West Michigan Commercial Real Estate Forecast Book

West Michigan Commercial Real Estate Forecast Book 2009 Grand Rapids Kalamazoo Grand Haven Holland Moving Forward | Redefining the Future TABLE OF CONTENTS Letter from the Executives 1 Grand Rapids - Office Grand Rapids - Industrial Grand Rapids - Retail Grand Rapids - Investment 2 4 6 8 Kalamazoo - Office, Industrial & Retail 10 Holland|Focus Properties - Office, Industrial & Retail 11 Grand Haven|Muskegon 12 Property Management 13 Resources Market Research Intelligence About Grubb & Ellis|Paramount Commerce About Grubb & Ellis Company Profile Grubb & Ellis Company Office Location Map 15 16 18 20 Contributing Sources Inside Back Cover LETTER FROM THE EXECUTIVES Grubb & Ellis|Paramount Commerce is pleased to release the 2009 West Michigan Commercial Real Estate Forecast book. This guidebook is an invaluable tool for current and prospective property owners, users, professionals, and investors, offering the collective knowledge, analysis, and expertise of our team of 70+ advisors and staff. We firmly believe there is a direct correlation between sound market and economic data and positive commercial transactions. As such, we hope this Forecast book offers you fresh information and insight for whatever direction 2009 may take you and your business. Each of our advisors specialize in a specific market area (Land, Retail, Office, Investment, Industrial, Corporate Account Service Team and Property Management), and continually tailor their education around this area of focus. This concentration and understanding of a particular market area enables the advisor to assist you, the client, in making the best real estate decision possible. In addition to our Grand Rapids office, our locations in Kalamazoo, Grand Haven, and our affiliate, Grubb & Ellis|Focus Properties in Holland, work together to offer a comprehensive and dedicated view of the West Michigan market. Once again, we truly appreciate this opportunity to share our insight of the West Michigan market as well as offer a glimpse into what differentiates Grubb & Ellis|Paramount Commerce from the competition. We encourage you to contact us for more information about West Michigan’s commercial real estate market. Sincerely, Grubb & Ellis|Paramount Commerce Bill Bowling, SIOR Duke Suwyn, SIOR, CCIM Ray Kisor, SIOR Chairman President & CEO Executive Vice President 1 | Letter from the Executives Grand Rapids OFFICE MARKET With dramatic fluctuations in capital markets, the stock market and state tax law, it is difficult to anticipate what the coming year will bring for the Grand Rapids office market. But it is with cautious optimism that we are forecasting a slight, positive absorption for 2009. As forecasted, the bioscience and healthcare industries are playing a vital role in the growth and development of West Michigan. The skyline of the Medical Mile in downtown continues to be filled with cranes as medical construction moves forward. The 245,000 square foot Lemmen-Holton Cancer Pavilion was the first building on Medical Hill to come online in June of 2008 and has already garnered recognition for its LEED certification from the United States Green Building Council. Also completed was a 125,000 square foot medical office building called Tower 25, which is part of a 700,000 square foot complex being constructed on Michigan Street. As more construction projects come online, a new parking structure will provide 2,300 new parking spaces for the area. Construction on the 240,000 square foot expansion of the Van Andel Institute is well underway and scheduled for a 2009 completion date. The Helen DeVos Children’s Hospital, consisting of 440,000 square feet, broke ground early 2008 and is expected to be completed in 2010. Also underway is the construction of the new location of the Michigan State University Medical School that is scheduled for occupancy in the year 2010. As these projects become completed, we expect to see an increasing demand for downtown office space. However, 2008 saw overall occupancy rates decrease 1.5 percent from 84.1 percent at year end 2007 to 82.6 percent at year end 2008. In 2008, downtown occupancy rates were 83.7 percent compared to 84.3 percent in 2007. Within the downtown market the best performing segment was Class A office. This segment finished the year with almost an 89 percent occupancy rate. With relatively few available Class A opportunities for In addition to a general hesitancy to move and commit to new leases, the office market is beginning to see more impact from foreclosures, subletting and shadow space. Foreclosed properties obviously have a negative impact on the pricing and value in the market. But many tenants and buyers are using soft economic conditions to their advantage. Those