Last month I attended the NAI Global convention in Austin, Texas, and had the opportunity to talk with industrial real estate brokers from around the country. One thing was clear: there are many markets across the country that are facing the same dilemma as we are in West Michigan. The supply of vacant industrial buildings is at an all-time low, and construction costs are rising rapidly.
Booming economy
The manufacturing industry is extremely strong in West Michigan. Historically known for the automotive and furniture sectors, West Michigan has developed a strong presence in the medical device manufacturing, food processing and aerospace sectors. This diversity is a good indicator of stability for the West Michigan manufacturing sector for the foreseeable future.
Chris Prins, NAI Wisinski
of West Michigan
The strength of the economy has encouraged many companies to expand operations and has attracted numerous out-of-market companies to West Michigan.
Low inventory
The industrial vacancy rate in the greater Grand Rapids market is currently 1.6 percent, which is historically low. In order to provide some context, in 2012 the vacancy rate was 7.2 percent. Typically, when the vacancy rate is this low, it is a clear indicator that inventory is too low, and the construction of new buildings is needed. Construction is taking place, but not at the necessary pace to keep up with demand due to rising construction costs.
Construction costs
There are a few reasons why new construction costs have increased. The first is a direct result of the tariffs on imported steel. It has been well publicized that these tariffs have caused an increase in both the cost of imported and domestic steel, which has an obvious impact on the cost to construct a building.
The second reason is that labor costs have gone up. It is difficult to find good employees right now, so contractors are having to pay their workers more to avoid losing good employees.
The third reason is related to new energy codes that have recently been passed in Michigan. Changes in the energy-efficiency requirements for HVAC, insulation and lighting have added an average of $4 to $6 per square foot to construction costs.
Despite this, there is still a fair amount of industrial construction occurring in West Michigan. For example, Amazon is in the process of building an 850,000-square-foot distribution center in Gaines Township, which is just southeast of Grand Rapids.
There is over 500,000 square feet of speculative industrial space currently under construction in the greater Grand Rapids area. However, since the industrial inventory is so low right now, the amount of new construction is not keeping up with the demand for industrial space.
Industrial real estate values
The juxtaposition of increased demand and low inventory, with rising construction costs, has had a direct impact on industrial real estate values. As one would expect, values have increased significantly, on both the leasing and the sales side, especially as it relates to Class B and C properties. The average lease rate for an industrial building in West Michigan is currently $4.44 per square foot. Compare that with $3.03 per square foot in 2012, and you can see how drastic the impact is.
A booming economy, low inventory, increased demand and rising values create interesting challenges for buyers, sellers and tenants. This economy has put more value than ever before on working with a well-connected local real estate broker with market knowledge and a little creativity.
— By Chris Prins, Industrial Specialist, NAI Wisinski of West Michigan. This article originally appeared in the November 2018 issue of Heartland Real Estate Business magazine.