Advisers see bright future for West Michigan real estate

Almost all sectors are seeing a bump in activity.
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Coming into the post-pandemic era, West Michigan remains vibrant and growing, according to the latest market reports from Bradley Company.

Industrial demand still is bullish in 2021 even after a high number of sales in Q4 2020. The warehouse and distribution sector, in particular, continues its positive momentum. Bradley Company observed six sale transactions in Q1 2021 that were over $1 million, with one over $4 million.

There were 11 sales transactions above $1 million in the final quarter of 2020, with six of those in December alone. The transactions combined accounted for $120 million, the highest sales volume in the past five years. The number of properties traded was the second highest in the five-year period. Industrial and warehouse space is in such high demand that properties will often get offers as soon as they go on the market and existing industrial properties are seeing record high prices as construction costs continue to increase.

“It depends on product type,” said adviser Kyle Grooters. “If you’re looking to buy a 40-60,000-square-foot building, you’re not going to get it now. As for leasing there’s product on the market, but it’s a little too expensive for our market considering people’s past experiences.”

The rise in asking rates is due in part to the elevated cost of construction, as well as a nationwide demand for steel, Grooters said. Asking rents are expected to rise as supply continues to lag demand. The average rate begins at about $5.53 per square foot in West Michigan. Comparatively, the national average is around $6.31.

In the previous quarter, several food distributors had laid off workers due to restaurants and bars having restricted capacity from the pandemic. While some sectors struggled, the e-commerce industry is in expansion mode. 

Conveyor Concepts, a manufacturer of automation equipment, is expanding its facility in Coopersville. The company is investing $1.3 million to enlarge its facility by 30,000 square feet. The company is benefiting from increased demand in e-commerce and more warehouse and distribution facilities that rely on its products. 

Likewise, Holland Steel announced a 34,000-square-foot expansion. The company makes steel products for a variety of industries and plans to invest $2.4 million in the project. 

The largest expansion project also is in Holland. A $35 million project by Hudsonville Creamery and Ice Cream Company includes a new 156,466-square-foot cold storage distribution facility and expanding its manufacturing capabilities at its headquarters. The company previously spent nearly $10 million on an expansion in 2020.

In addition to expansions, new facilities also are underway. Pfizer broke ground in March on a new $465 million facility in Portage in Kalamazoo County. The project was announced in 2018 and will open in 2025, creating 450 jobs. Amazon’s $10 million, 113,000 square-foot sorting and delivery center in Walker is scheduled for completion in Q3 2021.

West Michigan, like all office markets across the United States and the Midwest, saw a spike in office vacancy rates in 2020 due to the pandemic. The western Michigan area for Bradley Company includes Grand Rapids and Kalamazoo.

Grand Rapids is considered a secondary market, making it appealing for those looking for lower cost of living, compared to the large gateway cities. Office space had robust demand in Grand Rapids, especially in the downtown area before COVID-19. 

“West Michigan is a very appealing region for companies to relocate offices, driven by our low cost of living, natural environment and ‘cool cities’ for employees to work in a central office or for people working remotely for a larger market,” said Jeffery Tucker, principal and senior managing director of brokerage.

There is uncertainty as to what the office market will look like in the near-term, but most are bullish on the strength of demand for space in the Grand Rapids market.

With its many amenities, demand for downtown office space should rise as companies make decisions about their physical presence. Additionally, local universities, such as Grand Valley State University and Michigan State University, feed the economy with fresh graduates each year and entice companies looking to place themselves in a city with a great talent pipeline.

“But out-of-area companies are looking at our educated workforce here and how they can benefit from a wider talent pool, and in turn, Grand Rapids companies are benefitting from a global talent pool to expand their local talent teams,” Tucker added.

There are multiple companies building in or relocating to Grand Rapids. Acrisure, an insurance brokerage company from Caledonia, is building its new headquarters at Studio Park in downtown Grand Rapids. The building is currently under construction and expected to be completed in the second half of 2021. The company also is pledging to donate $15 million to Spectrum Health Helen DeVos Children’s Hospital.

Spectrum Health is building an eight-story office building north of downtown Grand Rapids. It will connect this eight-story building the Brass Works Building it bought for $24.7 million. It will house 1,500 employees. Construction of the new office building is expected to start in the fall of 2021.

Transaction volume in the western Michigan region was down 74.6% year-over-year in Q1 2021. Over $7 million worth of office properties sold in Q1, down from $29.9 million in Q4 2020. The median price per-square-foot was $141 in Q1 2021, which is a drop from $165 in Q4 2020 and $196 in Q1 2020. 

According to Integra Realty Resources, cap rates in the central business district ranged from 6%-6.5% and ranged from 7.5%-9.5% in the suburbs in 2020. Cap rates are expected to increase between 1-24 basis points along all asset classes and in the CBD and suburbs in the next 12 months.

Despite capacity limits and mandated closures last year in Michigan due to the pandemic, the West Michigan retail sector is thriving, especially in corridors with Class A properties. 

The pandemic forced many businesses to shutter their windows, but through the first quarter of 2021, openings are outpacing closures. National tenants not currently in the market and local entrepreneurs still are looking for space in West Michigan.

“Overall, I think we’re turning the corner,” said Bill Bussey, senior associate broker of retail. “When stores close, somebody wants that site. We don’t have many vacancies in the area … Manufacturing and retail have been a blessing for us. Plants are expanding and gaining employees. That in turn is driving retail because people have more to spend.”

Bussey pointed to the vibrancy of major retail corridors like Woodland Mall on the corner of 28th Street and East Beltline. He attributed the success to its sharp tenant retention and judicious leasing practices.

“We do a lot of team meetings and stuff like that that’s just changed the way business operates, and retail is no exception,” Bussey said. “Because of the way things are changing, a lot of people decided to call it quits, but so many more are still opening up.”

More and more restaurants are going to have drive-through lanes and will continue to offer curbside pickup even post-pandemic.

“Curbside pickup is great if you can’t have a drive-through, so that’s going to continue,” Bussey said. “If you think about a full-service restaurant, they would never do that before COVID, but it’s gotten so common that they have to do it now.”

New restaurant entrants to the market include Wahlburgers, which is opening a location in downtown Grand Rapids this summer in the new Residence Inn by Marriott. This will be the third location in Michigan.

Condado Tacos opened in February on Bridge Street, just west of downtown. This is its fourth Michigan location, but the first outside the Metro Detroit area. Loretta’s Deep Dish has opened in downtown as well. The Chicago-style pizzeria is a new restaurant concept by the founder of HopCat and the tiki bar Max’s South Seas Hideaway. The new restaurant is located in the basement of Max’s on Ionia Avenue SW.

In 2020, some breweries merged or closed, but seven new ones are opening in West Michigan. Brewery Nyx will be the first gluten-free brewery to open in Michigan, planning to open this month June just south of downtown Grand Rapids at 506 Oakland Ave. SW. Saugatuck Brewing Co. is expanding to a third location. The company purchased Creston Brewing after it closed in March 2020, and Saugatuck plans to keep the Creston name.

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