with confidence in their business are able to purchase quality properties at a below replacement value. For those who prefer leasing, rates and incentives in most product types are extremely low. In particular, tenants renewing existing leases are achieving substantial rent savings in exchange for recommitting to leases. The suburban office market saw a 2 percent drop in occupancy in 2008. Occupancy rates decreased from 84.1 percent in 2007 to 82.1 percent in 2008. Suburban Class A office space finished 2008 at 80.6 percent occupancy. Suburban Class B office space finished 2008 at 81.5 percent occupancy. Many downtown landlords have offered concessions by way of free rent and tenant improvements in 2008. However, as operating expenses start to increase in 2009, it is expected that landlords will be compelled to cut back free rent and tenant improvements until the economic crisis improves. The downtown Class B market segment finished 2008 with an 83.5 percent occupancy rate. In spite of larger vacancies, downtown Class B asking rents have had a slight increase to $19.41 per square foot in 2008 compared to $19.33 per square foot in 2007. tenants, landlords were able to hold the line on asking rental rates. 2008 asking rates were $21.20 per square foot in 2008 compared to 2007 asking rental rates of $21.11 per square foot. Grand Rapids Office Market | 2 Even in the absence of new construction, new space continues to come on the market as tenants shed space at the time of lease renewals. The phenomenon of shadow space continues to plague the market by placing office space on the market even in the absence of new construction. For the most part, tenants are absorbing this space as it comes back on the market, but it continues to pressure landlords. In an effort to become more attractive to tenants, many landlords are moving away from “net” leases and offering “modified gross” or even “full service” leases. While the simplicity of such leases is attractive to tenants, it can leave the landlord exposed to escalating expenses. With increasingly limited ability to raise rents, we forecast that landlords will continue to see pressure on their income stream as they try to manage properties in a rising cost environment. 1,400 1,200 Asking Rental Rates $/SF/YR, Full Service, Year End $24.00 $22.00 $20.00 $18.00 $16.00 $14.00 $12.00 2001 2002 2003 2004 Class A 2005 2006 Class B 2007 2008P 2009F Vacant SF & Vacancy Rates 20% 18% 16% 14% 12% 10% Most landlords and tenants are nervous about the start of 2009, but have a rising confidence for the second half of next year. It will still take a few years to work through excess inventory created by those tenants that need to reduce their office needs and others that need to re-align their lease rates to market. Until this levels out, we expect to see flat to moderate absorption in the Grand Rapids office market. We also expect to see rental rates continue to adjust downward until the market turns upward in the second half of 2009. Thousand SF 1,000 800 600 400 200 0 Class A Class B Vacant SF % Vacant Class C Absorption vs. Completions Year End Vacancy Rates Year End 1,000 800 600 400 200 0 -200 -400 -600 -800 -1,000 2001 2002 2003 2004 Absorbed 22.0% 20.0% 18.0% 16.0% 14.0% 12.0% 2005 2006 2007 2008P 2009F 10.0% 2001 2002 2003 CBD Thousand SF 2004 2005 2006 2007 Combined 2008P 2009F Surburban Surburban 3 | Grand Rapids Office Market Grand Rapids INDUSTRIAL MARKET The Grand Rapids industrial market started slow and steady in the first quarter of 2008 but made up for lost time during the remainder of the year. The vacancy rate decreased from 9.4 percent during the first quarter of 2008 to 7.5 percent at year-end. The consolidation, relocation and expansion of three companies in the Grand Rapids area, which absorbed nearly 2.5 million square feet, significantly impacted the overall vacancy rate during 2008. One of the companies consolidated their operations from multiple West Michigan locations, while the second company relocated operations from three locations outside of the market and the state indicating that Grand Rapids continues to be a viable destination for out of state industrial users to locate. The third, a locally based company, has been taking large blocks of space off the market for the last few years, and continued this trend in the fourth quarter of 2008. Although we expect continued interest from out-of-market companies looking at Grand Rapids, the amount of space taken off the market in 2009 will almost certainly be much less than it was in 2008 – likely only a few basis points, if any at all. While the year-over-year drop in net absorption will be dramatic, the Grand Rapids industrial market does, and will continue to compare much more favorably with many other markets