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The industrial real estate market in West Michigan, and particularly in Kent County, continues to trend positive. CBRE’s most recent survey of this real estate class recorded the fifth consecutive period of positive absorption, resulting in a vacancy rate of 7.8 percent for gross industrial space.
The industrial base in West Michigan includes nearly 95 million square feet of gross space, of which nearly 50 million square feet is categorized as “leased” space, with the balance “owner occupied.” The absorption of space is being led by the slow and steady improvement of economic conditions in our region.
As of the December 2012, the Grand Rapids unemployment rate stood at 6.5 percent, much better than Michigan and the nation, with unemployment rates of 8.9 percent and 7.8 percent, respectively, for the same period.
Economic Catalysts
Much like the rest of the state, West Michigan has benefited from the steady improvement of the auto industry. The increase in vehicle sales — brought about by both pent-up demand following the recent recession and by need resulting from natural disasters such as Hurricane Sandy — has boosted manufacturing orders to local companies that supply parts and capital equipment to the auto industry.
Additionally, our local manufacturing base has diversified itself to service the other major manufacturing leaders in our market — the office furniture and medical-related industries. Such diversification has greatly benefited our overall economy, which is supported by the office furniture original equipment manufacturers (OEMs) such as Steelcase, Haworth and Herman Miller, as well as medical and healthcare companies such as Stryker, Perrigo, ATEK and Autocam Medical.
Our local economy has also benefited greatly from the continued growth of the food processing industry. Locally based companies such as Roskam Bakery, Michigan Turkey Producers and Continental Dairy have grown exponentially and have helped to absorb large manufacturing factories previously utilized for office furniture and automotive manufacturing processes.
Moreover, the food processing sector has added thousands of jobs to the local economy with plans for continued expansion of their facilities and employment during the next several years. The continued expansion and investment by large international companies like ConAgra Foods, Kellogg Co. and Kerry have benefitted the local food processing industry. They too have recognized our area as having a strong workforce, available infrastructure and unique raw materials.
Available Space Dwindles
The combined increase in manufacturing output and absorption of quality manufacturing space has generated an increased demand for available warehouse space, either directly by the OEMs or by third-party logistics providers. The bulk warehouse segment, which accounts for approximately 25 million square feet of industrial space, has tightened up substantially during the past 12 to 18 months, leaving a limited supply for certain requirements.
Blocks of Class A warehouse space larger than 100,000 square feet can be challenging to find. While the dwindling supply has not yet led to any speculative development projects, discussions are beginning to surface about the need and interest to move in this direction. Asking rates for this type of space have remained fairly constant, but the market lease rates have returned to pre-recession levels, experiencing a 15 to 20 percent increase in final deal terms as well as a reduction in incentives such as free rent.
Similar to many markets in the Midwest and nationally, the West Michigan industrial market has experienced a dearth of new construction during the past three to five years. Until recently, the market was saturated with inventory, which applied price pressure on landlords and sellers for their existing product. This price pressure meant financing new construction projects was not economically viable.
The Haves and Have-nots
Now that the market has experienced absorption, the value for industrial properties has been on the rise, but not across the board. Buildings that are fairly new or which are in desirable locations and have a high degree of functionality have benefitted the most. Those buildings with obsolete infrastructure standards have been either absorbed by now or not experienced the same level of demand.
The market has experienced a steady increase in build-to-suit projects by companies that have not been able to find a suitable existing building. They have opted for new construction rather than try to retrofit a building that wasn’t quite right. For example, Heeren Brothers Produce recently broke ground on a $22 million, 150,000-square-foot headquarters that will provide distribution and processing space for fruits and vegetables.
While our market has improved at a slow and steady pace on the back of our diversified and capable manufacturing base, there is still some concern regarding the potential for a softening global economy and how that may impact our local economy. According to the W.E. Upjohn Institute for Employment Research, Grand Rapids will have a moderate 1.2 percent growth in the local employment base in 2013.
The Grand Rapids area has historically been considered a conservative business and real estate development market, and we will likely see additional build-to-suit opportunities and an increased demand for modern warehouse distribution space. Conversations regarding speculative development will continue to grow louder, but the market must continue to demonstrate steady improvement and strengthening of real estate fundamentals throughout the year.
— Drew Miller, managing director of industrial/corporate services advisor with CBRE/Grand Rapids.