Stakeholders in West Michigan’s commercial real estate, architecture and construction industries are coming off another big year for development and see few signs that indicate a significant slowdown in 2019.
Nonetheless, the impact of several large-scale projects underway in Grand Rapids and Kalamazoo is unclear and they leave lingering questions about whether the developments will encourage momentum in the coming years.
MiBiz convened a panel of industry experts to discuss these real estate and development topics and more. Participating in the discussion with this writer and MiBiz Editor Joe Boomgaard were:
- Melissa Collar, partner at Warner Norcross + Judd LLP, a Grand Rapids-based law firm that sponsored the roundtable
- Jim Conner, senior vice president at Triangle Associates Inc., a Grand Rapids-based general contractor
- Greg Dobson, COO and principal at AVB Inc., a Southwest Michigan commercial and residential development and construction firm based in Portage
- Tim Kelly, president and CEO of Downtown Grand Rapids Inc. (DGRI), a private nonprofit organization that administers several tax increment financing tools for the city of Grand Rapids
- Ted Lott, principal with Lott3Metz Architecture LLC, a Grand Rapids architecture and design firm
- Mike Murray, senior vice president for retail brokerage in the Grand Rapids office of Colliers International Inc.
Here are some highlights from the discussion:
What’s on your minds as you look ahead to 2019 in the local commercial real estate and construction industry?
Kelly: Looking at downtown Grand Rapids and the neighborhood, I think we’re really anxious and excited to see some of these projects that we’ve talked about for a number of years, and now construction (is beginning to) take shape. Our office is right at 29 Pearl Street, so the Warner Building and Hyatt Place are our new neighbor. There’s Studio Park going up right behind Van Andel Arena. There’s a new (Embassy Suites) hotel in Monroe North and a few others we could rattle off. We’re just excited to see these projects going on, and see how they operate and perform. In addition to that, we are hyper focused along with the city on the river revitalization. Obviously, from a recreation standpoint, that’s going to be a transformational project for the city, but I think it will also help drive a lot of development. There’s some milestones coming up for 2019, so it will be interesting to see how that takes shape as well.
Conner: At Triangle, we’re finishing up a strong year. We had a few school bonds that passed this past election year, so we’re setting up with a very, very strong backlog for 2019. We also have some nice pursuits coming up in downtown Grand Rapids, some housing projects … that are going to add to a much needed, more affordable housing market. There are some opportunities there that we’re pursuing, but the strength of the market seems to be good for next year for us.
Lott: We felt kind of fortunate in 2018 to open a couple of big deal projects for us: Our west side work with Rockford Construction, WMCAT’s new office, and also finishing up the Museum School — the renovation of the old (Grand Rapids) Public Museum. Those have been things that we’ve been working on for five years that are really great to be able to have people in and have online. On the heels of that, we’ve been able to expand our efforts in K-12. We’re excited about it. We’ve got a nice little backlog going into 2019. This is in addition to the stuff that we’re more known for, which is our community work, our neighborhood work, our infill design work, which is always ongoing for us. It seems that we’re always doing a restaurant or two someplace in town. Those are things that we love to do, and we love to have new places to hang out, so that’s always good for us.
Dobson: We’re finishing up a good year. I think the exciting thing for us, for 2018 rolling into 2019, is we have a downtown (Kalamazoo) project that we’re doing with the Hinman Company. It’s 135 units of new construction apartments downtown over structured parking. That’s one of three new ground-up projects that are going on in downtown Kalamazoo, of which there’s been zero other than maybe one building in the last 15 years. That’s kind of exciting going into the new year. … With the rental market … both from a suburban standpoint and an urban standpoint, we haven’t seen the end of it. We continue to build apartments, and some of our single-family home markets, we have a number of those that are kind of higher price points that are slow, and some of those same people are choosing to move to rental housing. I wonder how long does that continue before millennials start maybe forming households and do they want to move back into houses or not. The empty-nester market for us has been really good from the housing standpoint. We do a lot of walk-out condo ranches, duplex ranches, and those have been really strong.