around the country, regardless of size. A total market vacancy rate of around 7.5 percent at the end of 2009 will leave the market in good shape for growth and further gains in 2010. As forecasted, new speculative construction was almost nonexistent during 2008. This was primarily due to higher construction costs, lower than needed demand, depressed lease rates, and more recently, increasingly stringent financing requirements. Speculative investment by well capitalized, experienced buyers should increase in 2009 due to the anticipated willingness of some sellers to sell at a significant loss in order to remove non-performing properties from their books. In a market with rapidly changing dynamics and expectations, uncommon buying opportunities occur. Those investors ready to move quickly with cash are in an excellent position to consummate sales at historically low numbers. Redevelopment of older manufacturing sites continues to offer more economically feasible alternatives when compared to new construction and consequently, new construction in 2009 will be limited to owner-built properties and expansions, as it has been for the last several years. The dramatic decline of commodity prices will help the construction industry be more competitive with existing properties in 2009, and should help Although leasing was typically the more viable option for users in 2008, the industrial market did have multiple user sales of every size, including three over 400,000 square feet. Interestingly, even with the uncertainty in the market, approximately one million more square feet was purchased by users in 2008 than in 2007. This was driven primarily by the fact that many local companies with strong balance sheets felt that the market offered opportunities that were too good to pass up. Many sellers were more motivated to strike a deal than in recent years past, and users with a need and cash have been able to capitalize on those motivations. This is a trend that is expected to continue throughout 2009 as more facilities come on the market and motivated sellers look to firm up their balance sheets. The Grand Rapids industrial leasing market had steady rental rates, static concessions and favorable options for short and long-term leases. Tenants are still favoring short-term leases and managing to secure lease rates that are more typically in-line with long-term leases. Uncertainty about the economy and the tighter credit markets have and will continue to keep leasing activity balanced well into 2009, as wary users or those unable to purchase will continue to lease space until they feel more optimistic about the future and are able to secure financing for a purchase. to balance the effect of the tighter lending climate on the new construction market. Grand Rapids Industrial Market | 4 As anticipated, the Grand Rapids industrial market saw a marked decrease in all types of leased, cap rate investment sales, especially compared to the banner year of 2007. In 2009, although sellers and buyers will have adjusted expectations relative to pricing and financing from those they previously held, we expect leased, cap rate type investment activity to only slightly increase from 2008 levels. The worldwide banking industry is still trying to determine a way to accurately price the risky assets that are at the root of their problems, and until certainty returns to the capital markets, investment lending especially, will be extremely constrained. It remains to be seen how great an effect the near bankruptcy of the domestic auto makers, coupled with the worldwide economic slowdown, will have on demand for warehouse and manufacturing space in West Michigan during 2009. In many respects we are more insulated than the rest of the upper Midwest due to our diverse manufacturing base and relatively unleveraged business community. The health of our market is reflected in our current 7.5 percent vacancy rate, which is nearly one-hundred and fifty basis points better than the national average. However, with the entire global economy slowing, no business and no region will be unaffected. Hopefully at this time next year, we will all look back on the winter of 2008 and 2009 as the bottom while we move forward toward restored confidence and a sense of security that has been missing for what seems to have been a very long time. $8.00 $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 General Industrial Incubator Asking Rent R&D/Flex % Vacant Warehouse/ Distribution 14% 12% % Vacant Asking Rental Rates $/SF/YR NNN, Year End $6.00 $5.50 $5.00 $4.50 $4.00 $3.50 $3.00 $2.50 2003 2004 2005 2006 R&D/Flex 2007 2008P 2009F General Industrial Warehouse/Distribution Asking Rent & Vacancy By Property Type $/SF/YR Full Service, Year End 10% 8% 6% 4% 2% 0% Vacancy