Vacant land plays growing role in West Michigan real estate

BY Sunday, December 09, 2018 04:24pm

 

With vacancy rates across all commercial real estate sectors at near record lows in West Michigan, industry executives say buyers have increasingly turned their attention to vacant land.

However, the mix of zoning and land-use regulations in place across the region’s municipalities, coupled with rising construction and land acquisition costs, have led to challenges in finding the right land and launching a successful development, according to commercial real estate brokers. 

“You can drive around and look at all the land that’s out there and think that we can expand here and there,” said David Rapp, an associate vice president focused on the real estate investment market in the Grand Rapids office of Colliers International Inc., a commercial brokerage. 

But the reality is quite different, given the different land use and zoning policies in place from one municipality to the next, he said. 

“They all want to grow at a different pace. … Some (communities) want no growth,” Rapp said. 

Still, vacant land deals appear to be making an impact and alleviating some of the pent-up demand for new construction across sectors such as office, retail, industrial and multifamily. 

A recent report from Colliers identified 53 commercial projects totalling more than 3.6 million square feet being built on previously vacant sites. The Colliers report also included 13 multifamily housing projects with more than 1,900 residential units in the pipeline. 

“Coming out of the downturn –– since we weren’t adding any housing stock, we weren’t adding any new retail corridors –– there’s a little bit of catch-up going on with the population and catching up from a residential standpoint,” Rapp said. “We need to build a lot of product in order to create new needs in the market. We’re doing that. It doesn’t happen overnight.”

Particularly as vacancy hovers around 5 percent for existing buildings in the industrial market across West Michigan, commercial real estate brokers expect the demand for vacant land to continue. 

Stu Kingma, an industrial broker with NAI Wisinski of West Michigan, said vacant land transactions for new industrial space have been on the uptick for a number of years as the region’s automotive and furniture suppliers expanded coming out of the Great Recession. 

That said, Kingma notes the velocity of his land transactions has sputtered in recent months as the cost of construction and the needed lead times “can be an objection.” 

Nonetheless, he sees many manufacturers and other industrial users putting those objections aside amid mounting needs to expand. 

“The opportunity cost for not doing it far outweighs the cost,” Kingma said, adding that land held little value as West Michigan dug itself out of the Great Recession. “For a long time, buildings were on sale. When buildings were on sale, land wasn’t desirable.”

Lack of land?

Some evidence suggests that high construction costs and other factors are putting a damper on new development in the region. The Colliers report, citing data from the National Association of Homebuilders, notes that building permits in the Grand Rapids-Wyoming metropolitan area decreased 37 percent year-over-year from July 2017 to July 2018, compared with a 7-percent gain nationwide. 

Jeff Hainer, a senior research analyst with Colliers in Grand Rapids, pointed to the cost of construction and lack of quality sites as the core reason for that sharp decrease, adding that the overall cost per acre for land also has dropped. 

“I don’t think that is due to decreased value. I think that is because what is being transacted is just less desirable land (because the high-value stuff is already gone),” Hainer wrote in an email to MiBiz

However, real estate developers counter the “lack of available land” comes down to a matter of degrees. Speaking specifically about the Grand Rapids central business district and building new office space, developer John Wheeler recently told MiBiz he believes vacant land and other infill sites around downtown provide the best possibilities for new projects. 

“It’s not like we’re running out of land. We’re not New York City. That’s the good news. We’re not short on land inventory,” said Wheeler, president of Grand Rapids-based Orion Real Estate Solutions LLC. “What we’re short on is a company willing to bring down its heart and soul — its employees — into our downtown community and make the commitment to downtown.”

The Amazon effect

Vacant land played a critical role in what is perhaps the West Michigan region’s most high-profile new construction project. 

In June, developers representing Amazon.com Inc. closed on the purchase of 315 acres in Gaines Township from Steelcase Inc. to build an 850,000-square-foot distribution center. 

Property records show the new landowner paid $8.3 million for the land in southern Kent County, which Colliers’ Hainer called a “high premium,” noting that few tracts that large remain available in the region. 

To Rapp, that lack of large-scale available space could present future challenges given the demands for new entrants to the market. 

“As we looked at sites from a site-selection standpoint, there just aren’t many sites that can accommodate that size of a building and move at the pace that we needed,” Rapp said, referring to the location of the future Amazon facility. “There’s more users like that looking around. There are going to be future needs for larger buildings like that as Grand Rapids continues to grow and expand.” 


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