HEARTLAND SNAPSHOT, JULY 2009

Grand Rapids, Michigan, Industrial Market

When looking at the Michigan industrial market, the ailing auto manufacturing industry in Detroit casts a long shadow. A wider look shows the Big Three do not rule over the whole state, particularly the diverse industrial sector in West Michigan. The Grand Rapids industrial market is still heavily dependent on manufacturing, which provides approximately 20 percent of the area’s employment, but that only tells part of the story.

“Yes, we’re manufacturing, but we’re not solely dependent on one particular industry within manufacturing for support,” says Derek Hunderman, managing partner and vice president with locally based Grubb & Ellis|Paramount Commerce. “That diversification has saved West Michigan over the years from significant fluctuations in vacancy numbers and huge swings in demand.”

Of Grand Rapids’ approximately 113 million square feet of industrial space, 87 million square feet is devoted to manufacturing. The industries are varied and include alternative energy, aerospace, defense and furniture, in addition to a healthy amount of auto parts manufacturing. Outside of that, 22 million square feet of the market’s inventory is warehouse and distribution space, with the remaining amount comprising flex, research and development, and incubator space.

“Right now, what we’re not seeing is dramatic spikes in vacant buildings. Our vacancy numbers are holding their own,” Hunderman says, adding that the numbers have increased slightly, but not significantly. “The assumption, when people ask about Michigan, is that vacancy rates must be skyrocketing, but we’re not seeing that at this point in time,” he adds.

This is demonstrated by the 8.3 percent overall vacancy rate Grubb & Ellis reported for Grand Rapids in the first quarter of this year. The downside to these positive numbers is that demand has significantly decreased. Hunderman estimates that transaction velocity has dropped approximately 60 percent in the first half of the year compared to 2008 — with much of the activity consisting of a few leases and some small purchases by local owner/operators. New construction is at a standstill.

“There have been a handful of facilities that have sold for substantially reduced numbers, and it’s going to be interesting to see what type of ripple effect that has on values overall,’ Hunderman says. He cites an example in which a 100,000-square-
foot, state-of-the-art manufacturing facility appraised in April 2007 for $4.2 million. After being on the market for approximately 18 months, it finally sold in December 2008 for $1.2 million. “That throws appraisers and brokers into a bit of a tailspin when trying to establish value for the next building,” he says.

This example is not a one-off deal, either. There are several transactions that have recently been completed in Grand Rapids in which the property was significantly discounted in order to get the deal done. Hunderman says that this demonstrates the importance of having good information about the market and for it to be current. A broker needs to look at transaction velocity and how much supply is on the market, then determine how best to get his or her property to the front of the line.

Another unique trend is the rise in seller-financed transactions, which are being driven by buyers and sellers that agree to a transaction but cannot find a lender to finance it. If the seller has equity in the property, it will either structure a land contract or arrange a situation in which the seller takes a second seat to the lender, but in doing so, helps improve the deal’s equity ratio.

“The seller is now becoming the lender, and that’s a pretty significant phenomenon,” Hunderman says, adding that, in the past, seller financing was seen in one out of ten deals, but now is seen in half of the industrial transactions in Grand Rapids.

In general, Grand Rapids is experiencing growth, but the recession has slowed that down. Hunderman looks to the lending environment, which he says will have to unfreeze to get activity flowing again. The other thing that needs to happen is for the dust to settle in Detroit, which he says will delay the recovery until the automakers have a clear plan for the future.

“I think the further we get into this year and the beginning of the next year, the better things will get. How much so, is really just a wild card,” he says.

— Coleman Wood

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