A new kind of institutional investor has started to capitalize on opportunities in West Michigan.
Real estate investment trusts (REITs) increasingly have sought out opportunities in the greater Grand Rapids area in recent months, driven primarily by the region’s economic stability and the notion that returns here tend to be greater than on the east and west coasts.
Commercial real estate brokers say the greater Grand Rapids area appeals to institutional REIT investors and private equity buyers looking to park their cash in West Michigan real estate.
“I think the new phenomena is REITs looking at Grand Rapids as a place to invest. That wasn’t always the case,” said Stu Kingma, an associate broker and industrial service provider at NAI Wisinski of West Michigan, a Grand Rapids commercial brokerage firm.
Kingma adds that the area’s status as a tertiary market when compared with coastal areas — or even markets such as Chicago, Detroit or Cleveland — offers investors in the institutional funds a higher yield.
“REITs are return driven,” Kingma said. “We’re not an NFL market, but the MSA is on the radar.”
Kingma notes that capitalization rates — the rate of return an investor might see on a real estate investment — tend to run one to two points higher in West Michigan than in larger markets, especially on the coasts.
That’s certainly true for some of the REITs working in the area, even in the challenged retail sector.
“The West Michigan region is ripe with opportunities as the marketplace and local economy continues to strengthen,” Joe Coradino, CEO of Pennsylvania Real Estate Investment Trust (PREIT), said in an email to MiBiz.
The Philadelphia-based REIT owns Woodland Mall in Grand Rapids and recently unveiled plans to invest about $100 million into the interior and exterior of the 1.17 million-square-foot shopping center.
“Grand Rapids, in particular, is the center of West Michigan’s thriving economy,” Coradino said. “Biotech, medical, industrial design and tourism industries are growing; the food and beer scene is on the rise; and the region is becoming a hot spot for vacations and recreation destinations.”
As real estate investing has taken off nationwide in recent years, REIT activity actually dropped off in the “NFL markets” as deals have become increasingly more costly.
In an early February report, The Wall St. Journal noted that as commercial property values continue to rise, REIT activity “won’t be nearly as robust” as it has been over the last several years.
Nonetheless, REITs from around the country have remained active in West Michigan in recent months, judging by their string of acquisitions.
Case in point: Freehold, N.J.-based Monmouth Real Estate Investment Corp. (NYSE: MNR) acquired the new 343,483-square-foot industrial building located at 3466 Shippers Drive in Walker for more than $32 million in a sale-leaseback deal, as MiBiz reported at the time. The property is net-leased for 15 years to FedEx Ground Package System Inc.
The building sits on approximately 61 acres within Rockford Construction Co. Inc.’s Walker View Industrial Park, which is currently under development.
While executives at Monmouth Real Estate didn’t respond to multiple requests for comment for this report, commercial brokers view the deal as an example of the type of acquisition that REITs seek out, particularly with the growth of distribution centers brought upon by rapid consumer shifts to e-commerce.
“Credit and stability are important to (REITs). It’s a risk-adjusted return,” said Michael Visser, a senior associate focused on the investment market at Colliers International Inc. in Grand Rapids. “That’s where you see those deals. REITs are all over them. The chance of FedEx going out of business is very low, so for 15 years, (investors) know (they’re) going to get X amount of return.”
Sources noted that REIT investors also have invested in the region’s medical office buildings and aging multi-family apartment complexes, as well as in agricultural land deals.
LACK OF DEALS?
Even if the velocity of deals drops off, commercial brokers such as NAI Wisinski’s Kingma continue to see opportunity for REIT investors in West Michigan. However, others in the industry think REIT activity could quickly come to a halt.
Overall, West Michigan’s real estate market continues to experience higher occupancy rates and rising rents, checklist items that REITs see as unfavorable, according to industry sources.
REITs typically seek out “under-maintained” properties they can purchase at attractive prices and that offer “value-add” potential, said Michael Cagan, a senior associate in the Grand Rapids office of Marcus & Millichap, an international real estate brokerage firm.
“That often conflicts with the reality that a lot of properties are in decent physical shape and tend not to be undervalued,” Cagen said. “So buyers end up having to compete on terms.
“It’s definitely tougher to find deals. On the one hand, you have multifamily owners wanting to hold their property because they’re making a bunch of money on it.”
During the recession years, those same investors struggled to cover their debt service payments, often resulting in foreclosures, he said.
“On the other hand, we have some investors and some owners saying, ‘Things are going so darn good right now, why wouldn’t I sell?’” Cagen said.
Given the dynamic of tightening vacancy rates and rising prices, the market may be shaping up in favor of private equity investors as opposed to REITs, according to Visser at Colliers International. That’s because REITs tend to confine themselves to a specific sector of the commercial real estate market, as opposed to private equity investors who tend to be more nimble.
“(I think) there’s a lot of activity for private equity, (particularly for those) who can be flexible, and who are going after various opportunities in our market,” Visser said.