As 2017 comes to a close, West Michigan’s construction and development industry continues to show signs of strength.
With construction cranes dotting the sky in and around downtown Grand Rapids, industrial users cautiously expanding their facilities and retail going through an “evolutionary” period, the industry’s fundamentals are well positioned for growth in 2018.
That’s according to industry executives who joined MiBiz for a commercial real estate and construction roundtable discussion. Participants included:
- Melissa Collar, partner at Grand Rapids-based law firm Warner Norcross & Judd LLP, which sponsored the roundtable
- Jeffrey Hainer, senior research analyst at the Grand Rapids office of Colliers International Inc.
- Shane Napper, president of construction at Rockford Construction Co. Inc. in Grand Rapids
- John Parker, vice president of project development at Holland-based Elzinga & Volkers Inc., a construction management firm
- Don Shoemaker, principal of Franklin Partners LLC, a development firm based in Grand Rapids and Oak Brook, Ill.
Here are some highlights of the discussion.
From a high-level perspective, how would you describe 2017?
Napper: From a Rockford Construction perspective, we’ve had a strong 2017 — not really much different than 2016. All the segment markets aren’t dramatically different. We have seen a shift in how people are thinking about retail and the delivery around it. It’s just a different delivery, it’s not no delivery. So I think that thought process stays just as strong.
Hainer: In January (of 2017), we had a lot of clients asking, ‘When’s the next downturn? When’s the next bubble? What’s the next bubble?’ We boldly predicted that ’17 was going to be another strong year and maybe into ’18 we’d start to feel that. We’ve felt very strongly about ’17, and we feel very strongly about ’18 as well. We have record low vacancy rates across the board in industrial, office and retail, and a lot of outside interest from investors. The corner of Main and Main for retail is as hot as it’s ever been. We’re seeing record high rental ratings, record high occupancy ratings. Industrial is strong. We’ve seen a fair amount of construction, just not as much as the market probably needs. That’s because of constraining factors that we all are aware of, but that doesn’t mean the demand isn’t there.
What has the new construction looked like this year?
Hainer: We’re seeing a lot of companies kind of building on to what they have existing. If there’s any (speculative construction) it’s ‘we need 20,000 (square feet). Let’s build 50,000 and then figure out a solution for the balance until we need to expand into it.’ Pure spec is still relatively scarce.
With new construction, are the constraints the availability of labor and the overall cost of building?
Hainer: Yeah, it’s cost. It’s a conservative community. You have a company that makes widgets and they’re not intimately involved in the real estate market. They look at what it costs to build a new building versus what it costs to either add on to their building or try to find something else that works. They’d rather maybe invest in automation technology to be more efficient with the space they have, rather than spending their dollars on new real estate. That’s not to say we’re not seeing any construction. We definitely still are, just because it’s that good of a market right now.
Napper: The swing toward automation and technology continues to grow exponentially. In regards to industrial space, I would echo his comment, which is we’re (being asked) to come back into a lot of spaces and consolidate based on fewer people inside of a particular square footage of space and more automation. It’s then a lot of renovation costs associated with taking the same 50,000-square-foot box and trying to make it more efficient. The flip side of the coin is there’s a lot of industrial going up as well. So I think it’s a both/and. I think the demand of the both/and is what’s driving it. I don’t think either can satisfy all.
Parker: The conservatism of our area is interesting. We see a lot of projects where we’ll go through a level of pre-construction planning and estimating and then they’ll get shelved because owners will just go, ‘Well, I’m just going to wait and see.’ What’s interesting about that, though, is they don’t understand that this wave is still coming. So whatever capacity they might have been able to take advantage of, they lost, at least right now. There is still really strong demand for projects that are going to start next spring. What we see it doing is maybe stretching out a good time longer, because I think these projects that are up on the shelf are going to come off. I think people are feeling pretty confident.
How does the construction pipeline look heading into 2018?
Napper: I would say the pipeline currently looks even stronger going into ’18 than it did going into ’17, and not as strong as ’16. ’17 looked the weakest going in, but produced just as well. I think ’18 is definitely stronger than ’17 going in.
Parker: Going into ’17, that was probably our strongest backlog in recent corporate history. So for us, it was really focused on right-sizing the company for that growth that was coming, that backlog that was coming. We will know somewhat what our demand is going to be six to 12 months before, so it’s about, ‘What can we do to create a really good place to work and try to attract the best talent?’ Because we are still really short on that.
What does that mean going into the new year?
