Plant closings and the outsourcing of jobs overseas have especially hit hard the commercial real estate market for the Great Lakes, a region long supported by manufacturing.
“We do hope that the jobless recovery is over,” said Robert Bach, national director of market analysis for Grubb & Ellis.
“As I understand, there will be both a positive and negative side in terms of job creation. Of all the economic indicators out there, job creation is the most important in terms of demand for commercial real estate.”
The good news is that businesses are making money again and capital expenditures are up.
The bad news is that the real estate market is a lagging indicator; the market doesn’t pick up until about six months after the economy starts creating jobs, Bach said.
“Another difference between the economic cycle and the real estate cycle is that the real estate cycle has higher highs and lower lows because long after the economic cycle turns, we still have new product in the construction pipeline. It’s like trying to turn a large ship.”
Bach predicts the office market segment will be the last of the real estate markets to recover.
Office market demand in the United States fell through the floor in 2001 and 2002 with consolidations, plant closings and corporate downsizing, Bach pointed out, and the vacancy rate is now about where it was 10 years ago.
Nationally, the office vacancy rate is at the bottom, which means office rents may dip lower for the next two quarters, he said. There may be some slight improvement toward the end of the year, but not much, he added.
“Landlords will have more bargaining power in 2005,” Bach predicted. “Tenants — lock in your rates now.”
Vacancy rates in the industrial real estate market went up to a peak of 10.1 percent in the first quarter of last year, but have been coming down since.
“Conditions are beginning to improve so we’re more optimistic about the industrial market.”
The apartment leasing market has been very weak over the past two years because the housing market has been so strong, with a lot of renters becoming homeowners due to low interest rates.
“As long as rates remain low I think that’s going to continue,” Bach remarked. “But in 2004 we should see some job creation, which will be good for the apartment market. We may also see long-term interest rates come up slightly, which should also help the apartment leasing market.”
The retail real estate market has been doing well over the last three years, with the strongest returns of all four classes of real estate. That’s primarily because mortgage refinancing spurred by low interest rates put money in consumers’ pockets.
The commercial real estate investment market has fared well, too, in part because the stock market has been so volatile, Bach noted.
“I think people realized the steady income returns that direct ownership of commercial real estate offers and people also realized the stock market won’t be up 25 to 30 percent every year like it was last year, so people look at real estate as a good anchor for a diversified investment portfolio.”
Closer to home, what impact does the wave of manufacturing job losses and the increase in manufacturing outsourcing have on industrial space use?
As Bach pointed out, the manufacturing sector didn’t create jobs through most of the 1990s, yet industrial real estate flourished during the decade and enjoyed a vacancy rate below 6 percent.
The demand for industrial real estate, he concluded, is not strictly tied to manufacturing.
What will affect the industrial market most this year will be the low cost of funds, said John Kuiper, a vice president and industrial adviser at Grubb & Ellis/Paramount.
“That has really allowed tenants to become owners of property. Their operating expense on a cost-per-square-foot-basis is just as economical to own because of the low cost of funds.
“There is also an impact on the larger owners of buildings. The low cost of funds have allowed landlords to be able to hang in there a little bit longer with vacancies and also allowed them to decrease their rental rates. These are all things we’re going to continue to see into 2004 and probably into 2005.”
In the local retail real estate market, there is little space remaining for additional retail projects in Grandville’s RiverTown Mall area, said Matt Williams, a vice president and retail market adviser with Grubb & Ellis/Paramount.
“For the most part RiverTown has run its course,” he said.
The next big area will be in the south end of Kent County near Gaines Township.
Meijer’s move into the township is expected to start a chain reaction as developers gobble up prime locations along the new South Beltline highway.
Williams said Target and Kohl’s are expected to be part of the shopping center project.
Downtown Grand Rapids has seen a massive influx of institutional investment over the last couple of years and that’s going to continue, said Scott Morgan, a vice president and office market adviser at Grubb & Ellis/Paramount.
“This total investment is priced at approximately $500 million, and when you put that kind of money into a downtown, good things are going to start to happen.
“Downtown is becoming a much more attractive place to live, and we have in progress 600 dwelling units in the central business district that are coming on line. An interesting point about a number of these buildings is that they are taking older office space and converting it into residential units, which helps the office vacancy issues downtown.”