Despite political uncertainty and fears of an impending economic slowdown, commercial real estate and construction stakeholders have faith in the fundamentals of the industry in West Michigan.
As developers, architects and contractors close out 2016 and look toward the new year, they remain unconcerned the local industry will crater anytime soon, even as reports suggest volatility nationally and possible contraction within the Midwest market.
Among industry insiders with a positive attitude is Sam Cummings, managing partner of CWD Real Estate Investment Inc., a Grand Rapids-based development and property management firm. CWD spent much of the past year acquiring high-profile properties in the city’s core downtown business district, in addition to renovating aging office facilities and developing retail properties in West Michigan suburbs.
“We’re optimistic about our hometown,” Cummings told MiBiz. “We’re optimistic but we also pay attention to (real estate) fundamentals. We’re patient and we’re long. 2016 has been a good year and 2017 will be a good year.”
In addition to acquiring the two-building Fifth Third Bancorp. campus for an undisclosed price to the south of Calder Plaza in downtown Grand Rapids, CWD has started exterior work on two other office buildings at 50 Monroe Ave. NW and 250 Monroe Ave. NW. All told, the four buildings account for well over 500,000 square feet of office space.
The CWD executive remains mum on specific plans to market and absorb all that space, or even what the firm’s long-term plans may be. But Cummings is relentlessly positive in noting that users continue to invest in the downtown Grand Rapids core business district and the city’s outlying neighborhoods.
“We’re not in a hurry,” Cummings said of the ongoing renovations. “We want to do the right thing for the long term. For our own pocketbooks, it’s better if (absorption) happens closer to the time we renovate, but we want to get the right uses. People respond to a good product.”
Barring any major unforeseen events, other stakeholders in West Michigan’s commercial real estate industry largely seem to share Cummings’ sense of optimism. To back up that attitude, many of the region’s largest general contracting firms contacted for this report cited record or near-record years in 2016.
While acknowledging they’re fighting off an unprecedented labor shortage, construction firms still largely said they were well ahead of billings from the previous year.
That’s particularly true for Wolverine Building Group. The Grand Rapids-based general contractor spent much of the past year working on large — and in some cases speculative — industrial buildings around the region, according to co-President Curt Mulder. It’s a phenomenon Mulder is quick to note that West Michigan hasn’t experienced in quite some time.
“Manufacturers are bursting at the seams, but in 2015 many weren’t able to pull the trigger,” Mulder told MiBiz. “That made 2016 our largest year. And a lot of that was large work that we started in 2016, but won’t be done until 2017 so that makes 2017 a good year.”
Wolverine Building said its revenue grew from $168 million last year to about $225 million for 2016.
SIGNS OF A PLATEAU
On the whole, the commercial real estate market in West Michigan has experienced rising costs and decreasing vacancies across all sectors, with industrial and multifamily housing growing steadily in the last year — a trend most executives believe will continue.
At the same time, health care and big-box retail presents a bit of a mixed bag, according to Shane Napper, president of construction at Rockford Construction Co. Inc., a Grand Rapids-based general contractor that works nationally.
The company generated a record $523 million in total revenue in 2015, and Napper said Rockford is on track for about the same this year. However, he’s not convinced that pace of growth will continue throughout 2017.
“I feel like the percentage of positive change is going to come down a little bit but still completely be in the positive change realm,” Napper said. “I can start to see what I would say is the bending of the upward (trends). If you look at the Architectural Billings Index and some of the other trending stuff, I think that would tell you the same thing.”
Indeed, the most recent report by the Washington, D.C.-based American Institute of Architects (AIA) predicts further volatility within the industry. The Architectural Billings Index (ABI), which is often described as a leading indicator for construction activity, increased modestly after declining for several months, according the group’s November report.
However, the regional ABI for the Midwest sunk to its lowest level since the end of 2015. Through October this year, the Midwest region showed signs of contraction for six out of the 10 months.
“There was a collective sense of uncertainty throughout the design and construction industry leading up to the presidential election,” AIA Chief Economist Kermit Baker said in a statement. “Hopefully we’ll get a sense of what direction we will be headed once we get a clearer read on how the new administration’s policies might impact the overall economy as well as the construction industry.”
ROAD TO RUIN?
While West Michigan’s construction and development industry remains optimistic, the volatility and uncertainty shown in the AIA findings fall in line with national sentiment cited in a recent Wall Street Journal report.
The report from mid November headlined “Trouble Brewing in Commercial Real Estate” cited that defaults on debt — largely from pre-Great Recession lending — have started to climb in pockets around the United States.
Of the approximately $390 billion in commercial property mortgages overall, about 5.6 percent are more than 60 days late in payments, according to the report.
“I can paint a picture that it could be disastrous, with runaway inflation and high interest rates,” Charlie Bendit, co-chief executive of Taconic Investment Partners LLC, told the WSJ.
But West Michigan’s real estate community, often known for being more conservative than investors in larger markets, largely dismissed those concerns in interviews with MiBiz, noting they have been preparing for the market to shift.
“There are always macro things that can change the climate,” said CWD Real Estate’s Cummings. “We’re on pretty good footing and we’ve weathered two storms. We anticipate adverse conditions.”
Likewise, officials with the state say they’re confident the portfolio of available incentives for developers — mostly in the form of brownfield Tax Increment Financing (TIF) and the Community Revitalization Program (CRP) grants — will remain in place and help tough deals bridge financing gaps.
In the event of a downturn, policymakers have worked to get Michigan on more stable footing than it was eight years ago when the last recession hit, said Katharine Czarnecki, senior vice president of community development with the Michigan Economic Development Corp. (MEDC).
“It all depends on how quickly the state jumps back,” she said. “But people say that hopefully Michigan would be the last in and the first out. We’re trying to position ourselves and handle that as we approach it.”
The combination of high demand, readily available financing and incentives creates an environment for success, according to industry insiders. But Cummings of CWD also notes that executives tend to make significant miscalculations when the industry is at its peak.
“Frankly, it feels like all the stuff we’ve done as a community for 40 years is now paying off,” Cummings said. “I think our biggest challenge is not to screw it up. We need to preserve that culture. People make the biggest mistakes when times are good.”