West Michigan commercial real estate experts see slowly improving activity in retail and office markets that were particularly harmed by remote work and talent shortages during the COVID-19 pandemic.
“The two slowest things to rebound will be office and retail because one feeds off the other,” said Mark Ansara, managing principal at Advantage Commercial Real Estate LLC. “If you don’t have the butts in the seats in offices, the retail isn’t going to thrive. And if you don’t have enough employees working at retail and restaurants downtown, people won’t be as likely to want to go back to the office.”
Still, deal flow remains intact and West Michigan’s office and retail markets are faring better at this point than expected, Ansara said. As of June 2021, West Michigan had a 40-percent increase in year-over-year retail leases, according to Advantage Commercial Real Estate’s 2021 mid-year market trend report.
Meanwhile, West Michigan’s office space vacancy rate has held steady and ended the second quarter at 9.5 percent, according to Colliers International’s quarterly office report for Grand Rapids.
“I think (office) activity will start to increase a little bit, but we’re nowhere near to pre-COVID levels,” said Gary Albrecht, a principal and senior vice president at Advantage Commercial Real Estate. “I don’t think we’re in a position like the economic crisis of 2008-2009, though, because people are managing. It’s just an office world where we don’t know how it’s going to work yet.”
Labor challenges also mean employers may be more willing to accommodate workers who may not want to resume in-person work at an office, Albrecht added.
Michigan’s 5 percent unemployment rate in June was unchanged from the previous month. While it’s still above the roughly 4 percent jobless rate pre-pandemic, unemployment is a fraction of the 14.8 percent rate in June 2020.
On the retail side, 88 percent of Michigan hospitality companies are operating at inadequate staffing levels, according to a recent survey of Michigan Restaurant & Lodging Association members. More than four out of five of the survey respondents are operating at least 10-percent below full staffing levels, and nearly 80 percent of restaurant and hotel operators reported closing early or for certain parts of the day because of low staffing levels.
“If you can’t staff your business, you’re not going to build, and if you can’t get your store built or remodeled, then it causes delays,” said Earl Clements, senior vice president of Colliers International’s West Michigan office. “Hiring someone now costs so much more because you have to entice them to come work for you.”
The talent shortage, high prices and long lead times for raw materials, and the coronavirus delta variant are all likely affecting timelines of projects next year and into 2023, particularly for new construction, Clements said. He also said the continuation of expanded unemployment benefits has exacerbated the labor shortage.
The June 2021 billings index report issued by the American Institute of Architects was at 57.1, just below the May 2021 billings index at 58.5. Slightly fewer firms reported an increase in billings in June than May, but the current pace of billings growth is near the highest levels ever seen, according to the AIA.
Firms are reporting an average six-and-a-half-month backlog for projects, their highest in two years, following an average five-month backlog at the start of the COVID-19 pandemic. Some firms have raised concerns about their ability to meet the increased workload as they struggle to fill open positions, according to the AIA.
Meanwhile, retail has continued to perform well in high-traffic areas such as East Beltline Avenue and anywhere within a half-mile radius of 28th Street in Grand Rapids, Clements said.
“There are (retail) deals getting done,” Ansara said. “However, inventory is short and we don’t have a lot of good inventory, which is putting a lot of good retailers on the sidelines until there is something they want.”
Back to school
West Michigan real estate advisers are waiting to see whether the start of the upcoming school year will bring a positive effect on employees returning to work and resuming more of their pre-pandemic routines.
“We haven’t had normalcy in almost two years now, so getting kids back to school can be a positive for every industry,” Ansara said.
New office space construction is generally on pause right now, but in-person office work is expected to increase with the start of the school year, Albrecht said.
“A phased-in approach will start this fall with kids going back to school,” Albrecht said. “We’re not just going to flip the switch from day one with 100 percent of employees back. Companies are largely planning on staggering employees for the larger local entities in West Michigan.”
Albrecht has also seen trends in buildings with multiple tenants shifting or swapping spaces based on their square footage needs. Smaller companies also appear more eager to return to the office compared to larger companies that are generally avoiding long-term lease renewals right now, Albrecht said.
“I do think we’ll potentially start to see more long-term leases — we are at least seeing a little more willingness to explore long-term lease options,” he said. “The overall theme is: I don’t think the office market is taking a step back. I think it’s inching toward a more positive outlook. We’ll see what the fall brings and if the surge keeps happening.”