Murray: From the brokerage side in 2018, it’s been a great, great year for all the sectors. They’re all a little bit different and have their own challenges. We have to work a ton these days because there’s really not a lot of vacancy out there, so we’re not finding the locations we need, especially when it comes to the higher quality stuff in industrial and in retail. With office, there is some space in the suburbs and such. Downtown, there’s a lot of new buildings that have come online.
Retail’s a little bit more difficult just because our retail corridors are all full. You go to Alpine, or 28th Street, or Rivertown: It’s full. Some people see a big store closing, like a Younkers or a Sears or something, and they think the world is crashing down on them, but that’s not the case at all. In fact, they’re expecting a 25 percent increase in holiday retail sales this year. Online retail sales, according to the U.S. Census Bureau, are still under 10 percent of all retail sales.
There’s a new spec industrial building that came online this year, just because you had some passionate people that wanted to get some stuff out of the ground — some construction and developer groups — and they’re filling those up.
Collar: What we’re really seeing in the industry is infrastructure. We’ve got a lot of infrastructure that we had a lot of deferred maintenance or nothing at all that was ever done. … It’s everything from the Gordie Howe International Bridge, which we just went to a financial close on after 11 years, to very simplistic roadwork, utility work, infrastructure, and taking into consideration now with how our technology is evolving. We’re getting pulled into a lot of those types of things. You hear about autonomous vehicles, but there’s so much more to what our urban core is going to look like, so that’s one element. The second element is a lot of housing, whether it’s hotel or transient housing, or it is apartment, townhomes, and condominium. … The other piece is just the urban renewal, the redevelopment areas.
What do you see as some of the major issues affecting real estate development in West Michigan?
Lott: I get more and more frustrated with the idea of … ‘sprawl repair’ when the issue is we still have a ton of capacity in this city to build. On all those fronts, if we have a capacity, we have tons of density we can fit in our city, and that’s one of the struggles that I think we’re all having — whether we know it or not — this idea about how do we populate our city more efficiently or better for everybody. I think we can do that. We’re just not doing a very good job of it right now.
Murray: With everything that we’ve done at Bridge Street … it’s just amazing to me. It’s super cool, and we heard that Meijer’s (Bridge Street Market concept) is above projections on the people going through there. We have several retailers that are looking at that area, both retailers and restaurants and retail service establishments. Corporate America’s trying to get their arms around, ‘How do we analyze if this will work and we’ll hit these numbers?’ … Come to the urban core and it just makes them nervous. It’s not a downtown L.A. or a downtown Chicago, and so they’re kind of like, ‘Let’s let somebody else give it a try for a little bit.’
How does all the growth in downtown Grand Rapids build on itself in the next several years?
Kelly: We see plenty of opportunity for more development. Studio Park is one example of some of the infill that we’re planning to see over the next 5, 10, 15 years. … There’s a lot more room for growth. You think about the west side and the parking lots that are over there. There’s a lot of space down by some of the hospital and institutions just east of Division. We see more and more opportunity, and so a lot of our work right now is focusing on doing that … and making sure that people that want to invest are going to see the amenities that they want. Meijer was a huge milestone, I think, for the downtown neighborhood, although it’s just outside of our boundary — it’s adjacent. Having that urban grocery store was something that people have talked about in downtown for well before I arrived. Having that, having the museum school open up, having these amenities that families are going to want, I think it’s going to be a huge driver of some of this growth.
Conner: I agree. In Grand Rapids a couple years ago, they wanted to see 10,000 units for downtown. I think we’re at … 6,000 residents, so we’re slightly over halfway there. I do think there’s still need for that, (but) it’s coming in slow. There’s always that aspect of how do we get a better mix of people that can afford living downtown. I know probably five or six recent college grads that are headed to the east side unfortunately, because Detroit’s got a vibe about it, and quite frankly, they can live in the city cheaper than they can live here in Grand Rapids. There needs to be a balance.
