Real estate uncertainty could bring opportunity

How retail responds and changing office needs might prompt significant movement.
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The COVID-19 pandemic upended an otherwise steady and busy quarter for commercial real estate in West Michigan, according to Colliers International West Michigan’s 2020 Q1 market reports.

“Q1 began with a high level of activity across all sectors coming off a strong end to 2019; in fact, it was stronger than Q1 2019,” said Jon Potvin, managing director at Colliers West Michigan. “We projected another strong year in 2020, but the COVID-19 pandemic has wreaked havoc on the U.S. health and economy.

“COVID-19 presents big question marks across real estate sectors, though there are some positives that will come out of this: new spaces will likely become open that we never thought would be available. The next six to 12 months could also be a time for investors to take advantage of the current environment, which will prove to be a challenge for many tenants and landlords.”

The economy showed some signs of cooling down last year, and now the future for industrial real estate is more uncertain due to COVID-19. The first quarter began steadily in the West Michigan industrial market with a continued and significant lack of inventory with demand stemming primarily from large, Fortune 500-type companies.

Industrial vacancy rates in Q1 were at 2.17%, compared to 2.20% last quarter. The limited space continued to drive average asking prices higher. COVID-19 will continue to impact the industrial market. In the future, direct and sublease availability, along with sale-leaseback activity, is expected to increase as companies look to shed extra space and generate liquidity.

“The COVID-19 pandemic presents unique challenges for the industrial market and will continue to affect manufacturers and possibly interrupt supply chains, depending how long it continues,” said Steve Marcusse, SIOR, CCIM and senior vice president at Colliers. “But I believe there will be some long-term positives for the industrial market, including the onshoring of manufacturing, companies increasing critical inventory supply and a further shift toward online grocery fulfillment.”

NAI Wisinski of West Michigan, in its Q1 market reports, noted Steelcase is producing critical personal protective equipment for health care providers during the pandemic. The office furniture manufacturer is making masks for use in clinical environments, facial shields for clinicians in direct contact with patients and social screens for communication with visitors at safe social distances.

Steelcase plans to produce 6,000 masks and 12,500 face shields per week in its Grand Rapids facilities.

While Q1 began with a lot of activity for West Michigan retail, COVID-19 upended that activity by the end of the quarter, as Gov. Gretchen Whitmer’s shelter-in-place executive order forced retailers and restaurants in Michigan to close to help prevent the spread of the virus.

In response, some retailers focused more on their online presence, while restaurants offered expanded carryout, drive-thru and delivery services. Many retailers have been forced to lay off employees and find ways to cut other costs. Property owners and managers of commercial real estate continue to work with tenants on rent payments throughout the crisis.

According to previous Business Journal reports, some retailers, particularly in the beverage industry, are pivoting to products specific to fighting COVID-19. Long Road Distillers in Grand Rapids is just one of several distilleries that has shifted operations from making spirits to hand sanitizer. Long Road Distillers has partnered with multiple breweries, including The Mitten Brewing Company, Founders Brewing, Perrin Brewing Company and Shorts Brewing Company to get beer for distilling.

Long Road Distillers is selling its hand sanitizer to the public in 2-ounce bottles and is also supplying half-gallon refillable jugs for local health care workers, first responders, local hospitals and nursing homes.

Restaurants were a large part of retail activity in West Michigan at the start of Q1. As well, national retailers continued to be attracted to the West Michigan retail market, including Dallas-based Texas de Brazil, which planned to open in summer 2021 in downtown Grand Rapids, and Wingstop Restaurants, which opened its second West Michigan location in Wyoming in January.

According to the Q1 reports from NAIWWM, Eastpointe-based Detroit Wing Co. opened its first West Michigan location at 2004 East Beltline Ave. NE in Grand Rapids prior to the pandemic. Detroit Wing Co. has six locations in metro Detroit.

The major retail corridors continued to generate the most activity with vacancy rates at 3.34%. Lease rates are averaging $14 per square foot.

“We were reaching a point where there is limited space in West Michigan’s retail market, which could pose future challenges for those who want to move into the market or expand,” said Chris Prins, associate vice president at Colliers. “However, COVID-19 has presented significant new challenges for retailers, who are working to innovate how they get their products to customers. These new ways of reaching customers will likely remain in place after the pandemic.”

In the West Michigan office market, the start of the first quarter saw an increase in tenant activity. The national and local unemployment rate remained low, though in March the quarter took a sharp turn because of the pandemic.

The vacancy rate for downtown office space is 9.41%, and 6.17% for the suburban market. Rental rates increased downtown in the first quarter, totaling $21.68 per square foot, while decreasing slightly in the suburban market at $15.88 per square foot. In Q1, construction costs were beginning to come down after years of increases but will be hard to predict going forward.

“While we anticipated a slowdown in the economy this year, COVID-19 will accelerate that for the next several months and beyond,” said Gary Albrecht, senior associate at Colliers. “As many employers moved to remote work for the first time or significantly expanded remote working, it will be interesting to see how this impacts the office market in the future.”

Albrecht predicted companies might reconfigure their workspaces and realize they need smaller spaces to operate, or alternatively, they might need larger spaces to make their workplaces less dense.

Out-of-area investors and firms continued to generate a high level of activity to keep positive pressure on values for commercial real estate in Q1.

Significant investment deals in the end of 2019 and Q1 2020 included the sale of McKay Tower in downtown Grand Rapids to Gun Lake Investments and Waséyabek Development.

However, COVID-19 has caused great unknowns for investors, who are operating with a wait-and-see mentality.

“We assume that interest rates will remain low relative to historic times; however, insufficient bond markets will keep interest rates volatile in the near term,” said Michael Visser, associate vice president. “When we re-open, the way we conduct business will be different, so businesses and landlords will need to respond accordingly. The future is largely unknown, but we will know more about the impact as earnings and data emerge over the next 90 days.”

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