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Report: commercial real estate shows resiliency

Posted By: Grand Rapids Business Journal (As seen on WZZM TV 13) on August 19, 2022.  

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Despite continued uncertainty in a turbulent market, the state of commercial real estate in West Michigan still shows some flexibility.

“While there are definitely things going on that are outside of our control, whether that be inflation or interest rates rising … the market is healthy,” said David Rapp, principal and senior vice president of investment at Advantage Commercial Real Estate.

Advantage recently released its 2022 Second Quarter Market Trends report outlining key observations for the industrial, office, retail, land and investment sectors.

According to the report, inflation continues to be one of the biggest challenges for the nationwide market, local communities and businesses in every industry. But the outlook for West Michigan remains optimistic, especially for certain markets.

Industrial trends, for example, continue to indicate momentum despite supply chain issues and increased costs for wages and transportation. Manufacturing continues to drive the local economy, and e-commerce and logistics continue to provide new opportunities for investment in the area.

“Industrial has by far been the most active product type in our market,” Rapp said, also noting historically low vacancy rates and consistent demand for land.

The report indicates West Michigan has yet to see a negative impact on lease rates, occupancy percentage or sales volume when it comes to the industrial market. Looking ahead, however, increased caution may go into effect as uncertainty remains a factor for the nationwide economy.

Uncertainty also comes into play for the office sector in West Michigan as many companies continue to adopt a “wait-and-see” approach for a return to the office.

Per the report, others such as Acrisure that were once completely remote are now leading the charge back into the office, prompting other local businesses to reevaluate their plans for the second half of 2022.

For Rapp, office activity in Grand Rapids remains in a period of transition as companies try to discern their own unique needs.

“Downtown was quiet for a while,” he said. “The challenge is that leases and real estate needs continue on their timelines. A lot of companies are trying to figure out what to do with their people. ‘Are you going to work from home? Are we going to make you come back to the office? Do we need as much square footage as we used to? What’s the term on our lease? Can we shift and pivot?’”

Companies currently in the midst of three- to five-year lease terms likely will determine any stability in the market within the near future, according to the report. For now, any drastic changes for Q3 of 2022 appears unlikely.

When it comes to the retail market in West Michigan, the new report from Advantage shows an increase in activity during Q2. The report authors suggest a link between this growth and the return to office for some companies, creating a boost in overall activity in downtown Grand Rapids.

This burst in activity does not reflect an increase in new retail space, however.

“There’s not a lot of development from a retail perspective right now,” Rapp said.

Furthermore, while the first quarterly report from this year anticipated more action from national retailers, the new report indicates uncertainty due to limited availability.

Even with this limited inventory in Grand Rapids, local entrepreneurs still are eager to introduce their concepts to the market, though Rapp noted the demand and challenges are site-specific.

“There are users in the market that want to be in particular well-established retail corridors, and different users are sort of fighting for those sites,” he said. “And when I say they’re fighting for sites, they’re not fighting for vacant land parcels because there really aren’t a lot there. They’re fighting over existing buildings that might be repurposed.”

Looking ahead, the report calls for commercial real estate professionals to exercise creativity to assist businesses with finding ideal sites within West Michigan. At the same time, entrepreneurs with groundbreaking ideas could ensure a healthy retail market in the coming years.

Overlapping all the sectors, the investment market in West Michigan has experienced challenges beyond inflation. High interest rates and stock market volatility are key factors making the market difficult to navigate.

As investors lead with caution while demand remains high, the report expects many properties will be held for the foreseeable future.

“The investment market is definitely something to watch because the interest rate increases have definitely impacted values or are starting to be absorbed into the market. We’re starting to see some properties sit a little bit longer just because the seller’s expectations are higher than what the market can bear based on the new debt market and the interest rate market,” Rapp said.

The report also notes a difference in perception for the reality of land value as an increase has occurred in recent years. Once again, industrial land remains a sought-after development type as the sector experiences growth.

And while uncertainty remains prominent among several recent commercial real estate trends, Rapp does not see caution as a negative approach.

“We don’t oversupply our market in West Michigan, and there’s a lot of reasons that go into that,” he said. “But because we don’t over supply our market, it remains healthy.”