Rates All Product Types, Year End Absorption vs. Completions All Product Types, Year End 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 2001 2002 2003 2004 2005 2006 2007 2008P 2009F 2,500 2,000 1,500 1,000 500 0 -500 -1,000 -1,500 -2,000 2001 2002 2003 2004 Absorbed Thousand SF 2005 2006 2007 2008P 2009F Completed 5 | Grand Rapids Industrial Market Grand Rapids RETAIL MARKET Although the retail sector is feeling the pinch like other sectors, West Michigan’s diverse economy and the substantial number of new construction projects for medical use have proven to be somewhat stabilizing forces. As a general rule, stores are showing a decline in retail sales compared to last year, which is causing most retailers to be more cautious about expanding and a smaller group is concerned about survival. New construction has slowed, but currently planned developments continue to draw the interest of several national tenants. The second half of 2008 brought the anticipated slowdown in consumer spending, which resulted in slower, more cautious growth from large retailers and limited expansion for most small retailers and quick service restaurants. As a result, vacancy rates increased slightly. 2009 will be the year of uncertainty in the West Michigan retail sector due to the current economic crisis. Overall, asking lease rates will be lower and landlords will have to be more flexible in their negotiations. However, given the current tightening of the financial markets, landlords may have a difficult time getting additional financing for tenant improvements. The 28th Street SE corridor will see the most new construction for this market in 2009. There are several developments scheduled to be completed in the 28th Street SE submarket next year. They include a 10,000 square foot center just east of the East Beltline Avenue corridor, which will include a new Chipotle Mexican Grill; a 28,000 square foot center at Kraft and 28th Street SE, which is a Meijer out lot, with tenants Qdoba and AT&T; and the redevelopment of the former Ethan Allen furniture store into a Jared’s Jewelry with the adjacent 20,000 square foot center. The closing of the Linens-N-Things store at Centerpointe Mall resulted in a large vacancy, but that is expected to be filled when a Jo-Ann Fabrics Superstore moves into the space in early 2009. The 28th Street SW corridor had significant vacancy adjustments in 2008, which was mainly attributed to the conversion of the former Roger’s Department Store into a Klingman’s Furniture store by Israels Designs for Living. The area also saw Studio 28, the nation’s first mega-plex, announce that they were closing due to the age of The West Michigan retail market, like much of the nation, has experienced retail and restaurant closings. However, the area has not been affected by big box retailer closings. The area has supported big box retailers mainly because the area did not get overbuilt when the retail markets were flourishing. While we have had some mid-sized retailers close stores, others such as Nordstrom’s Rack and Jo-Ann Fabrics have continued to do well. Some smaller retailers and restaurants are cautiously optimistic and continue to expand. Jimmy John’s, Chipotle Mexican Grill, AutoZone, Family Dollar, A.J. Wright and Qdoba are maintaining growth in this The M-6/South Beltline corridor has experienced slower tenant growth than expected, but is still positioned well for future growth, especially at the Byron Center Road interchange. The first Hyatt Hotel in West Michigan is located in the M-6 corridor, and is nearing completion. The biggest development for West Michigan, the proposed lifestyle center to be located at East Beltline Avenue NE and 3 Mile Road, has been pushed out. Construction is not expected to begin until 2010, which means this development will have little impact on the retail market for 2009. The proposed 450,000 square foot shopping center in Walker, anchored by Cabela’s and JC Penney, is also on hold. The Alpine Avenue corridor remains one of the strongest retail sectors in the Grand Rapids retail market. While vacancy rates increased slightly in 2008, there continues to be development and interest in this corridor. In 2008, the new 220,000 square foot Super Wal-Mart opened which replaced the previous 130,000 square foot facility. Also, there are proposed plans for a new retail development on the north side of Art Van Furniture that may gain momentum in 2009. that facility and continued expansion in other areas. As a result, it opens up a potential opportunity for a big box retailer to redevelop the existing site which would bring increased traffic flow to the area. Grand Rapids Retail Market | 6 market as cost-conscious consumers demand both quality and value. The Grand Rapids retail vacancy