Parker: I think as we go into ’18, it’s really being smart about what we take on. Because that demand’s really high, there’s lots of people out there looking to do lots of things. (We need to ask:) Does this really fit our business? Does it fit what we’re good at? Are we getting ourselves into trouble with speculative projects that are just going to be really tough, and really strained, and take resources away from those good ones?
Collar: I see a lot of business owners — whether it’s office, (or) some retailers — trying to find how to use their space more efficiently. They’re putting people in smaller spaces, but trying to create a different atmosphere. We hear all the time about collaboration, and in some of the businesses, it probably works better than others, but it seems to be a theme across the board.
Parker: Or just attracting new talent too, freshening up their space to attract, as there’s a talent gulf out there. All things being equal, trying to be a cool place for people to work is (driving) a lot of the renovation work that we’re seeing.
Napper: I would agree. In almost every segment — health care, education, industrial, retail, office — people are trying to find a way to maximize efficiency in their current space. A lot of this thought process is the ability to share space. It’s been interesting to watch the culture of some of our long-term Grand Rapidians go through that shift.
How is that culture shift playing out in the development of new office space?
Shoemaker: We’ve owned a lot of office buildings built in the ’80s, and every one has one big issue: There’s not enough parking for the new users that are going to come in. We have Kellogg’s at 5300 Patterson. They have 600 people in 60,000 feet. We have Priceline on Eastern. They have 1,200 people packed in. … But there’s a room where there’s a foosball table and bean bag chairs, there’s lots of conference rooms. … (The point is) focusing more on price per employee per year than on price per foot. We are looking to build a new building at the Studio Park project (a mixed-use movie theater-led project in Grand Rapids) and really are going to make that message. Just focus on your price per employee per year because it’s going to be a very efficient space, not the price per foot. The price per employee per year should be the focus, especially with the higher density offices.
Napper: That’s exactly right, especially if you’re going to do a true ROI from an office environment. True ROIs are based on your assets, (which) in this particular case — in most places — is people.
Hainer: Especially with 99 Monroe, (a renovated downtown Grand Rapids office building Franklin Partners sold in 2016), they really had that mindset of, ‘We’re going to put a lot of money into this to make it a place where companies are going to want to have their offices to attract and retain talent.’ It’s not just about the bottom line anymore. It’s really about providing a space that’s going to get us the best talent.
Shoemaker: The bar keeps getting raised in bigger markets because it’s so competitive and there is a lot of new development. The rooftop decks get much more elaborate. The fitness centers turn into … this luxury fitness center. It also fits within the higher density office space that buildings should provide more amenities. When we did 25 Ottawa, we had a room in back by the alley, and my partner, Ray, decided we should convert that into a bike room. We had a bike repair station in there and stuff. I thought, ‘That’s a waste of time. How about storage?’(But) when Spectrum moved their I.T. group in there and we gave the open house tours, they couldn’t wait to see the bike room. They thought it was so cool.
What’s next as that culture shift plays out?
Shoemaker: I’m not sure what the next thing is, but it’s continually focusing on how do we differentiate our product, how do we make it better. I think there will be peer pressure in the Grand Rapids market because of Miller Johnson (which moved into Arena Place), because of Warner Norcross moving to new, bright, open, inviting spaces.
What role does talent attraction play in how companies look at their spaces?
Shoemaker: The challenge in this world right now, in the office world, is how do we hire and retain. We’re constantly looking at what’s the technology in the building. It’s always changing and I think you pick up on it more in markets where there’s more competitive development because people have to do it. … You just try to do things, because … if you need 20,000 feet and go look at 20 buildings, how do they pick your building? … When we bought 99 Monroe and I met with the senior office brokers in town, they all said, ‘You’re foolish. You’ll never get that rent. The Dutch won’t pay it.’ The Dutch will pay it if it’s worth it.
Collar: Yes, exactly. … You see all this downtown development, you see the mixed-use and all the amenities that come with it. I think that’s what attracts, but it also is what creates … some of the parking issues, because we have a higher density use and so forth. I think it’s a good problem in many respects, because it shows that we’re a growing community. We’re a community of problem solvers. We’re going to figure out this parking situation. There’s many alternatives to that, but we’re bringing in great talent because we’re trying to think creatively on how to develop these pieces of property that make people want to stay in a very mobile society.
Shoemaker: That’s a really good point. Cities that aren’t growing don’t have parking problems.
Parker: I think there’s something to be said about not being on the bleeding edge of something too, (about) being able to see a little bit of what’s happening and watch people. You can take a misstep and then we get the benefit of not doing that. I think … riverfront development is a great one: Look to some other places — good and bad — and go, ‘What were the pitfalls?’ Again, I think it’s a feather in our cap sometimes, that conservative step back. Let’s watch a little bit and then let’s do it the right way or do it our way.
