HEARTLAND SNAPSHOT, DECEMBER 2006

Grand Rapids, Michigan

Set to in Grand Rapids in open fall 2007, the new 24-story, 340-room JW Marriott is Owned and operated by Amway Hotel Corporation, a subsidiary of Alticor.

In addition to these developments, Grand Rapids continues to see significant real estate investment by local investors and an influx of outside capital making real estate investments in the area. The new South Beltline highway (M-6) going across the south side of Grand Rapids has spurred huge growth in medical, retail, residential and apartment construction. Demographically, the population has increased to more than 1.2 million and continued growth is forecasted. More importantly, the median age is very low (under 34), indicating that the younger population is remaining in the area after graduating. Possibly due to the explosion of medical research and medical development in the area, Michigan State University is moving its medical school from Lansing to Grand Rapids in 2009. Interestingly, this area also boasts one of the highest rates of patients per capita in the country.

With more than 6 million square feet of office inventory in the downtown area, overall Class A rental rates for 2006 averaged approximately $21.30 per square foot along with a vacancy rate of 16.9 percent. With two new proposed office projects scheduled to launch in 2007, rental rates are actually expected to increase due to the consolidation of the ownership of downtown office buildings and higher construction costs.

Low-rise office condos will remain a viable market alternative for those users desiring ownership over leasing. In the suburbs, the new M-6 highway corridor has remained the hottest submarket primarily for medical uses. Metropolitan Hospital is moving its entire campus to M-6 and Byron Center Avenue, and will expand to a 200,000-square-foot Health Village concept that will include 170 acres of medical, office, retail, hospitality and residential. St. Mary’s Hospital and Spectrum Hospital have also added campuses along M-6. Office rental rates in the suburbs averaged $19.70 per square foot and are forecasted to remain steady throughout 2007. The most exciting new offering in the suburbs is an 82,000-square-foot building in Harley Medical Park on Cascade Road at Interstate 96. Overall suburban vacancy rates are 15.3 percent. However, a wide spectrum of concessions are being offered in the suburban markets due to a surplus of inventory.

Michigan, synonymous for decades with the auto industry, has seen numerous layoffs and continues to see decline in the automotive sector. Conversely, Grand Rapids has embraced new industries such as life sciences, agriculture, alternative industry and advanced manufacturing. These industries are significantly driving growth in the greater Grand Rapids market. Outside investors have discovered Grand Rapids, and are buying significant properties for investment and redevelopment. One good example is the purchase of a 915,000-square-foot manufacturing facility from Steelcase by Franklin Partners, which in turn created two smaller buildings. X-Rite quickly purchased 350,000 square feet, and all but 100,000 square feet of the second building have been leased. Franklin has also purchased a 416,000-square-foot facility that is currently being marketed by Grubb &Ellis|Paramount Commerce.

The West Michigan industrial market totals approximately 112 million square feet, with an occupancy rate of 90.5 percent. This should improve significantly, as the former Steelcase property, a 4.7 million-square-foot facility, is redeveloped into retail, residential and office, removing it from the industrial inventory. Closing with the new buyer is scheduled for early 2007.

In 2006, new industrial construction was primarily in the southeast submarket and totaled approximately 665,000 square feet, or 84 percent of the overall submarket construction. 

Moving out of the recovery phase of the market cycle, interest rates will be a huge determinant on what many local manufacturers decide to do with their real estate. If the trend of increasing the cost of funds continues, expect that leasing activity in 2007 will become much more prevalent. Overall, the four interest rate bumps that occurred in the first half of the year created an increase in leasing activity primarily in the greater-than-50,000-square-foot range. If this continues into 2007, we will see rental rates slowly firm up and concessions decline. Currently, rental rates for warehouse/distribution space range from $3.11 per square foot, triple net up to $3.38 per square foot in the downtown submarket. On the other hand, R&D/flex space is on the higher end of the scale at $5.54 per square foot, due to the smaller supply and inclusion of office space.

As we move into 2007, market conditions are expected to improve further as the city and state governments offer approximately $2 billion in tax incentives for new and expanding businesses statewide.

The retail segment remains the strongest, with an overall vacancy rate of 7.5 percent. The venerable 28th Street Southeast area continues to be strong, with two malls, new construction of Waterfall Shoppes near Interstate 96 and a submarket vacancy of only 6.2 percent. The newest retail areas are along the new South Beltline (M-6). The largest development, at 393,000 square feet, is being completed by Ramco Gershenson Trust along Kalamazoo Avenue at M-6 and features Target, Meijer and Staples. This area also boasts a new 16-screen theater and numerous new restaurants. The new year should also see the construction of West Michigan’s first lifestyle center as a result of two competing sites. Robert B. Aiken’s site on the East Beltline (M-37) will be 400,000 square feet, while Trademark Property Company has a larger site in northwest Grand Rapids with an initial 419,000 square feet, plus a proposed Cabela’s. If Cabela’s confirms its selection of a West Michigan site, it will be the second in the state. Due to the abundance of sportsmen, Michigan is the only state with both a Cabela’s and Bass Pro Shop Store.

— Bill Bussey, retail group vice president; John Kuiper, industrial group vice president; and Chip Bowling, office advisor, of Grubb & Ellis|Paramount Commerce in Grand Rapids contributed to the article.

©2006 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.