rate has held at or slightly below the national average of 8.4 percent in 2008 and much lower than Detroit’s vacancy rate of 10.0 percent. In addition, grocery sales will remain strong in 2009 as Spartan Stores and Meijer explore expansion and relocation of some older stores. With the uncertainty hanging over Detroit’s automotive industry, Grubb & Ellis|Paramount Commerce is carefully watching what effect that may have on the retail market in West Michigan in 2009. Vacancy rates could significantly increase, especially on the 28th Street corridors, Alpine Avenue and Plainfield Avenue, if more car dealerships have to close their doors. The challenge will shift to determining how to best utilize this new vacancy and it remains to be seen what the effect on the retail market will be. 8% 7% 6% 5% 4% 3% 2% 1% 0% Unemployment Rate - Grand Rapids/Wyoming Metro vs. U.S. Not Seasonally Adjusted 2002 2003 2004 2005 2006 2007 2008 2009F Grand Rapids - Wyoming Source: Bureau of Labor Statistics United States Asking Rent By Corridor In summary, despite the economic crisis, most of the West Michigan retailers have been able to maintain their position in the marketplace. Some attrition is to be expected, but to date it has been less than predicted. While the outlook for 2009 may be less positive than we would like to see, there are still enough bright spots in the region that will keep interest focused on West Michigan for a long time to come. Rivertown Pkwy. Plainfield Ave. E. Beltline Ave. Alpine Ave. 28th St. SW 28th St. SE $0 $10 $/SF/YR NNN $20 $30 $40 $50 Median Household Income 2008 $51,000 $50,500 Thousand SF SF Vacant & Vacancy Rates by Corridor 600 500 400 300 200 100 25% 20% 15% 10% 5% 28th St. SE 28th St. SW Alpine Ave. E. Beltline Ave. Plainfield Ave. Rivertown Pkwy. 0% % Vacant $50,000 $49,500 $49,000 $48,500 Source: Claritas Grand Rapids/ Wyoming Michigan U.S. 0 Vacant SF % Vacant 7 | Grand Rapids Retail Market Grand Rapids INVESTMENT MARKET West Michigan has continued to diversify its economic base helping to present a more stable environment for real estate investors. The medical expansion in downtown Grand Rapids continues to be at the center of this diversification and growth. Construction projects such as the Van Andel Institute expansion, The Hauestein Center at St. Mary’s Hospital, the Helen DeVos Children’s Hospital and the Michigan State University medical school are all underway. These investments into Grand Rapids indicate the area’s ability to utilize highly skilled and educated work force to retain sustainable growth in the healthcare industry. 2007 was a record year for investment activity, especially from out-of-state investors. This trend slowed during 2008, primarily due to the lack of available capital. The first half of 2008 saw slightly below average deal momentum as credit continued to tighten and capital became harder to obtain. The second half of 2008 proved to be more difficult, as the capital markets froze completely and investors fled to the sidelines or sought extremely aggressive value-add transactions. Many deals that were under contract fell out of contract due to the more cautious investor. As predicted, underwriting requirements for all financing tightened as the psychological effects of the subprime lending crises created strain on lending practices. The credit crunch has created a cautious mentality, not only in West Michigan but also around the nation. While financing became more difficult in 2008, it has created attractive pricing for opportunistic buyers. In 2009, buyers will find opportunity in under-performing assets. We anticipate that there is a backlog of troubled assets that will begin to hit the market as lenders facilitate the work-out or foreclosure processes in an effort to move these properties off their balance sheets. Further, buyers may benefit from re-pricing of many assets as sellers begin to set assets to more appropriate pricing levels. Additionally, 2009 will see a transition to more local investors becoming active in the market. Record investment volume over the last number of years Retail investment sales have been affected as lower consumer confidence levels have led to a loss in revenue for many retailers across the nation. This has directly impacted their sustainability and ability to pay continuous higher rents. As expected, the retail investment market slowed in 2008. The West Michigan Industrial investment market slowed in 2008 after a record year in 2007. As predicted, sales activity of investment assets was muted in 2008 due to less available product and an erosion of the capital markets as lenders severely tightened their underwriting practices. Investors did see positive space absorption, as several large companies consolidated and/or relocated their