John Kuiper, Colliers International
With the industrial real estate market in Grand Rapids nearing critical mass — where demand is strong enough to fill the entire supply of available space — a new challenge has emerged for developers. How do they create enough new, competitive product to keep up with continued market momentum?
For the first time in a decade, total inventory in the industrial market must grow. The solution will likely come in the form of new construction and creative repositioning of functionally obsolete facilities.
During the Great Recession and slow recovery, many companies consolidated operations. Buildings that had become vacant were repurposed, substantially modified or eliminated altogether. Now, we are beginning to see a trend of new construction. Both speculative and build-to-suit construction has become the logical solution to the lack of inventory.
Noteworthy Projects
An investment group led by a local building materials supplier, and marketed by the industrial team at Colliers, is developing a 45,000-square-foot light manufacturing speculative building, located at 3838 Soundtech Court in Kentwood, a southern suburb of Grand Rapids. Delivery is expected by June 1.
On the city’s southeast side near Gerald R. Ford International Airport, a new industrial building is under construction at 5300 Broadmoor Ave. An investment group led by local general contractor A.J. Veneklasen Inc. is building 50,000 square feet of speculative space, with the intent that a larger user will be able to develop the remaining balance of the parcel. The site has room for an additional 250,000 square feet. Delivery is expected July 1.
Other projects on the drawing board include a 30,000-square-foot industrial building in the southwest Grand Rapids suburb of Hudsonville, plus a 40,000-square-foot building on Clyde Park Avenue in Kentwood. Speculative building is something we haven’t seen in years and is a response to the tight market.
The new construction will lead to a modest increase in rents overall. It will also increase the rental rate spread as functionally obsolete space becomes even less desirable and new buildings command rates much higher than previously seen.
The construction activity could also lead to the creation of a new industrial corridor. Since large lots of land will be needed for ground-up development, dense industrial areas might not necessarily be the solution. Submarkets with the highest availability of land will generate the most interest for spec developers and space users looking to construct their own building.
Market Drivers
The aerospace and automotive industries are continuing to invest and grow in West Michigan. In December 2014, General Electric Aviation announced that the company was awarded a contract to produce its avionics system for the new Boeing 777X commercial airliner. GE produces the avionics system at its Grand Rapids facility located at 3290 Patterson Avenue SE. The company indicated this contract alone will employ more than 100 people for multiple years.
According to the Michigan Aerospace Manufacturing Association, the state aerospace industry is expected to grow by 7 percent annually for the next six years, which will translate into a roughly 50 percent increase in overall growth by 2021.
Thanks to the sharp drop in gasoline prices over the past year, automobile manufacturers are experiencing an increase in demand for larger, less fuel efficient vehicles such as SUVs and trucks that generally yield a higher profit margin. This enables auto manufacturers to reinvest capital in eco-friendly product lines, which will regain popularity as fuel prices readjust to higher levels.
Shortage of Skilled Labor
As demand for product increases, the ability to rapidly expand all facets of business to meet that demand poses a challenge. When the manufacturing industry slowed a decade ago, many skilled workers found opportunities elsewhere or in other fields. The manufacturing career path for persons preparing to enter the workforce became less appealing. Now, as hiring now becomes a necessity again, firms are finding that the talent pool has dried up.
The West Michigan Manufacturing Council is considering ways to address the issue. One possible solution is for companies to work with high schools and colleges to create a pipeline of workers. Another is the creation of management training programs and building amenities such as cafeterias and workout facilities for employees.
Leasing, Sales Trends
The velocity of leasing and sales activity is on the rise. Space users signed 52 leases in the fourth quarter of 2014 compared with 39 in the fourth quarter of 2013. Meanwhile, there were 33 property sales transactions in the fourth quarter of 2014, up from 21 during the same period a year earlier.
This increase in activity across the board led to total net absorption of nearly 600,000 square feet during the fourth quarter of 2014, the largest quarterly gain since 2008.
In summary, the story is one of a lack of quality, modern space. However, transaction figures paint a picture of rising demand across our region. That’s always an encouraging sign.
— By John Kuiper, SIOR, CCIM, Principal, West Michigan Brokerage, Colliers International. This article originally appeared in the April 2015 issue of Heartland Real Estate Business magazine.