By Drew Miller, CBRE
Despite some level of macroeconomic uncertainty, the fundamentals of the industrial real estate market in West Michigan remain solid. While the overall number of tenants in the market has recently declined slightly, the demand for space from local companies and tenants new to the market is still outpacing supply.
Nationally, the overall industrial vacancy rate finished the second quarter of 2023 at 3.7 percent, 30 basis points higher than the previous quarter but 100 basis points lower than the 10-year average. Comparatively, the West Michigan industrial market, of approximately 170 million square feet, ended the second quarter with an availability rate of less than 3 percent. The combination of a diverse economy, robust infrastructure and a conservative approach to development all factor into the continued strength of the region.
Grand Rapids, the second-largest city in Michigan, and West Michigan at large are blessed with a well-balanced and diverse economy led by office furniture, automotive suppliers, aerospace, food processing, e-commerce and advanced manufacturing companies. The area is home to many of the leading office furniture and related design companies, including MillerKnoll, Haworth and Steelcase, all headquartered in West Michigan, with many of their manufacturing and suppliers desiring to locate in the area.
Advanced manufacturing continues to flourish, with significant growth in automation and lithium battery manufacturing. LG Energy announced it has committed to investing an additional $3 billion into its existing battery manufacturing plant in the Lakeshore community of Holland, Michigan. In addition to the 1 million-square-foot expansion of its manufacturing plant currently under construction, market demand has continued to increase from its supplier base seeking to locate within proximity.
Grand Rapids has strong ties to the automotive industry, with 61 of the top 100 automotive suppliers in the state located in West Michigan. Continued innovation has allowed T1 suppliers like Gentex, Lakes Enterprises, ADAC and Royal Technologies to expand and flourish. As of early October, the UAW strike was underway, which, if it continues, may negatively impact real estate demand.
Known as Beer City, USA, the area is home to such breweries as Founder’s, New Holland and Bells. Additionally, 203 food processers are driving the local economy, such as major global and store brands like Kellogg’s, Roskam Baking, Gerber and Fairlife Milk. This industry is thriving in large part due to West Michigan’s access to natural resources and infrastructure.
The existing infrastructure in the area has supported industrial growth, resulting in a strong local real estate market. The area is supported by major highways, rail systems and an international airport, making it desirable for companies to locate to the region. The natural resources found in the area are positively impacting the area’s ability to retain and attract talent, which is vital in today’s tight employment market. The area boasts a very competitive cost of living, as well as a vibrant and eclectic culture and natural attractions, including proximity to Lake Michigan, national parks and outdoor recreation activities like boating and skiing.
West Michigan has long taken a conservative approach to real estate development, which has aided in not overbuilding during good times and avoiding a surge in vacant inventory during a downturn. Such is the case during the last several years of unprecedented demand for industrial real estate space.
Due in large part to the rise in interest rates, historic high construction costs and uncertainty in the economy, virtually all construction starts for speculative development were put on hold in the third and fourth quarters of 2022. The pause has contributed to rental rates and property values increasing with continued steady demand. Developers have chosen to wait to break ground on planned projects until leases are signed. There are several significant construction starts that may be announced in the fourth quarter of 2023.
The conservative development approach, coupled with the diverse economy and existing infrastructure, have continued to attract outside investors to Grand Rapids. Large industrial investors find the area appealing due to the region’s stability, quality facilities and slightly higher returns they can achieve compared with coastal and other core markets like Chicago, Atlanta and Dallas.
One constraint on the market is the current lack of shovel-ready and fully entitled industrial land sites available for future development. The constraint has reached the attention of the Michigan Economic Development Corp., which recently announced its Strategic Site Readiness Program. The program allows landowners to apply for funding to assist in getting their sites, ideally 50+ acres, closer to being shovel-ready.
The future of Grand Rapids and its industrial real estate market looks bright. Industrial real estate performance lags the overall economy, so we anticipate some level of slowdown in the next six to 12 months, but the market is well-positioned to handle some slowdown in demand.
Drew Miller, MCR, is a senior vice president with CBRE. This article originally appeared in the November 2023 issue of Heartland Real Estate Business magazine.