operations to West Michigan. Companies moved into the market to take advantage of West Michigan’s strong manufacturing base and large population of skilled labor. West Michigan continues to have the strong foundation for future growth of high skill manufacturing which bodes well for the long term viability of the industrial market. In 2009 we will see a return of activity from local investors who will take advantage of the attractive cap rates. We anticipate that 2009 will continue to be a year of tight credit. The lenders that are still active in the market place have tended to be more selective on their loans and require more stringent underwriting criteria. This will require that investors and sellers should explore more creative ways to complete transactions such as assumption of debt, land contracts and seller financing. has been driven by out-of-state investors bringing capital into West Michigan. This trend took place because West Michigan offered a better return and better fundamental value than other markets. As the economy has slowed and values have begun to recede from record levels in other comparable markets, demand from this out-of-state investor has slowed considerably. We anticipate that the investor base will return to more of a locally-based value range that is reduced from the peak. Grand Rapids Investment Market | 8 Investors have been significantly more cautious regarding retail investments and have increased underwriting standards for this asset type. More than other product types, retail investment activity has been slowed due to the changing economy. The proposed lifestyle center was delayed in 2008 and construction could start in late 2009, which could bring renewed interest from national retailers and investors to the market. Office investment sales in West Michigan were limited in 2008 as investors sought under-valued product with significant upside. In downtown Grand Rapids, the trend of consolidation of properties to fewer owners slowed as investors worked to stabilize their investments before taking on new projects. The medical expansion on Michigan Street continues to play a significant role in the Grand Rapids office market. As new product comes to market, there is an increasing focus on how the second-generation space will be backfilled. Investors will take a wait-and-see approach in 2009, as they determine exactly what effect the new space will have on medical office space in the suburban markets. The West Michigan multi-family market remained strong in 2008 primarily due to two factors: (i) rental rates increasing; and (ii) occupancy rates increasing. The improvement of the multi-family market has been driven by higher underwriting standards for prospective home buyers. The downtown housing market continues to be fueled by student housing, as downtown institutions continue to expand and Michigan State University’s College of Human Medicine anticipates opening in 2010. The sub-prime challenges will remain the focus of apartment activity in 2009. Activity is expected to remain strong, rental rates will hold firm and financing will be available to qualified buyers. 20% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 1/1/05 Source: Fed Reserve Total National Investment Activity $140 $120 $100 Billions $80 $60 $40 $20 $0 2005 2006 2007 2008 $277 Billion $317 Billion $426 Billion $111 Billion Source: Real Capital Analytics, Grubb & Ellis Treasury Constant Maturities & Fed Fund Rates 2005 - 2009 7/1/05 1/1/06 7/1/06 1/1/07 7/1/07 1/1/08 7/1/08 1/1/09 10 Year Treasury 1Year Treasury Fed Funds Treasury Constant Maturities Rates 1976 - 2009 15% 10% 5% 0% Jan - 76 May - 84 Sep - 92 Jan - 01 Source: Fed Reserve 10 Year Treasury 1Year Treasury 9 | Grand Rapids Investment Market Kalamazoo OFFICE, INDUSTRIAL & RETAIL MARKET OFFICE The completion of the Miller Canfield building in 2008 attributed to nearly 20,000 square feet of positive absorption in the Kalamazoo central business district (CBD). As forecasted, renovation and redevelopment projects continued in 2008, which kept landlords competitive in their lease rates and concessions. In 2009, we expect there to be additional renovation and redevelopment, as well as continued lateral movement from existing CBD tenants. In the Portage submarket, the Trade Centre II building became nearly 85 percent occupied as demand for Class A office space remains strong. This demand will affect all submarkets as tenants reposition themselves into newer space, which has and will encourage landlords to renovate second-generation space. Downtown Battle Creek remained steady during 2008, as over 70 percent of the total vacancy remains in three buildings. In 2009, vacancy rates and asking rental rates are expected to soften. INDUSTRIAL The Southwest Michigan