Industrial real estate developers, builders brace for slight slowdown in projects

BY Thursday, October 13, 2022 04:16pm

Demand for industrial space for years has outpaced the supply in West Michigan, but commercial real estate experts and developers are expecting the situation to ease as interest rates creep higher.

The big question among many local brokers: How much will the national economy have a negative effect on demand over the next two quarters? 

“The national trends certainly are hinting toward some of the slowdown, but it’s been on such a crazy, rapid expansion pace that it’s probably a healthy thing for the market to be a little more balanced,” said Steven Marcusse, principal and senior vice president at Advantage Commercial Real Estate Services LLC who focuses on industrial properties.

With heightened demand for industrial space, Marcusse expects the local market to remain solid.

“We’re still seeing off-market sales and there are still a few different projects being built or planned for next spring,” he said. “All activity is still going well.”

The total vacancy rate for industrial space was at 3 percent across West Michigan, and as low as 0.7 percent in northeast Grand Rapids for the second quarter of 2022, according to an industrial insight report from brokerage firm JLL Inc. Occupancy gains through the first half of the year reached 2.6 million square feet, with more than 1.8 million square feet of net absorption recorded in the second quarter alone, according to the report. 

“The construction market is in a transition that is likely to accelerate in the months ahead,” Ken Simonson, chief economist at the Associated General Contractors of America, said in a recent statement. “Steeply rising interest rates have crushed demand for single-family housing and threaten developer-financed projects, while newly enacted federal legislation will soon boost investment in power, manufacturing and infrastructure construction. But a pickup in these segments will require improvements in the timely approval of projects and adequate supplies of workers and materials.”

Grand Rapids-based Pioneer Construction Inc. currently is working on several industrial projects in various stages of development. 

“We’re busy and have a good backlog of work so we’re optimistic, but increasing costs are causing some clients to take another look at projects,” said Chris Beckering, executive vice president of Pioneer Construction. “We have not had an outright cancellation, but we have had projects that have been delayed.”

The company has had to get creative to work around the obstacles of long lead times and high construction costs.

“Materials can take a year or longer from order to delivery,” Beckering said. “It’s taking longer than it takes to build an entire project.”

Lead times are coming down on some materials, but are still high for pre-engineered metal and steel, he added, noting the longest lead time is for electrical service panels, which could take up to two years for delivery. Pioneer has been ordering electrical equipment at the very beginning of projects, although construction can still start without them, which isn’t the case for items such as pre-engineered steel components.

“There is no silver bullet, but we are engaging earlier to anticipate potential projects and have changed how we package bids,” Beckering said. “Rather than waiting until the entire project is ready to bid out, we’re breaking it up in chunks. We’re also working with our suppliers more, leveraging buying power and calling in favors.”

Lack of developable land

Regional economic development firm The Right Place Inc. plans to “attack” the low vacancy rate for industrial space by working with construction and development partners, along with the Michigan Economic Development Corp., to identify potential sites for future development opportunities.

“When you combine the increasing construction costs with supply chain issues for those construction materials and a severe lack of available sites to build, you have a problem,” said Tim Mroz, senior vice president of community development at The Right Place.

Finding 50- to 100-acre sites in metro areas is becoming difficult and forcing companies to turn to more rural communities, which also adds the obstacle of creating extensions for utilities like water, sewer and electric, Mroz said. He described a lack of water and sewer infrastructure as a “game-stopping challenge” for industrial projects.

“The current model is if a developer wants water and sewer extended to the site, it is the developer’s responsibility to front that cost,” Mroz said. “There are various models that allow developers to be repaid as future extensions to that line come forth, but that’s a long-term payback that isn’t appealing to most developers.”

In West Michigan, municipalities in the Battle Creek and Big Rapids areas have set aside properties for large-scale industrial projects. Global battery manufacturer Gotion Inc. is eyeing Mecosta County to develop a nearly $4 billion manufacturing facility that could bring more than 4,000 jobs to the area. 

Local officials have worked for the past two decades to lay the groundwork to facilitate a large-scale development at the vacant industrial park in Mecosta County. As well, Fort Custer Industrial Park in Battle Creek has drawn a high level of interest and investment. 

“Our industrial park has been successful over the decades, but we’re starting to get more looks from realtors and people who have not traditionally explored the Battle Creek market,” said Battle Creek Unlimited President and CEO Joe Sobieralski, noting that Fort Custer has about 300-400 acres of property left, although not all of it contiguous. “(Parcel) size and labor are limiting factors, but people know we have utilities.”

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