Advisers cautiously optimistic for retail

Office sector remains in ‘wait-and-see’ limbo.
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Colliers advisers said the retail vacancy rate has decreased since last quarter but may creep back up due to landlords trying to recoup rent they previously abated. Courtesy Colliers West Michigan

Multiple commercial real estate markets in Michigan are showing signs of recovery as activity picks up across the state, according to Colliers West Michigan’s 2021 Q1 market trend reports analyzing trends in West Michigan’s retail, industrial and office sectors.

“A new year offered a fresh start for many people, and a light at the end of the pandemic tunnel,” said Jon Potvin, managing director at Colliers West Michigan. “This extended to commercial real estate markets around Michigan, which saw heightened activity beginning in 2021. We are feeling more optimistic about the future and seeing signs that markets are recovering.”

The retail sector, which was hit extremely hard by shutdowns related to the COVID-19 pandemic, is showing some signs of recovery and causing cautious optimism among advisers and retailers.

Improved economic activity spurred by more people being vaccinated and feeling safer to venture out, in-person learning on college campuses and other returns to “normal” have driven consumer spending and a growing optimism that will help entertainment, retail, bars and restaurants. 

Advisers saw tenants active in many segments, from grocery to home goods and furniture to home improvement. There has been more activity with medical-related tenants, fitness and restaurants with and without drive-thru service, and a vacancy rate of 5.10% overall.

The vacancy rate has decreased since last quarter but may creep back up due to landlords trying to recoup rent they previously abated. Rental rates remained steady at $14.31 per square foot, and advisers noted high-quality spaces in good locations are getting leased.

“Retailers are beginning to feel cautiously optimistic about the coming months as we’re seeing signs of a rebound,” said Earl Clements, senior vice president at Colliers. “Retailers and restaurants worked hard to adapt during COVID-19, and they continue to do so leading to processes and practices that will likely stick around post-pandemic.”

Advisers are telling clients not to wait and to buy or lease when a space becomes available. The demand has increased since the start of the pandemic when many retailers and restaurants were severely struggling due to stay-home orders and capacity limits. The market is opening back up and is only going to accelerate through the spring and summer, according to Colliers.

Multiple deals were made in the first quarter of 2021, including a new Chick-fil-A on the west side of Grand Rapids. Loretta’s Deep Dish pizza opened in downtown Grand Rapids, and Grand Rapids’ only Black-owned wine and jazz bar, GRNoir, opened its doors in February.

Wahlburgers announced it also will be coming to downtown soon, and the longtime owners of Cottage Bar and One Trick Pony sold their restaurants to local investors.

Activity in the industrial sector remained strong as new businesses enter multiple markets, making industrial a continued bright spot for the commercial real estate industry throughout the COVID-19 pandemic.

Across Michigan, demand far outpaces supply, with vacancy rates at 1.68%. The cost of construction can be a hindrance, so some companies are entertaining leases as an alternative.

Opportunities to purchase or lease large quantities of industrial space in West Michigan are becoming more rare, with some transactions happening off-market. Finding quality space is often a matter of being in the right place at the right time. Interest rates continue to remain low at 2.20-4.60%.

“Industrial supply continues to lag behind demand, and there’s been almost no speculative building,” said Julie O’Brien, vice president at Colliers. “We have businesses that want to grow but are remaining cautious in the current market. We will continue to see the vacancy rate decrease, meaning more competition for those growing companies, like e-commerce.”

It also has been difficult to find experienced talent despite an unemployment rate of nearly 6%. In multiple Michigan markets, advisers are seeing consistent activity after the initial hesitation spurred by the pandemic. 

Moderate activity came from subleases, because of how businesses have adapted to changing space needs due to the pandemic, requiring fewer employees at a single location.

Both manufacturing and warehousing facilities are in demand, as are true flex-space options that offer the combined option of warehouse and manufacturing components along with an additional finished space for office or retail. Buyers and tenants are looking for spaces at all square footage levels, according to Colliers.

In Q1, Pinnacle Construction broke ground on a 15,750-square-foot industrial building in Walker that will be anchored by German Auto Service. In St. Johns, an investor acquired a 250,000-square-foot manufacturing facility. In Holland Township, Harbor Steel & Supply Corp. is investing $2.4 million into expanding its founding location, the fifth expansion for the company at its local facilities.

In the office sector, small deals have been completed throughout Q1, but uncertainty remains about what office work will look like post-pandemic, and the timeline for getting workers back to offices remains unclear. In Q1, according to Colliers, very few tenants entered Michigan office markets, though buyer activity is strong, and more space is becoming available.

Advisers are operating in “wait-and-see” mode with an office vacancy rate at nearly 9.59%, a number that is expected to increase. Rental rates dipped slightly at $16.84 per square foot, while sales costs are predicted to rise.

“The office sector has certainly been a challenge throughout the COVID-19 pandemic, but we are optimistic that the administration of vaccines and the listing of restrictions on in-person working will impact office attendance,” said Scott Morgan, senior vice president at Colliers. “While it’s uncertain whether big moves will be made in the office sector this year, we know companies will be looking for new and different spaces moving forward to accommodate social distancing.”

There was some activity in the office sector in Q1. Spectrum Health acquired the 171,895-square-foot Brass Works Building at 648 Monroe Ave. NW for $24.7 million, while also developing a separate building into 80,000-100,000 square feet of office space. This acquisition also solidifies the uptick in demand for medical office space since the pandemic hit last March.

Also in West Michigan, VRA (Vitreo-Retinal Associates) signed a 10-year lease for an 8,700-square-foot new building to be constructed at 1060 N. 19th Street in Kalamazoo. The building located at 920 Cherry St. SE in Grand Rapids sold in April.

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