industrial market had a strong first half in 2008 with more activity than it has had in the last three years. The Kalamazoo submarket vacancy rate dropped significantly from 32 percent at year-end 2007 to 19.3 percent in 2008. This was mainly attributed to Kaiser Aluminum, Polymer Solutions, and the expansion of Fabri-Kal. In total, nearly 800,000 square feet of positive absorption resulted in the acquisitions of these company acquisitions/expansions. Although we expect this trend to continue to soften somewhat in 2009, it may spur the long-anticipated need for We expect continued difficulty for small retail and restaurant users in obtaining financing in 2009. As a result, rental rates will be more attractive for tenants; however, retailers will remain cautious about their expansion plans. Renovations of existing space and new construction will slow due to the lack of available funding. RETAIL Overall, vacancy rates in the Southwest Michigan retail market increased from 5.8 percent in 2007 to 8.2 percent in 2008. The current economic climate has caused some users to downsize or leave the market entirely resulting in several new vacancies on the Westnedge corridor. As forecasted, national restaurants and retailers remained optimistic on the Kalamazoo market due to the historical nature of conservative retail development in Southwest Michigan. The Battle Creek Fort Custer Industrial Park had an increase in vacancy from 5.2 percent year-end 2007 to 8.7 percent in 2008. However, this increase was attributed to 280,000 square feet of vacancy in one 320,000 square foot building and the addition of a 216,000 square foot United Steel freestanding building, which became vacant in December, 2008. In 2009, we expect this industrial park to have slow and gradual growth, as it continues to be the largest industrial park in the area. Additionally, there are very few spaces available for users needing 100,000 square feet and larger, which will lead those users to the Fort Custer Industrial Park. new construction due to the lack of supply for buildings over 50,000 square feet. Vacancy Rates 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Kalamazoo Kalamazoo CBD Office Industrial Portage Industrial - Asking Rental Rates Product Type $4.50 $4.00 $3.50 $3.00 $2.50 2005 2006 2007 2008P 2009F Total Percent Vancant $/SF/YR NNN Warehouse/Distribution General Industrial Kalamazoo Market | 10 Holland OFFICE, INDUSTRIAL & RETAIL MARKET OFFICE The downtown office market remains the most sought after space in the greater Holland area. Completion of Plaza East adds 48,000 square feet of Class A space to help accommodate the demand for office space in downtown Holland. Rental rates, especially downtown, held steady in 2008 and Grubb & Ellis|Focus Properties expects this trend to continue into 2009. Overall, vacancy rates increased slightly as tenants looked to reposition themselves in the market. There was limited new construction outside of downtown Holland and we expect to see limited new speculative construction in 2009, as landlords look for creative ways to attract tenants. INDUSTRIAL The Holland/Zeeland industrial market had a steady first half of 2008, while the second half of 2008 slowed. The uncertainty with the economy will continue to play an important role in the development and growth of the industrial market in the West Michigan lakeshore market. New construction was limited in 2008 and is expected to remain There are a number of 50,000 to 100,000 square foot buildings available in the West Michigan lakeshore market, which has contributed to the increased vacancy rate. As a result, tenants have been able to negotiate favorable leases with encouraging rental rates and increased incentives during 2008. As we move into 2009, we expect that this trend will continue. Demand for 10,000 to 50,000 square foot buildings continues to be the most highly sought after space in the West this way in 2009. Construction along the US-31 corridor has slowed, as landlords are offering great rental rates and concessions for existing retailers looking to relocate. Asking rental rates declined slightly in 2008, but with limited new construction rental rates should stabilize in 2009 as existing vacant space becomes occupied. Overall, the West Michigan lakeshore industrial market has had slightly increasing vacancy rates and diminishing rental rates. While we anticipate a few companies such as Perrigo and Request Foods to explore expansion, we expect that 2009 will see steady growth. RETAIL The downtown Holland retail market remains the strongest corridor in the greater Holland area. Vacancy rates remained consistent with 2008 rates and we expect to see similar rates into 2009, despite the economic concerns. The opening of the City View Hotel has