Real estate experts from Colliers International’s West Michigan office predict the market in 2021 will have pent-up demand with some improvement in most sectors from last year. But that will depend on the rate of COVID-19 cases and how the vaccine is rolled out.
Colliers International’s West Michigan office reflected on 2020 during a virtual forecast event on Thursday, and discussed trends that can be expected this year across different real estate sectors.
The retail landscape in 2020 and carrying into the beginning of 2021 is highlighted by empty office buildings because of a large increase in employees working from home and businesses — especially restaurants — struggling across the sector. Meanwhile, residential and industrial construction are faring well, as is the commercial market.
“West Michigan made it through an extremely tough year in 2020, and I am confident the commercial real estate industry will continue positively in 2021,” said Jon Potvin, managing director of Colliers West Michigan. “We have learned a lot in the past year and multiple sectors made many changes that will likely be in place post-pandemic. As we see a more widely available vaccine this year, we’re cautiously optimistic this year will be one of recovery.”
Most office parking lots throughout the region are still empty, with many employees working from home. The good news is the economy is rebounding and tenants are paying rents and not defaulting on leases, said Scott Morgan, senior vice president of Colliers International’s West Michigan office.
The year ended with an 8 percent vacancy rate across office space, which is “quite strong” in the West Michigan market, Morgan said.
Subleases in office space are up about 50 percent locally from the year before, which reflects the large amount of uncertainty with the COVID-19 vaccine and its deployment in corralling the virus, Morgan said.
“You’ll see spacing out in offices and a trend toward more private offices going forward,” Morgan said. “The most immediate thing is work from home will continue to stay, but there will be a rotation and people coming into the office part-time. What the pandemic has done is accelerate certain trends that are already happening. You saw a work from home trend before COVID-19.”
Morgan said he expects office occupancy levels to eventually return to pre-pandemic levels as businesses are eager to get back into offices, despite the work from home trend.
“In West Michigan, that (work) culture and getting employees back to work is really important,” said Kyle Sischo, managing director of Colliers International’s West Michigan office. “When you’re not working in the office it’s hard to keep that culture. A lot of companies are chomping at the bit to get back.”
The large number of people still working from home has caused a lack of demand in the office market. Those looking for office space in the future will seek buildings with more space and updated HVAC and air circulation systems, Morgan said.
Nationally, there is a big trend of people moving to the suburbs from downtowns or big cities, and companies are following them in relocating offices, Morgan said.
“Grand Rapids always lags. We’ve seen a little bit of that, but we haven’t seen quite as much,” Morgan said. “In the last five years the trend was the other way around.”
Restaurants are among businesses that were hit the hardest by the pandemic and ongoing restrictions aimed to slow the spread of the virus, but there have been winners and losers in the industry. Chain restaurants have enough capital to restructure and are better set up to change how they operate to adapt to COVID-19 restrictions and consumer comfort level compared to local establishments, said Chris Prins, associate vice president of Colliers International’s West Michigan office.
The Michigan Restaurants and Lodging Association predicts about 5,600 establishments will close in Michigan in the next six months, but Prins believes the total number of closures will be lower.
Paul Isely, associate dean of the Grand Valley State University Seidman College of Business, said during the forecast event that 30 percent of restaurants in the state are currently shut down. He estimates that 20-25 percent of restaurants will shut down permanently.
“It’s very dependent upon the space,” Prins said. “I think you’ll see models continue to shift and go smaller and smaller. There are always people willing to get creative in restaurants.”
Meanwhile, many retailers have not been able to make their rent. The 4.78 percent vacancy rate ending in 2020 is expected to increase in 2021.
“Amazon has definitely had an effect on retail this year but we saw the whole shop local movement as well,” Prins said.
For West Michigan’s lakeshore communities, many shops and restaurants were struggling from May through August but numbers picked up in July as people canceled long-distance vacations and opted to drive to Michigan’s beach towns, said Drew Durham, associate at Colliers International’s West Michigan office.
“We’re thinking this summer is going to be a very robust tourism season,” Durham said.
The industrial and manufacturing sectors have fared the best throughout 2020 on the construction and investment side, aided by the fact that most manufacturing was considered essential and not affected by shutdown orders. Activity picked up to pre-pandemic levels by the end of the 2020.
“In our portfolio and clients we have throughout West Michigan, the majority of movement has been in manufacturing,” Sischo said.
E-commerce, trucking companies, cleaning companies and last-mile delivery companies have done well throughout the pandemic, leading investors to deploy capital into the industrial market. There is uncertainty going forward, but new supply is beginning to arrive on the market.
The annual forecast event was conducted in partnership with the Seidman College of Business at Grand Valley State University. The forecast took place after a group of 10 leadership staff at Colliers International’s West Michigan office left the Colliers earlier this month and started a new commercial real estate brokerage firm called Advantage Commercial Real Estate Services LLC, as MiBiz previously reported.
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