In what way is technology affecting real estate development and construction?
Napper: I look at Nest controls of HVAC units. That was cutting edge two years ago. If you had a Nest, you thought you were just like the cat’s meow. If you don’t put it in a $100,000 house now, they want to know what happened to their Nest controls. That’s how fast it’s moved — from being the highest damn thing you could have on an app on your phone, to now (it’s) just … base. So that’s one of the challenges in the development and construction world as they think about rents and we think about building: Pretty soon, amenities go to the base. They move so fast, that expectation you have.
Shoemaker: I think hospitality trumps all of it in the end. It’s a little harder to list on a brochure, but certainly in multi-tenant buildings (it’s important). Julie Maue in our office did a great job of creating a community in an office building. Everybody knows each other. Everybody likes each other. They’re treated like clients. No one’s ever told, ‘Go read your lease.’ Those things matter as much as … the amenities and what you build in the space.
West Michigan –– and Grand Rapids specifically –– has all of a sudden caught the attention of a lot of out-of-market investors, particularly on the institutional side. Do the current market fundamentals continue to favor that outside interest?
Shoemaker: We sold two properties to institutional investors out of New York who were seeking a little better yield than they can get in the major markets. You should see it in every marketing piece on everything in Grand Rapids: number one ranked this, top four this, top five this. It’s startling how Grand Rapids is ranked in growth and lifestyle. It’s still undiscovered, but it’s not. We came here for the first time in 1997 and I couldn’t have told you what the difference was in Grand Rapids and any other city in Michigan. But it’s drastically different. That’s getting more and more attention, I think. You’ll see more and more institutional investors coming here. So definitely, the positive news here: I’ve noticed it so much more in ’17 than I have prior. I would say way more.
How are the real estate and construction sectors dealing with the changing dynamic for retail, which has been going through some major changes this year?
Napper: I’m pretty close to it. Obviously, it’s a big part of our business. I would say generally, things get overemphasized in a lot of cases. I think the thought of the death of retail, as some people might call it, that feels a little bit overstated. I mean, to take retail from where it is today to zero doesn’t make any sense. You can’t take it to zero, (but) it’s evolving. … I would say it is one of the most changing environments that we need to react to the quickest. There might be others, but retail for sure is in that.
How is Rockford Construction reacting?
Napper: I don’t see it much different than what we just talked about in the other segments: They’re just trying to get more dense. They’re trying to figure out ways to have less square footage and deliver more, and deliver more of the things that people want, and maybe less of the things that people don’t want. Obviously, with Bridge Street Market (a small-format Meijer store concept), they’re going down to roughly a 40,000-square-foot floor plate, and they’ve been anywhere from 120s to 200,000 square feet. … They will be successful in that format, but they have to figure it out. They will have to figure out what people want, and what product to have, and those types of things. (The industry is) evolving tremendously around technology, but you still need the product. The product isn’t going away. It isn’t as if all of a sudden we don’t need tomatoes. Just maybe how we receive them, or maybe how we want to receive them has changed. But the tomatoes don’t go away. So when people said retail was dead, you still need to buy tomatoes. So unless you’re going to grow them yourself, we’re buying them from somebody. Thus, it’s retail.
Collar: Haven’t we seen this in history though? If you think about how retail started … you have the little downtown market, and you have the downtown pharmacy and the soda shop. You had this nice downtown area. … People talked about what Monroe Mall was like before I moved here 24 years ago. It had a vibrant retail area, I’m told. Then you saw this exodus of all these retailers leaving and going into bigger (and) bigger (spaces). At the same time, we were all going into bigger homes and bigger offices. Everything was big, and let’s sprawl. Now … people want the experience of retail. I don’t want to go into this huge area, unless of course there’s some economic advantage. … I want to go somewhere that looks nice, that’s competitive. Local is really, really nice.
Are we going to see more of a shift to where the brick-and-mortar stores serve as more of a showroom and then people just buy online?
Hainer: I think that’s kind of the trend that we’ve seen. Inventory on premise has shrunk, because you can have one of everything rather than 15 of everything. They want to try it on, then they’re going to go home and they can buy it online. Logistics start getting more efficient, and so price points can come down. It’s more efficient to do it that way, but that still keeps a brick-and-mortar store relevant, to go touch and feel and look at the product.
