Talent, financing remain hurdles for West Michigan commercial real … – Crain’s Grand Rapids Business

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West Michigan construction and commercial real estate experts expect a slight slowdown for most new projects and deals to continue into 2024, citing the rising cost of capital and tight talent pool in the construction industry. 

The American Institute of Architects’ (AIA) monthly billing index — the leading indicator of the health of the construction industry — has been on the decline, with a score of 44.8 for September, which marked the lowest score reported since December 2020. A score below 50 is considered a negative indicator. 

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Business conditions have softened in every region of the country, but architecture firms in the Midwest appear to be faring better, reporting the highest average score in September at 49.3. 

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Jenny Waugh, vice president of sales and marketing for Cascade Township-based architecture and engineering firm Fishbeck, said her firm still has an “incredible backlog” made up of a healthy number of infrastructure projects fueled by state, local and federal funding. 

“We’re still in the West Michigan bubble, and we still have really good relationships with our banks and I see people still getting funding,” Waugh said during a Crain’s Grand Rapids Business real estate outlook event on Nov. 8. “But if you leave the West Michigan bubble, it’s much harder to get a bank to finance your project. We see that in the other regions where we work, especially when you go out west — projects just aren’t getting financed. It makes a difference when a project can get any federal or state funding, or incentives like (tax increment financing) or brownfield, those are moving forward.”

Financing hurdles are causing more developers to look for creative ways to find gap funding through incentives, said Brad Laackman, CEO of Grand Rapids-based Honor Construction and partner at Victory Development Group. Laakman said his firm and others in the area have already begun to feel the slowdown. 

“We’ve absolutely seen, in the second half of this year, a slowdown of projects,” Laackman said during the outlook event. “It’s very hard to get those senior loans to do those things to make it all work and still be conservative enough to bring a project to fruition and build it up. So that has kind of rippled through the industry and definitely slowed us down. We haven’t seen cancellations of projects, but we’ve seen a lot of shelving.”

Waugh said the economic headwinds are causing more developers to buy up property and conduct preliminary environmental studies and pre-construction activities but then sit on projects.

The Crain’s Grand Rapids Business Power Breakfast on commercial real estate featured Brad Laackman of Honor Construction, Jenny Waugh of Fishbeck and John Kuiper of Advantage Commercial Real Estate. Credit: Crain’s Grand Rapids Business staff

Labor concerns

On top of financing obstacles, Waugh, Laackman and recent data from the Associated General Contractors of America (AGC) indicate that the struggle to fill open construction, engineering and architecture positions is the biggest issue the industry is facing right now. 

The number of people employed in the construction industry in Michigan in July was up by 8,200, a 4.5% increase, from last year, according to the latest U.S. Census Bureau data analyzed by AGC. Even so, contractors are struggling to fill positions, with 85% of AGC members reporting in a September survey that they had a hard time filling hourly craft positions.

“We can have as many apprentices as we need right now and build that up, but there’s still this big gap of people who can’t run a crew on a job site,” Laackman said. “We’re seeing that turn into subcontractors of subcontractors on site and a lack of control in leadership and management of quality on site. So labor worries me the most, wherever the economy is, it’s just a lack of talent in that middle, crew chief level.”

While Fishbeck has 700 employees and grew its staff by 22% this year, there still is a lack of engineers to hire, Waugh said. More engineers are retiring than the number of people graduating from the field, she added.

Industrial property
A development-ready industrial site south of Grand Rapids. Credit: Courtesy of Brian Silvernail, Byron Center Real Estate

Industrial strength

Meanwhile, the industrial market continues to outpace every other market segment in West Michigan, though a small lull is expected in that sector as well, said John Kuiper, CEO and principal of Advantage Commercial Real Estate.

“I do anticipate a little bit of a slowdown, but we have to put it in context,” Kuiper said during the outlook event. “Not only in West Michigan, but across the country, the industrial markets have grown at almost two times the normal rate for the last three or four years. Now it’s kind of normalizing back to what it historically was.”

Five years ago, a typical vacancy rate for the industrial market in the region was 8% to 9%. Today, those vacancy rates are hovering at an extremely tight 2%, Kuiper said. 

JLL reported a slightly higher vacancy rate for Grand Rapids’ industrial sector at 3.2% in its most recent industry report. 

“Though year-to-date absorption is negative, single-digit vacancy rates will continue to present supply constraints until new supply is delivered to market,” according to the report.

As well, timelines for industrial projects will be stretched out because of the rising cost of construction and interest rates, while a lack of available land for building will likely cause the market to “balance out,” Kuiper said. 

“Some of these pauses and changes in the market will create opportunities as well,” Kuiper said. “For every company that isn’t going to make it, that provides an opportunity for a couple of people to step up and backfill that space and move forward. From an overall market standpoint, we’re really healthy.”

Downtown Grand Rapids office
Insurance brokerage and fintech Acrisure has been leasing office space near its downtown Grand Rapids headquarters. Credit: Crain’s Grand Rapids Business file photo

Office: A ‘dirty’ word

The office market, disrupted by a widespread shift to remote and hybrid work environments, is in a far different position.

While demand is still fairly strong for high quality, class A space, “office is a dirty word for banks” at the moment, he said.

This lack of capital available to renovate or build out office space has caused more interest in second-generation office space, said Jeff Karger, senior vice president at JLL’s Grand Rapids office.

The most recent bright spot for the market is Acrisure LLC leasing 40,000 square feet of additional office space downtown, in addition to the company’s seven-story headquarters downtown. 

Downtown Grand Rapids’ office vacancy rate is at 14%, according to the latest quarterly report from JLL. Vacancy has ticked up from last quarter, and rents are likely to remain flat or decline over the next six to 12 months. 

JLL also forecasts ongoing higher vacancy rates in downtown compared to the suburban market, where vacancy rates are expected to remain in the single digits, according to the report. 

Hybrid work models also have caused tenants to avoid paying for five days of downtown parking, contributing to some increased activity in the suburban office market this year, Karger said. However, Karger expects that most office relocations from downtown to the suburbs have now leveled off.

“On a micro-level, we’ve leased up significant deals downtown that haven’t been announced yet,” Karger said. 

The office market will likely stay on a similar path through the first half of 2024 — the earliest sign of “light at the end of the tunnel,” Karger said.

More from Crain’s Grand Rapids Business:

Amphitheater takes ‘big step’ forward with $15M in support from Kent County

Kent County indefinitely delays vote on John Ball Zoo surface parking plan

Major cheese producer laying off more than 100 workers in Mecosta County

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