Lott: One of the things that I don’t think we take enough time understanding is that we really have built no housing in the city of Grand Rapids for about 40 years, until about five years ago. All the residential development was outside the city limits. It was 100-percent suburban focused, and you could almost write the same program about all of it. It was either something like a Ramblewood, or it was a ranch house. That’s all we built, and it was all built outside the city. The idea of housing in the city has had a ton of barriers, not the least of which has been just the understanding or people coming to terms with the risk of the situation, which is, oftentimes, as much or more of a barrier than getting financing or finding people to build it. Those are all fixable things, but we’re just starting to come to terms with the risk as a community when it comes to housing. That’s across the culture. That’s not just ‘I want to build an apartment building on a corner,’ that’s how the neighborhoods perceive it, that’s how our city government perceives it.
Do you see that perception changing?
Lott: Of course, not everybody is on the same page with what we should be doing, what our best practices should be, and what we think on not just our downtown, but our neighborhoods should look like. I don’t necessarily have answers on that front, but I think that it’s imperative that we need more housing supply in our market and more diversity in housing supply in our market. … We can’t build ranches on a third of an acre anymore in the city. We need to figure out how to build more density in our city. If we can’t figure that out, then we’re going to kind of squander some of these opportunities. Once again, this isn’t just about 10,000 people downtown. This is about demographics, whatever that boundary is downtown. When they’re looking at downtown retail, they’re looking at what’s happening up the hill for demographics. How are we going to populate these areas of our city respectfully, with more density, so we can have more people in the city, and have people be more willing to take on the risk?
Dobson: It’s fun to watch. You pull into town from the south, and there’s multiple tower cranes in the sky. It’s impressive and exciting at the same time. To me, the question has always been: What is the critical mass to make any downtown successful? You’re over some threshold already, that makes it a fun place to visit, for me. From a planning standpoint, not everyone appreciates density. You get into certain environments and people do, and in other environments people are anti-density. I think that’s a very keen observation, and something that obviously the planning commission of the municipalities are going to have to deal with around here, and hopefully in an intelligent fashion.
What do you see as driving the growth in the Kalamazoo region?
Dobson: Part of it’s we’re watching what’s going on here (in Grand Rapids), but if you measured it on a percentage, we’re still way behind, both in terms of time and amount. But the for-rent properties and the for-sale properties in downtown Kalamazoo have been 100 percent for years. The market’s a little different in terms of rental rates, which even makes a pro forma work a little different on what we do in Kalamazoo from what I would see in Grand Rapids. They’re challenging for all the projects to get through.
Meijer’s new Bridge Street Market has been mentioned as a game-changing amenity in Grand Rapids. Does the newly-opened Gordon Food Service store to the east on Michigan Street have the same effect?
Collar: That’s part of the key. We’ve gone so long as a city without having all of these amenities and so forth, that there’s a little bit of a learning curve for all of us. On the way home, we can actually stop somewhere, pick up our groceries. We can do our other errands. We can have a drink, we can eat, and then all of the sudden I think that becomes transformational. Not only can we do that, but wait a minute, why am I driving to the suburbs, when everything is finally here? That was always the complaint. I know when I moved here, there was no Van Andel Arena, the DeVos Place wasn’t what it is. We had two hotels downtown and really didn’t have all that stuff. If you wanted to live downtown, you had to commute out to do everything. Now, we’re commuting in. How often are you saying, even on the weekends, ‘I know I’ve been downtown all week, but let’s go back downtown.’
What do you see as the challenges for doing corporate office recruitment in downtown Grand Rapids?
Kelly: I think that’s a space that, working with the city and The Right Place and the other organizations in town, we’re trying to position ourselves to assist in that conversation about recruitment. Obviously, the retail brokers and office brokers are in that world every day, but I think if we can get on the same page from the city’s perspective and think creatively about how we can attract a large office user, there’s some opportunity there. For us, we see the downtown experience as a way to market to office users because it is going to be a tool to attract talent, to retain talent.
Lott: I think that we have two different problems, or maybe just two different sides of two different coins with this idea about how do we get these transformational developments. Those are always exciting to think about and talk about, but that’s one of the worst ways possible to build your city. (As the) details of the Amazon deal are coming out, thank god that Detroit or Grand Rapids didn’t land that. With the amount of incentives that we’re having to hand away for transformational development like that, it’s difficult to argue that those would be sustainable for anybody over the long term. The great thing about incremental development as it relates to rehabbing buildings and doing smaller projects to stitch your city together, is ultimately over the long term, it’s a much richer experience for everybody, and the ground is a much more sustainable, urban model.
