Innovation marks real estate response

COVID-19 forced brokers to set up a whole new way of doing business in 2020.
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Multifamily housing picked up in the third quarter and became a safe haven for investors who still expressed confidence in West Michigan. Courtesy Colliers West Michigan

West Michigan brokers and agents had to adjust to weather the COVID-19 pandemic in 2020 across the industrial, office, retail and multifamily markets, according to real estate leaders who spoke at the virtual West Michigan Economic and Commercial Real Estate Forecast.

“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.”

Retail

In Grand Rapids, the vacancy rate as of Q3 2020 was 4.78%, which increased throughout the year due to closures because, in many cases, retailers were not able to make their rent.

Advisers predict moderate demand going forward, but only in key retail corridors. They expect the vacancy rate to increase in the first half of the year. Rental rates continued to decrease throughout the year to an average of $13.67 per square foot. Interest rates also were low during last year and are predicted to remain low throughout 2021.

Despite its challenges, the retail sector did show some activity in 2020, particularly with restaurants that have a drive-thru component. New restaurants came to the Grand Rapids market, some local restaurants rebranded, and others opened new locations in walkable neighborhoods.

Colliers Associate Vice President of Retail Chris Prins said national retailers are better equipped to come out strong compared to local businesses.

“Your chains, your corporate America companies, they can get creative enough and have enough capital behind them to go back to the bank and say, ‘lets restructure some of these deals, let’s get creative on how we use our apps,’” Prins said. “I don’t see the hit as hard on them just because of the firepower behind them. For the locals, it’s going to be difficult, especially the ones in downtown Grand Rapids.”

The Grand Rapids Downtown Development Authority approved up to $243,000 in 2020 to help businesses winterize outdoor dining experiences during the pandemic. People also enjoyed “social zones” in downtown Grand Rapids during the warmer months of this year, adjusting to primarily outdoor dining to help slow the spread of COVID-19.

The latest surge in COVID-19 cases in late 2020 heading into the winter months was the biggest challenge yet, and there may yet be more restaurants that join the list of small local businesses that announced their closures in 2020.

Industrial

The industrial sector continued to fare better than others. After a brief slowdown at the beginning of the year, by year’s end, the industrial market picked up to pre-COVID-19 levels.

This is good news for Grand Rapids, which historically has attracted major manufacturers in the commercial furniture, automotive, technology, medical device and food processing sectors.

The U.S. unemployment rate was high at 6.9% in November 2020 due to surging COVID-19 cases, after nearly recovering since the Great Recession over a decade ago. Job growth will be slow, and there are concerns for a rough winter with the continuing pandemic and uncertainty in the workforce. Manufacturers have been forced to adjust by offering more flexible shift times and dealing with frequent absenteeism due to mandatory quarantining.

Market activity this year came predominantly from demand for manufacturing and warehousing space for large companies re-shoring operations and supply chain logistics. Investors remained confident in the West Michigan market through the continuing economic slowdown. The industrial vacancy rate remains low at 2.38%, and demand has remained greater than supply all year. Low interest rates have been a motivational factor for buyer activity, which will be a continued trend as rates are expected to remain low through 2021.

Office

After hospitality, the office market was arguably the second hardest-hit real estate sector. Due to COVID-19, most businesses put looking for a new office on the backburner. People don’t know what the office environment will look like in the short- and long-term when employees are able to come back to work full time.

Companies that have set high standards for safety and care for employees and customers have come through 2020 slightly better than others, because both employees and customers feel more comfortable in those businesses. They also have been able to avoid frequent stops and starts caused by an employee testing positive for the virus.

In 2020, the West Michigan office vacancy rate was 7.79%. Average rental rates increased to about $18.06; however, the trend of increased rates may reverse if employees are staying home well into 2021.

“The good news is that the economy is good. Tenants are paying rents,” said Scott Morgan, senior vice president of office at Colliers. “We’re not seeing defaults in the leases. We’re seeing payments made. We’re seeing companies do very well economically overall … Probably the biggest issue we’re going to run into is the extent to which subleases go up on the market.”

Despite 2020’s challenges, desirable spaces and buildings continued to perform well. Perrigo, an Allegan-based pharmaceutical company, is investing $44.7 million to move its North American corporate headquarters to Medical Mile in downtown Grand Rapids, a move expected to create 170 jobs. However, this is an outlier. Many companies declined to expand and haven’t grown ini the past year. Even health care, which reportedly has been weathering the pandemic better, has seen slow growth.

Multifamily

When the pandemic began, there was a significant slowdown in multifamily transaction activity, but things changed in Q3, when the multifamily sector returned as both a bright spot and a safe haven for investors, proving West Michigan still is a place where people want to live.

According to the U.S. Census Bureau, the population is nearly 1.1 million people in the Grand Rapids MSA, with a median age of 36.1 and a median household income of $65,739. West Michigan’s multifamily sector added over 1,100 units in 2020, and more than 1,000 units are planned for this year.

“Between 2015 and 2020, we obviously as a market have delivered thousands and thousands of units,” said Matt J. Jones, associate vice president of multifamily investments at Colliers. “Locally, a lot of the easy, low-hanging fruit from a development site perspective has been picked already. So you’re starting to see developers get creative … or find sites that need some work.”

While there is high demand for additional units, the cost of construction remains high and is pricing some projects out of the market. Many developers are turning to tax credits and grants to make projects work financially but this already is a highly competitive process.

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