Parker: I joke about Best Buy is Amazon’s show room, basically. So you go there, mess around with stuff, and then go home and shop for it. I don’t know how you keep a customer from (doing that). They can go experience it in your showroom, but then go out to shop online.
Hainer: I think that’s why we see these big boxes closing. I mean, Sears was a 350,000-square-foot showroom with 50 different lawnmowers there. Now you can go see one and go buy it online. That big box that Sears was in is now seven other retailers, including a department store that’s only 90,000 square feet. So they’re able to shrink that footprint to consolidate things, but still keep that customer shopping within the brand.
What options do landlords in less-than-prime areas have when it comes to their retail holdings?
Napper: Alternative, more destination-oriented things. You see pools go in, and people go take their kids to learn to swim in shopping centers. You see gyms going in, trampoline parks. It’s something that you’re going there because you want to go there. You’re not stopping in because you’re going by. Those things typically … can’t pay as much rent. They reflect in the demand for those spaces, but it’s getting creative. I see the de-malling that’s gone on around here very successfully. It makes sense, because if I needed something, now I might actually pop down onto 28th Street, because it’s easy now. It’s not park and walk across the parking lot of the mall.
Collar: That is something that shows exactly how local does so well, that service that they offer. If you have a short period of time, you can call ahead and say I need these items and they have them ready for you. They offer you a beverage and they say, ‘What else can we do for you? Oh, and we have on-site alterations.’ … It makes you want to come back.
Given that The Right Place and other partners submitted a proposal to bring Amazon’s second headquarters to the region, is Grand Rapids ready for a corporate attraction project of such magnitude?
Napper: I think every big opportunity drives opportunity for growth. Personally, as I look at it, … this type of process brings up things. … I think it brings things through that we do very well, so we don’t want to forget those. And I think it brings up deficiencies, which I think is also good. You can’t continue to grow if you don’t want to address some of the problematic areas. Big opportunities like that, I think, have shown some opportunity for growth. It was a good check-up on, ‘how are we really doing?’
Parker: Growth just to grow can be a risk, too. It was a great opportunity to get everybody together and look and point out some of these things. But what can we learn from that and take and apply to these (other opportunities)? Amazon is a huge company. There’s a lot of really large, nice companies that are looking for places to relocate to. … These mid- to large-size companies that want to relocate here are going to be great for all the demands on the things that we want to develop and things that are being built here, too. … I think we’ve got to be careful not to chase the really shiny stuff. Because there’s a lot of good stuff going on that maybe is just under the radar, less competitive, maybe won’t stretch the incentive systems as much as something like an Amazon might, where we start giving away the farm to attract these things. Then we put undue stress on our communities as well.
Collar: That’s such a good point. We’ve been quite diversified in our businesses in the West Michigan area. I think that tends to help us in those down times of our economy if you’ve got the diversification. So choosing a really, really large great company is absolutely something we should be doing, but we can’t forget about what the rest of our business environment is here.
Does it hurt our downtown that many of our large, legacy companies tend to be headquartered in the suburbs?
Shoemaker: Yes. I’ve heard John Wheeler (a developer and executive at Orion Construction) talk about how he wants to build a 30-story building downtown and get one of these companies to move downtown. I do too. Driving into the city, the skyline’s great. It’s lacking a 30-story building that has a big corporation’s name on top of it, I think. Does it need it? No, but it would be kind of the next step, I think, for the city.
Workforce issues have been discussed for years in the construction industry. Given all the various talent initiatives, are we seeing any progress?
Napper: (We’re) still at a major deficit, just as a baseline, of skilled trades. We had a mass exodus of skilled trades, and (we’re) trying to get people back. It’s difficult. Exits are always traditionally a lot more expeditious than entering — it is in any thought process of life, generally. I would say, at least from my seat, we still need alignment. What I mean by that is we’ve got a lot of people working individually, in my opinion, still. I think our community could still come together a little bit better. We all could play a part. I think we all have the right mindset, but I still feel like there’s a lot of side roles or segmented things, through our education system, through workforce development.
Parker: I think the other piece of this (is) the trade contractors need to really look at the way they operate. Are they running their business in a way that people want to go work for them? The job site can be a great place to work, full of educational opportunities and growth, and it can be a terrible place to work if people are running it the wrong way. Why would somebody want to go do that? We’re asking people to go out in 20 degree weather and do hard manual labor. So what are the other things that businesses can do to make themselves great places to work? It’s going to take everybody. I love the alignment analogy, and the umbrella, because I do think there’s a lot of different things (happening). I don’t think unionization is the umbrella.