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West Michigan industrial market stays healthy during pandemic

BY Sunday, August 16, 2020 05:10pm

The industrial sector in West Michigan has been the quickest in the real estate market to bounce back from the pandemic, nearly returning to where it was pre-COVID-19.

That’s according to industry experts who cite the industrial market’s solid position going into the pandemic as contributing to its current relatively healthy status. As well, they note many manufacturing businesses were considered essential throughout the governor’s shutdown order and allowed to remain open. 

In yet other cases, the overseas supply chain disruptions caused by the pandemic could also be creating more of a pull for U.S. companies to reshore production to domestic facilities, experts said. 

Stu Kingma, associate broker for NAI Wisinski of West Michigan, said there’s no question the industrial market is the most healthy commercial real estate sector currently. Retail stores are struggling and business that can be done remotely has largely transitioned away from in-person operations, he said. 

However, most manufacturing work still needs to be done in a large industrial space.

“You can’t build a car in your basement,” Kingma said. “From that perspective, the demand for space is going to remain healthy in the industrial sector.”

Matt Abraham, a senior real estate adviser at Grand Rapids-based First Companies, said the uncertainty stemming from the election year is affecting the industrial real estate market right now more than the pandemic. Every election year brings about a “wait and see” mentality for many operators, he said.

“We will probably see some long-term effects more operationally because of the pandemic,” Abraham said. “The way companies set up their internal workflow and how they manage people in their buildings themselves will change, but I don’t think it’s going to lessen the demand for industrial space.”

Relocating operations to U.S.

COVID-19 also is causing some manufacturers to consider relocating foreign or far-flung production closer to home, increasing local demand in industrial spaces.

“We’ll start to see some supply chains migrate back to the States,” Kingma said. “This has been a real eye opener for some manufacturers with supply chains overseas.”

With the limited industrial space in the West Michigan market, more companies are renewing long-term leases, as well as planning ahead for future expansion, said Dan Bailey, vice president and market leader at Grand Rapids-based Rockford Construction Co. Inc. 

“Because of the actual market trending today and not having full clarity on what global trade looks like in the future, (companies) are making it very flexible to expand here in the future as needed,” Bailey said.

An early example of companies reshoring production happened early on in the pandemic when local companies jumped to manufacture personal protection equipment that was in high demand and typically came from overseas sources.

“We saw adaptations in local companies that had never built face masks before,” Kingma said. “Immediately, the demand was here, so people pivoted and manufactured face masks, face shields and hand sanitizer almost overnight.”

Especially during a pandemic, West Michigan remained a desirable location for a company to expand, given its close proximity to major markets and a good quality of life without the congestion and crowded conditions of places like New York City or Chicago, Abraham said. 

“There are a lot of good fundamental reasons companies decide to relocate here,” he said. “We have public transportation, but it’s not a necessity to use that to get around. It’s not a major metropolitan area so we have a much better ability to social distance.”

Limited space

However, future growth in West Michigan’s industrial market could face some challenges because of a lack of quality facilities that’s persisted in recent years coming out of the Great Recession. 

To that end, much of the industrial market is currently occupied, with a second quarter research report from Colliers International noting a region-wide vacancy rate of just 2.25 percent. Meanwhile, construction of industrial facilities remained flat, a trend that’s expected to continue throughout the third quarter as well. 

Average lease sizes also fell to just 5,000 square feet in the second quarter. 

“Tenants are looking for space with a loading capacity under 10,000 square feet, as well as short- and long-term warehousing,” according to the Colliers report. 

Bailey at Rockford Construction specifically noted West Michigan has limited options for industrial and warehouse facilities. This means companies in West Michigan have the option to build new facilities — which involves a higher cost — or they can look at retrofitting existing facilities with the aid of automation and robotic technology, Bailey said.

“Companies are looking at it both ways and they kind of have to because there is limited space available,” Bailey said. “We did not have a lot of capacity before the pandemic.”

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