found themselves scrambling to keep up.
While many developers, contractors, architects and industry insiders view 2016 as a year in which projects moved through the pre-development phase, they believe 2017 will be the year for execution.
MiBiz gathered a group of commercial real estate and construction stakeholders to reflect on the past year and give some thoughts on whether the tide can continue into 2017. Participating in the roundtable discussion were:
- Max Benedict, principal at Grand Rapids-based Third Coast Development LLC
- Melissa Collar, real estate and construction partner at Warner Norcross & Judd LLP, the Grand Rapids-based law firm that sponsored the roundtable
- Jim Conner, vice president of business development at Triangle Associates Inc. in Grand Rapids
- Kris Larson, president and CEO of Downtown Grand Rapids Inc.
- Greg Metz, principal at Grand Rapids-based Lott3Metz Architecture LLC
- Josh Szymanski, business development director at Owen-Ames-Kimball Co.
- Mary Anne Wisinski-Rosely, partner and office adviser at NAI Wisinski of West Michigan
Here are some highlights from the conversation.
If 2017 is the year to execute on all the projects in your pipelines, what challenges are standing in the way?
Metz: The knowns are labor, and I hear that with other architecture firms. We’re having a hard time hiring people to do it. My opinion, right or wrong, is pay people enough that you won’t have trouble hiring anybody, but the developers don’t like that. (Laughs.) That’s one thing I see.
Szymanski: We’re seeing those execution pains though. We all recognize that it’s expensive to keep some of these people, but it’s more expensive to find more people. So we’re meeting that market, but there’s just not enough new supply out there and it’s putting pressure (on us).
Collar: That’s a challenge for us, too, because of the cost of construction. Whether it’s from a landlord’s perspective or a tenant’s perspective or an owner/buyer/seller perspective, it’s a challenge because people don’t want to pay a higher rent. They don’t want to pay higher costs of occupancy. It’s a challenge. It’s putting pressure on landlords to try to do deals and get tenants. But then their margin becomes really small because of the cost of building out the space. That’s going to be tough moving forward. And then if interest rates go up … that makes that margin even smaller — or tenants or buyers have to pay more and they’re not going to like it, especially in West Michigan. (Laughter.)
Wisinski-Rosely: (The construction talent shortage is) a challenge for us because if you do get that tenant or that buyer who needs that space redone, it’s timing. Can we get it done in time? And then, will they choose that space or a space that could be ready (quicker)?
How does this workforce dynamic in construction affect a firm like Third Coast Development?
Benedict: It’s cost and it’s cost again. As we go a couple more months than we originally planned because we can’t find the good talent or good workers, that’s a month that we’re paying interest on $5 million. That really adds up. To the interest rates, the fed rates: Yeah, there will be a bump in there. But we’ve already seen the 10-year Treasury notes, which most (developers’) notes are based off of, go up 50 points. We’re already feeling that.
Occupancy rates have increased across most sectors. While that’s great for developers, it’s created some concern with end users. Will this continue to be a long-term issue?
Larson: I think in some ways, at a political level … there seems to be this interest in working to make things cost less. Particularly at the local level, we hear those conversations among local elected officials. It’s almost like a hyperventilation about the rising cost of housing.
Upon reflection about the population decline of this community for nearly 40 years, people became accustomed to stagnation, to loss of population. … You just can’t compete if that’s the expectation of the willingness to pay. I feel like we’re fighting an unsustainable battle about trying to make things cost less. … That’s not pointing fingers or placing blame. I just feel like we spend so much time responding to ‘the rent is too damn high.’ We need to think about what we can do to continue to invest in the community and make this a place people are happy with.
Does that mean everyone should get used to paying higher prices?
Larson: How do you make it cost less? You have to decrease demand.
Benedict: I think of rising wages, as we’re all talking about this crunch of not enough talent. (Construction companies) are going to start bidding against each other and all of a sudden you’ll be paying more and more and we’ll see that across the board, from medical to office. As those wages come up … that will help lessen the blow of those big numbers. I’m on the affordable housing committee that the mayor created with (Grand Rapids First Ward City Commissioner) Jon O’Connor. We’ve been looking at this. There’s no silver bullet. The bricks and sticks cost what they cost. Unless we get the state and federal governments to up all their investment and all their incentives that they can give us, there’s no answer. You just have to pick around the edges and figure out how to make this better, not how can we solve it.
In which sectors might we be underbuilt or overbuilt?
