Real estate markets adjusting to ‘new normal’

Biggest hurdle will be whether more employees work in the home or office.
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Advantage Commercial Real Estate recently released its mid-year market trend reports for 2021, showing industrial real estate is stepping up to meet consumer demands, even in the face of high construction costs. Meanwhile, retail and office companies in West Michigan still are adjusting, but some post-pandemic changes may be here to stay.

Advantage counted dozens of industrial projects that are currently under construction this year. Companies showed continued interest in West Michigan because of its location, business-friendly incentives, skilled workforce and overall modest cost of living.

“We have less than 3% inventory vacancy in West Michigan in the warehousing space,” said Mark Ansara, managing principal at Advantage. “Once it’s built, it’s leased. If you’re in the market looking from 10,000-100,000 square feet, you’re going to be hard-pressed to find it.”

The average days on market for industrial lease space dropped 15% from Q1 to Q2 this year. The number of total leases signed rose 54% in the first half of this year, compared to the same time last year. In addition, the number of sale transactions more than doubled; all while the amount of available vacant space continued to dwindle to under 3%.

The reason for this surge of industrial activity is the demand for goods, according to Advantage. Although the demand for goods did not really change during COVID-19, the way those goods got to consumers did. Online shopping became pervasive as people stayed home, increasing 39% from a year ago across the U.S. To fulfill these online orders in a timely manner, new distribution networks had to be planned.

“Construction costs are extremely high, and lead times are extended. However, the demand is so high in our market that new construction is still happening,” said Advantage Director of Research Jeff Hainer. “Land is getting scooped up at a quicker rate. That type of property is so valuable that people know the only solution to satisfy the demand is to create supply. They’re willing to pay more for land and are willing to pay the higher construction costs and labor costs to get it done.”

Lead times and construction costs are now the biggest challenges industrial users and developers are facing. Advantage reported continued difficulty both domestically and internationally with lumber and steel production output, as well as supply chain issues and international tariffs. These factors have contributed to the major delays and inflated prices. Increased government investment on infrastructure projects also has exacerbated this, the report said.

From the retail perspective, the biggest constraining factor on the market in the first half of 2021 was the lack of employees willing to fill open positions. But some submarkets are faring better than others.

“In general, if you’re talking about shopping, those types of retailers are not hit as bad for employees versus food service,” Ansara said. “We’re getting into critical holiday hiring season, which typically starts in September-October. From my understanding, they’re still pretty good. Food service and hospitality is where the challenges are. You see a minimum amount of people sign up for hundreds of jobs.”

To date, the federal government has given out over $4.55 trillion in total budgetary resources to aid in helping individuals and families through the pandemic. According to Advantage, with child care costs soaring and minimum wage still lagging, many people won’t put themselves in a worse financial situation by taking a low-wage retail job.

In April, 2.7% of all workers quit their jobs voluntarily, the highest rate since the Bureau of Labor Statistics started recording the statistic.

Retailers learned some new tricks during the pandemic shutdown. Many were forced to pivot to online ordering and either contactless curbside pick-up, drive-through or delivery.

Some restaurants with extra capacity in their kitchens have started essentially time-sharing their facilities to other delivery-only concepts. Even with the ability to serve a dining room full of customers, many are choosing to keep the pandemic-era models they created and keep those dining rooms closed, largely due to staffing.

Examples of these “ghost kitchens” in Grand Rapids are Blacklist Bagels, 9th Street Steaks, Pronto Pasta, Li Grand Zombi and the recently announced Mitten Pizza Co. opening in Rockford — none of which have a physical dining room, only a rented kitchen.

Many retailers in West Michigan, both local and national, continue to push forward with plans for new openings. Chick-fil-A is building a new store on the southeast corner of Lake Michigan Drive and Wilson Avenue NW in Standale, which plans to open in September. Dollar General’s new DGX concept opened its first local location downtown at 111 Lyon St. NW. A 34,000-square-foot Total Wine and More opened in July on 28th Street SE. AutoZone is building a new 38,000-square-foot “mega hub” store in Wyoming that will open in August.

The main question surrounding the current office market is, “what will be the new normal?” Unsurprisingly, most white-collar employees adjusted quickly to the pandemic. Utilization of technology accelerated, and most had workers quickly established at their in-home offices. Employees found the flexibility of remote work allowed them to better manage a work/life balance, and many actually found their productivity increased — and employers agreed.

“There are so many variables right now, but what we’ve seen is every company is a little different,” Hainer said. “Across the board, it’s pretty safe to say the traditional office use and setting has changed. People who have figured out how to work from home have continued to do that. Some employers want their workers back, but they also want to keep them happy. If the work gets done they’re willing to accommodate that, because there’s such a talent shortage now — particularly in retail, but also in the office world.”

In West Michigan, the average lease size decreased by 23% in 2020 compared to 2019, showing that tenants were not as willing to commit to large amounts of space while there was so much uncertainty during the shutdown. Lease rates fell a bit flat, and vacancy increased, as some tenants either let their lease expire or consolidated/downsized. Some with newfound underutilized space were able to sublease part of their space, thus creating no net-effect on vacancy.

Traditional offices are not obsolete, though. People who used to work remotely are itching to come back, because they miss that social interaction, Hainer said. 

“People don’t want to be stuck in their house all the time, but they have families and are still figuring out the new world we’re living in,” Hainer said. “Throughout the latter half of this year, I think we’ll see the office market find its place. Activity is up. People are coming back to the office.”

“I can tell you people are going back to the office,” Ansara said. “They may not be going back to the office as often.”

Spectrum Health is a prime example of what the new normal will likely resemble. The health system is the largest employer in Grand Rapids, with more than 25,000 employees throughout the area and some 1,500 in office-related positions downtown.

While uncertainty is still prevalent, Spectrum is in the process of consolidating its leases from across the city into a new Center for Transformation being built on North Monroe Avenue. The development will house 1,200 employees and is expected to save more than $15 million in annual rent. In addition, Spectrum has committed to offering flexible work options for these employees.

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