GRAND RAPIDS, Mich. -- Advantage Commercial Real Estate says the regional economy in West Michigan is holding steady, despite recent ups and downs.
It released its first quarter Commercial Real Estate report.
In the industrial sector, it finds that businesses are having to strategically navigate rising costs, high interest rates, and evolving demand patterns. A slight uptick in leasing and sales activity in the office sector has occurred since the start of the year. The report says landlords are needing to be more proactive and flexible to fill their spaces. As for retail, there is still strong demand, but suitable spaces have been hard to come by.
Here are more details in a Clark Communications news release:
NOTABLE FINDINGS
- Industrial – weighted average lease rate/SF are at $7.18 NNN ; vacancy rate at 1.60% in Kent and Ottawa County
- Industrial space in Grand Rapids sits at just a 2.5% vacancy rate, starkly lower than the national average of 5.7%
- Office – suburban lease rates are at $15.09; CBD (commercial business district) rates are at $19.54
- Retail- weighted average lease rates/SF are $20.22 NNN
- March CPI inflation year-over-year: 3.1%
INDUSTRIAL
Looking Back
As the first quarter of 2024 kicked off, there was palpable anticipation across the region about any potential market shifts in commercial real estate. In an area where manufacturing forms a significant 21.1% of the gross regional product, attention is naturally drawn to industrial commercial real estate.
Despite recent economic ups and downs, the region is holding steady. Looking back at the last few months, we’ve seen some space-related adjustments amongst Grand Rapids area-based companies. Overall, however businesses are growing, and demand is strong across different sectors.
First Quarter
Subleasing is taking the spotlight this quarter in the middle of a period of right-sizing in the market. Faced with rising costs, high interest rates, and evolving demand patterns, businesses are having to strategically navigate these challenges.
Over recent quarters, a main topic of conversation has been focused on the continual increase in new construction pricing, which is impacted by land costs, steel pricing and increasing labor rates. However, we are now starting to see some moderation. Markets are showing slight signs of easing, especially in construction pricing and labor costs.
The construction of battery plants around Michigan has also been felt in West Michigan, notably the LG Chem “Smart” factory in Holland.
Looking Ahead
As we head into of the second quarter of 2024, we anticipate lease rates to remain stable across the market. We’re closely monitoring the growth of smaller sub-markets around Grand Rapids, where development is spreading into more affordable areas. We expect strong user sales to continue into the foreseeable future.
OFFICE
Looking Back
Despite being somewhat sidelined during the pandemic, the office market has remained steady over the past quarter. We’re seeing a slow but noticeable increase in leasing and sales activity as the needs of office users change.
First Quarter
Though subtle, we’ve noticed a slight uptick in activity since the beginning of 2024. On the leasing front, there’s been an increase in interest this quarter as business leaders are eager to get employees to return to the office.
As more people return to the office, they’re raising the bar on what they expect from their workplace. This shift is changing how landlords and tenants interact, with landlords needing to be more proactive and flexible to fill their spaces.
Currently, many office tenants are operating under lease agreements established before the economic downturn. As a result, tenants are contemplating spaces with modern amenities and may opt for smaller footprints, reflecting the rise of remote work.
Over the past quarter, there has been a shift in how people are using their office spaces. There is a noticeable change in how offices are being seen—not as places you go every day, but as central hubs where the entire team gathers occasionally. This trend is impacting what companies look for in office spaces.
Looking Ahead
As we head into the second quarter of 2024, we anticipate continued growth in both office space sales and leasing activity. We expect to see more employees returning to the office, prompting landlords to enhance amenities to draw them back.
RETAIL
Looking Back
Over the past year, West Michigan’s retail scene has been steady. As we kick off 2024, it feels like déjà vu from the start of 2023: strong demand persists, but suitable spaces are hard to come by. Despite this challenge, the market remains firm, with national brands showing continued interest in our region. In the previous quarter the holiday season saw a flurry of retail activity, leaving us on a high note as we have moved into the new year.
First Quarter
Over the past year, the demand for retail space in our market has remained strong, extending into the first quarter of 2024. While demand for retail space remains high, the limited availability of quality space is driving up lease rates and highlighting the need for innovative solutions to address the shortage of retail space in our market.
Looking Ahead
In the second quarter of 2024, we anticipate that the retail market will continue on its current path. While vacancies are expected to remain relatively scarce throughout the year, we remain optimistic about the ongoing activity in both leasing and sales transactions across the West Michigan retail market.
INVESTMENT
Looking Back
Despite pessimism in the media, West Michigan’s market is still buzzing with activity as buyers and sellers stay on the lookout for opportunities.
First Quarter
Investors are gradually adapting to the current market conditions, which some are considering the new normal. Comparing the federal funds rate over the past 50 years, the current rate of 5.33% in February 2024 is significantly lower than the peak of 19.1% in 1981. Although it’s the highest in a decade, it’s viewed more as a market correction that a cause for concern after experiencing a prolonged time period of what some might consider an unhealthy sub 1% rate.
Sellers are feeling a sense of urgency to take action as their legacy loan terms are nearing expiration. This urgency is compelling sellers to reconsider their pricing strategies to ensure transactions are completed smoothly.
Investment activity in West Michigan is holding steady, with transactions progressing at a moderate pace. In the past quarter, we’ve seen local investors, whether owner-operators or individuals with smaller portfolios, seizing opportunities with sustainable returns. While larger investors may be holding back to seek better cap rates in bigger markets, this cautious approach has been the norm here for some time. There have been several deals with local investors over the past quarter, proving that our market remains vibrant and open for business.
For years, West Michigan has been a reliable market for regional investors, but there’s a growing need for more investment, especially in the office sector. The media might be painting a grim picture of the office market right now, but if you’re an investor, it’s crucial to focus on local dynamics rather than national trends. There’s a genuine demand for improved office spaces, presenting an underutilized opportunity for savvy investors willing to look beyond the noise in suburban areas and downtown.
Looking Ahead
Looking ahead to Q2 of 2024, our outlook for the West Michigan investment market remains optimistic and steady. Our attention will be focused on the activity in Downtown Grand Rapids, where upcoming projects such as the proposed soccer stadium and Acrisure Amphitheater.
LAND
Looking Back
Across West Michigan, vacancy rates in nearly all asset classes remain below national averages. Notably, industrial space in Grand Rapids sits at just a 2.5% vacancy rate, starkly lower than the national average of 5.7%. Progress has also been made in land development during the past quarter, thanks to funds allocated from the Strategic Site Readiness program (SSRP).
First Quarter
Despite ongoing challenges in finding suitable land and navigating municipal regulations, there’s a new surge of activity. One notable development is the progression of SSRP, which has allocated $87.5 million for transformative projects. These funds are aimed at acceleration the development of sites with essential infrastructure, addressing long-standing obstacles like high utility installation costs and conflicting zoning rules.
In our current market, we’re facing significant challenges due to high construction costs, labor expenses, utility fees, and strict zoning rules. Despite ongoing discussions, recent trends show vacancy rates dropping below normal levels, highlighting the urgent need for more development
Michigan’s government has recently cleared the House, aimed at spurring the growth of data centers in Michigan through tax exemptions. The goal is to create more jobs in the data industry across the state.
In the ongoing discussions surrounding residential development, it’s clear that there’s a significant demand for housing in West Michigan. This demand is further fueled by major projects like the LG battery Plant and potential data centers.
Looking Ahead
Looking at the second quarter of 2024, we’re optimistic about the progress we’ll see in highlighted projects like the Strategic Site Readiness Program and the Data Center Bill.
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