Benedict: Define overbuilt. (Laughs.) Obviously, market-rate residential is extremely hot, and I don’t see any declines in rents. I suppose as more product comes online, we’re seeing longer absorption periods. A couple years ago, it was if you build it they will come. There was a wait list. Then all of a sudden you start planning for that and you’re coming to the end of your rent-up reserves and you have four units vacant. I think as far as an overheated market, it might be that, but there’s others that say we’re keeping up with demand or not even hitting the mark yet.
Conner: I think still there’s a lot of pent-up demand because we’re seeing growth in all the sectors. There’s no empty industrial buildings right now. Retail is hot and that’s a large sector we focus on. Health care is moving everywhere. The announcement of U-M and Metro Hospital, I think that’s going to spin off an awful lot of new investment in that part (of the city). Mercy in Muskegon is growing with their new development. I think it’s still growth. I guess, how steep is the climb is the million dollar question. But I think it’s all positive.
Szymanski: Same in the school markets. The birth rates were projected to be down for years, and that drives the direction of schools. They’ve leveled and are coming back, and people are moving to this area based on the expansion of industry. All the communities surrounding Grand Rapids — and now Grand Rapids — has joined in.
Conner: The tax base is changing, too. Because times are good, interest rates are coming up a bit, home values are back on the rise. Even the small townships and municipal governments have the money to build that new library or fire station. All those different things are driven by property value.
With all these planned major developments, the legislature is now looking at some expanded incentive packages. Are those helping to bring businesses to a community like Grand Rapids?
Larson: Locally, we hope this isn’t just another thing for downtown Detroit and it’s a mechanism we can find a way to use locally. But it’s going to come at the expense of earmarking some income tax that will be generated by that development. Part of that is determining whether the income tax is new to the city. … But if there was this kitty of dollars for importing a Switch or a new company to the state that wasn’t here beforehand, then that’s just getting aggressive and using the same tools that other states and countries are using to bait (companies).
Szymanski: That’s one of the fun conversations you get to have once these people decide to come here. It’s competitive. We compete on the metrics. But ultimately when you have those conversations, it’s a cultural decision. Grand Rapids has a lifestyle. People see it and it puts it over the top.
Do you envision the level of available incentives changing significantly in the coming years?
Larson: With the changing qualifying expectations, particularly at the state level … it’s gonna get harder and those dollars are going to get fewer and fewer. Or there will just be fewer projects we can incentivize and the others will just have to find a way to make it on their own. We’re going to face some hard choices. The states are already facing it. Politics don’t favor West Michigan because we’re perceived as healthy.
What are the major uncertainties as you begin looking to the new year?
Larson: Political instability … even at the local level. Things like term limits change the conversations and it changes the priorities and goals of the community. That affects our ability to really be strategic and pointed about what we’re trying to effect and what outcome we’re trying to create. Constantly, it feels like we’re up against a wall with a new conversation that we just had three years ago, and we had it five years before that. But with the outcome of the national election, I’m actually encouraged that there will be a newfound sense of local-level bootstrapping, which is what we can control as a community and an emphasis on local decision-making.
Collar: The continuity of who your local leadership is (is important) around here. I don’t think any signature projects get done without an element of partnership with local governments. Those really signature projects that bring high-impact economic benefits — you really need to have that. We’re so unique in that. It’s so much easier to sit down and talk with our leaders here in town, both public and private leaders. That makes a big difference. Political uncertainty can slow that down.
Conner: I think West Michigan has been a leader at that. We have other parts of the state and country that have been trying to mimic that. Kalamazoo is trying to play the same playbook almost. And maybe some of the challenges we had they’re trying to improve on. Detroit is trying to get those public-private partnerships. I think a lot of what you’re seeing in Detroit is exactly that, and that’s why it’s working.
Collar: It affects the reputation of the community as well. One of the first questions consultants will ask is about the community. How do things get done in this community? Is it efficient? Will it be a six-month process or a six-year process? That has a big impact on whether a project will move forward.
Are there concerns that growth of the city will come at the expense of aging suburban office and retail facilities?
Szymanski: It’s an opportunity, really. A lot of these facilities are becoming dated compared to the new stuff that’s being built, so it’s an opportunity to renovate and improve those spaces. You see it with some of the de-malling projects.
Wisinksi-Rosely: From an office perspective, there’s a great opportunity in the suburbs, only because if people are price-conscious, that’s the alternative. To occupy office space in downtown Grand Rapids is significantly more than to occupy office space in Cascade. Not only are the rents higher, you have the cost of parking. Whether that’s passed on to a tenant or to an employee, it’s a higher cost of living to be in office space downtown. I think we’ll see more opportunities and growth in the suburbs from that perspective. Also the availability of parking downtown is causing people to look. Right now, there’s just no (parking) available. I’ve got office space that I can’t lease because I can’t get people parking.
