Real estate markets adjusting to ‘new normal’

Advantage Commercial Real Estate recently released its mid-year market trend reports for 2021 showing that industrial real estate is meeting consumer demands despite high construction costs. Meanwhile, West Michigan retail and office businesses are still adapting, but some post-pandemic changes may remain.

Advantage counted dozens of industrial projects currently under construction this year. Companies showed continued interest in West Michigan because of its location, business-friendly incentives, skilled workforce, and the overall modest cost of living.

“We have less than 3% inventory in the warehouse area in West Michigan,” said Mark Ansara, managing principal at Advantage. “As soon as it is built, it will be rented out. If you are looking in the 10,000 to 100,000 square foot market, you will have a hard time finding. “

The average days on the market for commercial rental space fell by 15% from Q1 to Q2 this year. The number of signed leases rose in the first half of this year by 54% compared to the same period last year. In addition, the number of sales transactions has more than doubled; at the same time, the vacancy rate continued to shrink to below 3%.

According to Advantage, the reason for this surge in industrial activity is the demand for goods. While the demand for goods didn’t really change during COVID-19, the way those goods got to consumers changed. Online shopping became ubiquitous as people stayed at home, and grew 39% year over year in the US. In order to fulfill these online orders promptly, new sales networks had to be planned.

“The construction costs are extremely high and lead times are longer. However, the demand in our market is so great that new builds are still taking place, ”said Jeff Hainer, Research Director of Advantage. “Land is drawn faster. This type of property is so valuable that people know that the only solution to meeting the demand is to create a supply. They are willing to pay more for land and are willing to pay the higher construction and labor costs for it. “

Lead times and construction costs are the greatest challenges for industrial users and developers today. Advantage reported ongoing difficulties domestically and internationally with wood and steel production, as well as supply chain issues and international tariffs. These factors contributed to the long delays and inflated prices. Increased government investment in infrastructure projects has also exacerbated this, the report said.

From a retail perspective, the biggest inhibiting factor in the market in the first half of 2021 was the lack of employees willing to fill vacancies. But some sub-markets do better than others.

“In general, when it comes to shopping, these types of retailers are not as bad for employees as they are for the hospitality industry,” said Ansara. “We are entering the critical holiday season, which usually starts from September to October. As far as I understand they are still pretty good. Gastronomy and hospitality are the challenges. You can see that a minimum number of people are signing up for hundreds of jobs. “

To date, the federal government has allocated over $ 4.55 trillion in budget to help individuals and families through the pandemic. With childcare costs skyrocketing and the minimum wage still lagging, Advantage says many people will not find themselves in a worse financial position by taking a low-wage retail job.

2.7% of all workers left their jobs voluntarily in April, the highest rate since the Bureau of Labor Statistics began collecting statistics.

Retailers learned some new tricks during the pandemic shutdown. Many have been forced to switch to online ordering and either contactless roadside pickup, drive through, or delivery.

Some restaurants with additional capacity in their kitchens have started to essentially split their facilities into other delivery-only concepts. Despite the ability to serve a dining room full of customers, many choose to keep the pandemic-era models they created and keep these dining rooms closed mainly for staffing reasons.

Examples of these “ghost kitchens” in Grand Rapids include Blacklist Bagels, 9th Street Steaks, Pronto Pasta, Li Grand Zombi, and the recently announced opening of Mitten Pizza Co. in Rockford – none of which have a physical dining room, just a rented kitchen.

Many West Michigan retailers, both local and national, are pushing their plans for new openings. Chick-fil-A is building a new store on the southeast corner of Lake Michigan Drive and Wilson Avenue NW in Standale to open in September. Dollar General’s new DGX concept opened its first local location in downtown 111 Lyon St. NW. A 34,000-square-foot Total Wine and More opened on 28th Street SE in July. AutoZone is building a new 38,000-square-foot “mega-hub” store in Wyoming that will open in August.

The main question surrounding the current office market is, “What will the new normal be?” Unsurprisingly, most employees quickly adjusted to the pandemic. The use of technology accelerated and most employees quickly settled in their home offices. Employees found that the flexibility of working remotely enabled them to achieve better work-life balance, and many even found their productivity increased – and employers agreed.

“At the moment there are so many variables, but we’ve seen that every company is a little different,” said Hainer. “Across the board, it’s almost safe to say that traditional office use and environment has changed. People who figured out how to work from home continued to do so. Some employers want their workers back, but they also want to make them happy. When the job is done, they are ready to take it into account, because now there is such a talent shortage – especially in retail, but also in the office world. “

In West Michigan, the average rental size declined 23% in 2020 compared to 2019, showing that tenants were reluctant to commit to large amounts of space while there was so much uncertainty during the closure. Rental rates have decreased somewhat and vacancies have increased as some tenants either let their leases expire or are consolidated / downsized. Some with newly discovered unused space were able to sublet part of their space, which did not have a net effect on vacancy.

However, traditional offices are not out of date. People who used to work remotely itch to come back because they miss this social interaction, Hainer said.

“People don’t want to be stuck in their house all the time, but they have families and are still discovering the new world we live in,” said Hainer. “In the second half of this year, I think the office market will find its place. Activity is in progress. People come back to the office. “

“I can tell you that people are returning to the office,” said Ansara. “You may not go back to the office that often.”

Spectrum Health is a prime example of what the new normal is likely to look like. The healthcare system is the largest employer in Grand Rapids with more than 25,000 employees across the area and approximately 1,500 in office-related positions downtown.

Although uncertainty still prevails, Spectrum is in the process of consolidating its leases from across the city into a new center of transformation under construction on North Monroe Avenue. The development will accommodate 1,200 employees and is expected to save more than $ 15 million in annual rent. In addition, Spectrum is committed to offering these employees flexible work opportunities.