Where are the transformational office clients in Grand Rapids? They’re out there. I think today, they’ve just decided they prefer to be in the suburbs for a lot of reasons. I’m not so worried about that. I’ve stopped dreaming of the white whale in these situations. Not that it wouldn’t be cool for it to show up. But to me, there’s a lot more work to be done, rather than sailing the high seas for the white whale.
On the construction front, are the various skilled trades training programs having an impact?
Conner: I do think there’s a pretty big movement to start some additional training programs and to really promote the trades again, but it takes time. … It takes a lot of time to do that, and ABC (Associated Builders and Contractors) works with a bunch of groups, and then there’s a lot of different private businesses and subcontractors and general contractors that are contributing to these different programs as well. It simply takes time. We’re coming out of it, but we’re in it.
Collar: My understanding is a lot of those master trained, highly skilled technicians are retiring. Because for so long we weren’t hiring a lot (and) parents are under the belief that you all have to go to college, (recruiting has been a challenge). We could very well in the next decade find that we have some really serious labor shortages in certain skilled trades.
Have tariffs on steel and metals affected construction costs?
Conner: Costs are a problem on every single project. Every single one.
Lott: I’ve never worked on a project where construction cost wasn’t a problem. I think that’s an important perspective. We can have this every year and complain about construction costs.
Conner: That’s a fair point. Some of it, when you do get a little longer in the tooth and you remember when you used to build stuff for $100 but now it’s $300, it’s just your memory of it. Some of that’s just what happens with inflation, but there’s no question there isn’t a project that we deliver pricing on where you aren’t kind of taking deep breaths before you do it. It’s just a reality of the market. I think there are areas from a labor standpoint that have caused costs to increase, just because subcontractors are making decisions of … (let’s) throw out a high number, and probably one of them will end up being the winner. Costs are a big deal.
Dobson: Of course construction costs are a component; so are interest rates. That’s a big component. The last one is rent. Not a lot of people in any market, it seems, want to build speculative anything, whether it’s spec home, spec apartments. You’ve got some people doing that, but spec homes, spec retail, spec industrial: It’s a scary deal because you’re sitting on not only the land acquisition costs, but then you’re sitting on the infrastructure costs, and then you’re also sitting on a building cost. I do think it’s hard to lease space that you don’t have. There is an economical award, potentially, for doing it, but it’s hard to do.
As you look to 2019, are there things you’re paying attention to that might not be on people’s radars?
Lott: We have new leadership in city government. We have new leadership in the state government. Certainly at the state government level, I’m hopeful that we’ll start to see a state government that’s friendly to cities, rather than being adversarial to cities. I’m also very hopeful with our new city manager about working on aligning some of these broader interests that the city has and that the city of Grand Rapids, as an organization, can do a better job of coming alongside groups like DGRI, or developers, or whoever, to further our broader interest.
Dobson: The Kalamazoo projects rely heavily on MEDC support to make (them viable). It will be interesting to see what happens with the MEDC moving forward.
Conner: It’s a really weird time. You look at the trending history of incline and growth, and we’re past the 10-year cycle. Everyone’s saying, ‘When’s it going to drop?’ There’s no sign it’s going to drop, but everyone’s pulling back and reserving, and I wish everyone would say, ‘You know what, it isn’t slowing yet. Why are we pulling back?’ Just keep going, because we need that second push to come. I think it will only pick up.
Murray: One of my concerns, back to this low unemployment rate, … is now we just passed Proposal 1 (legalizing recreational marijuana). How are employers going to deal with it? Is that going to take away people from the job force, or will it add people to the job force, because now it doesn’t matter? I don’t have that answer. I don’t think a lot of people have that answer quite yet. Will that bring more people to the city because (the law) is more relaxed and liberal now? Does that help the growth? I don’t know.