What does that parking crunch say about the state of the city?
Metz: Grand Rapids is going through a paradigm shift. ‘We have to drive, we have to drive.’ It’s about educating that we’re no longer a small city. We’re growing into a bigger city. It’s going to take a couple years to make businesses realize that they have to offer different incentives instead of driving. I think The Rapid is working on solutions with the Silver Line and new BRT lines to help mitigate and make it easier. And I agree, I think the suburbs are still hot right now. But once that paradigm shift occurs, I think downtown will look hot and sexy again.
Larson: I want to focus on the land use side of it. It’s a bit of a critical failure on the part of the community that we’ve not done a better job of linking transportation planning and land use decision making — particularly as it relates to the incentives that we wield. With the planning for the Silver Line, we should have had a land use plan with an incentive overlay three years before that first bus ever rolled down Division Avenue. We should be colocating opportunities for mixed-use development around every stop. That’s what we should have been doing. Meanwhile, we’re just getting around to thinking about a land use plan now.
In the meantime, if brokers can’t lease office space downtown because potential tenants perceive there’s a lack of parking, what options do they have?
Larson: Communities that have adopted a parking cash-out methodology (where employees are given money and make their own choice of how to get to work rather than take a supplied parking spot) have seen a 26-percent reduction in the uptake of parking spaces. If we added 26 percent into downtown, all of your problems go away. That’s just by enabling the person that wants to skateboard to have the same cash benefit as the person who rides a bus, a person who walks, a person who carpools. It’s just enabling everyone to participate equitably in the decision. It costs the company no more, but it does make available the spaces for those that choose to drive.
How does parking impact apartment developers around the city?
Benedict: There’s the chicken and egg, really. Along Michigan Street (where Third Coast has built several projects and has projects in the works), we’re trying to get to this density that attracts retailers to the area so that all these residents don’t need to get in their car to go get groceries or whatever. And if we can do that, then we can draw potential retailers to the area so our tenants don’t have to get in the car. Then more people will opt out of having a car. But to build that density under current zoning, you have to go ask for parking waivers. Those aren’t easy. You come under fire, and there’s a lot of people that don’t want that high density in their backyard. It’s a tough battle, but ultimately the increased density brings in public transportation. We’re potentially going to have a higher frequency bus route that goes down Michigan Street.
Metz: Like Kris (Larson) is saying, if we can tie land use to it, now you can say down the road, ‘I want to develop there because that solves the problems (Third Coast Development is) having on Michigan.’ It makes your job easier as a developer and you’ll see a higher ROI because of that.
Wisinski-Rosely: It’s about changing that mentality. We’re experiencing it on Michigan Street, where we have potential users for retail spaces but they say there’s not enough parking. People won’t shop at the businesses if they can’t park. But they’re not thinking about the walkability of the people in the neighborhood. They want people from Ada to come, but if there’s no place to park, they see it as a negative. We’ve lost a few tenants because of that.
How does the industrial sector look from a construction and development perspective next year?
Conner: I think it will continue to grow. There’s a lack of inventory currently. There’s some companies coming to town that are building new because they’re not able to find the type of space they need. I think the industrial market will be one of the hottest sectors for the next several years. The tidal wave is starting to turn. Look what the state continues to do. I think there’s a lot of things they got right this time.
Szymanski: Their businesses seem to be strong. As long they’re strong, they can invest. That’s what it takes to grow. Industrial (users are) surprisingly picky tenants. If you’re just making a widget, it’s fine, but a lot of them have specific power requirements, ceiling requirements and you can’t just move them into any vacant space.
Wisinski-Rosely: Our company sold an industrial building recently that never hit the market. It became known it was going to be available. One of our agents had the buyer. He’d been looking for two years.
Conner: And the buildings aren’t just to house machines. They’re creating an environment for people. (They have) windows and air conditioning. When you think of the old industrial plants, it’s not that. It’s polished floors, break rooms, weight rooms. I think it’s a shift of the people in there. They’re not the old blue collar. A lot of them are educated people running technical equipment. It’s a different building altogether.
While myriad positive economic signs exist , there’s still lots of uncertainty lurking out there. What’s your hope for how that shakes out next year?
Larson: Ultimately, incentives are not the true decision point. Finances play a role in making a decision but quality of life, access to talent and workforce — there’s so many decisions (that drive investment). I think everyone (in economic development) is chasing their tails and trying to keep up with the Joneses with incentives. It’s not a sustainable path because at the end of the day, we need to correct that market failure. Where willingness to pay is lower than cost, that should be the real objective, to get to that level of economic sustainability and inching forward on the willingness to pay.