The commercial real estate market in West Michigan was quite active in 2015 across all property sectors, including one massive data center deal that is expected to spur billions of dollars in investment.
Both new development and transactions involving existing facilities drove deal volume in 2015. Consequently, vacancy rates dropped while leasing rates generally rose.
We expect a high level of commercial real estate activity this year as well. A lack of inventory for existing product will continue to drive new development in 2016.
Stuart Kingma, NAI Wisinski of West Michigan
Industrial Strength
The industrial market, in particular, has experienced a shortage of quality product to satisfy the demands of distribution companies from across the area.
The greater Grand Rapids industrial market consists of approximately 115 million square feet. At the end of 2015, the vacancy rate was 4.1 percent. This marks a significant improvement compared with the depths of the Great Recession when the vacancy rate approached 10 percent.
For the first time in years, we are seeing speculative development across all sizes of industrial properties. Lease rates for these speculative buildings are significantly higher than what we have experienced in the recent past due to the relatively high cost of construction. The good news for landlords is that tenants are absorbing the space in these newer and more expensive buildings.
Notable Deals
Nevada-based Switch recently purchased Steelcase’s pyramid-shaped building on the southeast side of Grand Rapids. Switch will house its data center in the facility, which has been vacant for six years. The building spans about 600,000 square feet and once housed office furniture maker Steelcase’s research facility.
It is expected that significant additional infrastructure will be constructed on the site in the next five to 10 years. This is a game changer for West Michigan’s information technology (IT) community.
Switch’s 1,000 clients include eBay, Intel, Dreamworks, HP, Intuit, JP Morgan Chase, Sony, Boeing, Cisco, Google, Amazon and Time Warner, which is expected to bring an influx of IT talent to the region.
This redevelopment project by Switch also will put a longstanding empty office structure to productive use. The project is currently under construction, and it is anticipated that Switch will occupy a portion of the building later this year.
Over the next 10 years, it is estimated that Switch’s investment will approach $5 billion, will create at least 1,000 new IT jobs and keep thousands of local construction trade groups busy over an estimated 10-year construction period.
When finished, the new Switch Michigan facility will be the largest data center campus in the eastern United States and will feature a 2 million square-foot state-of-the-art, high-tech campus in West Michigan. A majority of Switch’s subcontractors will be engaged from the local workforce.
Tanger Makes a Splash
The grand opening of the 350,000-square-foot Tanger Outlets mall in nearby Byron Township in July of last year was a very notable event and has brought significant energy to the US-131 interchange at 84th Street, which is just south of the emerging M-6 corridor.
The opening of the mall, which provided ample new shopping opportunities for the greater West Michigan region, was met with much excitement from retailers and shoppers alike.
The total rentable square feet in the West Michigan retail market is approaching 17 million square feet, and at year-end 2015, the vacancy rate was approximately 10.9 percent.
We expect continued downward pressure on the overall retail vacancy rate this year, but higher vacancies will persist in areas that are past their prime in terms of building type and location.
In addition to the debut of the Tanger Outlets mall, 2015 also saw the opening of Trader Joe’s, Fresh Market, West Elm and Wolfgang Puck, along with a number of other specialty restaurant establishments.
The northeast retail quadrant around the Knapp and East Beltline interchange will continue to fill in this year. Meanwhile, Chick-fil-A and Freddy’s Frozen Custard & Steakburgers are looking for sites in the northeast quadrant.
CBD in Demand
The office market in Grand Rapids also enjoyed good fortune in 2015. The overall vacancy rate at the end of 2015 stood at 9.1 percent, but in the central business district (CBD) the Class A vacancy rate was much lower at 6.2 percent.
While downtown is experiencing a significant amount of new construction, tenant demand remains strong in the redeveloped CBD. The tight space conditions in the downtown office market will be tempered somewhat as new projects come on line.
Parking expenses, which are significant relative to the overall cost of occupancy, will remain a challenge for employers looking to locate downtown. It is estimated that parking rates can account for an excess of $5 per square foot of rentable space.
While the suburban office market recorded positive net absorption during 2015, rental rates remained relatively flat in all four suburban quadrants.
Apartment Sector Shines
The multifamily market in metro Grand Rapids area continues to mirror national trends in terms of vacancy and cap rates. The average rent increased 5.6 percent on a year-over-year basis in the fourth quarter of 2015. At the end of 2015, the occupancy rate exceeded 97 percent, with nearly all product types experiencing positive momentum.
Cap rates continued to fall and approached 6.4 percent as the year came to a close. It will be interesting to see if cap rate compression continues this year. Investors will be keeping a close eye on the movement of interest rates.
Employment Drivers
The seasonally adjusted unemployment rate for the Grand Rapids-Wyoming metropolitan statistical area was 3.1 percent in December 2015 compared with 5 percent nationally for the same period.
Continued strength in the automotive and furniture sectors will propel the industrial and office markets in 2016, and the Switch development will most likely spur a lot of nearby activity for the retail, office and industrial sectors.
— By Stuart Kingma, SIOR, Associate Broker, NAI Wisinski of West Michigan. This article originally appeared in the April 2016 issue of Heartland Real Estate Business.