not only brought a new “urban” feel to downtown Holland, but also additional jobs. Overall, vacancy held constant at 5 percent and will remain steady in 2009 as downtown space is highly sought after. Michigan lakeshore market. Landlords are concentrating on upgrading existing properties and offering competitive lease rates to attract prospective tenants to their space. This trend is expected to continue in 2009. Average Asking Rental Rates $14 $12 $10 $8 $6 $4 $2 $0 Industrial Retail Office Vacancy Rates 14% 12% 10% 8% 6% 4% 2% 0% Industrial Retail Holland Zeeland Office Holland Zeeland 11 | Holland Market Grand Haven OFFICE, INDUSTRIAL & RETAIL MARKET OFFICE The office and service sector remained flat in 2008. There was no new speculative construction and we expect this trend to continue in 2009. Last year’s announcement of the Mercy Hospital and Hackley Hospital merger has not had an effect on the market as of now. However, with the continued growth of the Grand Rapids medical market and the merger, it is anticipated that the area may start to feel the effects of this in 2009. The activity continues to come from small users. There has been a mixture of company downsizing and tenants repositioning themselves in the market, as landlords are still offering favorable tenant concessions. There have also been a number of tenants absorbing small space after relocating out of household basements. These tenants are able to sign short-term leases with as much as six months of free rent. As a result, pricing has declined from $15 to $17 per square foot to $10 to $13 per square foot. In 2009, we can expect a similar trend to continue. INDUSTRIAL Overall, the Grand Haven industrial market had small, positive absorption in 2008. As reported last year, the Grand Haven Magna-Donnelly facility was for sale and they were leasing space in Muskegon. In 2008, Magna-Donnelly came back to their existing building. There continues to be local and some regional activity and occasional interest from users looking to the area. Interest in middle size buildings remains at the center of the activity and it is expected to continue into 2009. In addition, we expect to see lease space more sought after as buyers take a wait-and-see approach to what will happen in the first half of 2009. The Muskegon industrial market remained ripe with opportunity and value. This area continues to offer the most attractive pricing for the available space. In addition, the local governmental agencies are still eager to be involved and offer assistance wherever needed. The sale of After closing in 2007, the Great Lakes Downs Race Track was purchased in 2008 as a potential casino redevelopment. Initial plans are to reopen the race track and transition into a casino. As the area develops around the track with new hotels and various retail strip centers, it is anticipated that it will create between 400 and 500 new jobs. RETAIL The Grand Haven and Muskegon retail market slowed in 2008 and it will remain slow in 2009. Asking rental rates have decreased from an average of $22 per square foot to $16 per square foot. The area has had Jet’s Pizza, wireless phone companies, and Jude’s Barbershop relocate and expand in the Grand Haven and Muskegon markets. Construction on the new Walgreen’s on Robbins Road was delayed and it is expected to break ground in 2009. Outside of the Henry Street corridor there will be no new construction, as retailers weigh in on the national economy. The Muskegon retail market had pockets of strength in 2008. Occupancy and rental rates held steady. The trend can be expected in 2009, as Henry Street remains the strongest corridor in the area. three industrial buildings; Nichol’s Paper, the Roundy’s building and the Verizon building, helped attribute to the positive absorption in the market during 2008. The new Wacker/Ground Heaters Inc. facility in Norton Shores was completed in 2008 and is currently up and running. In 2009, new construction is expected to be nearly non-existent. Grand Haven|Muskegon Market | 12 Grubb & Ellis|Paramount Commerce PROPERTY MANAGEMENT Now, perhaps more than ever, professional property management is the way to go. The attention to detail and budgeting, keeping property owners current with market trends through close alignment with brokerage allows for good, timely business decisions in a market economy that is challenged with rising costs and lease concessions aimed at tenant retention and ongoing market leasing. 2008 was a growth year for Grubb & Ellis|Paramount Commerce Property Management. The management portfolio expanded from 4,100,000 square feet to 4,500,000 square feet. Property Management added new software systems for electronic processing for streamlined banking and state of the art lease administration for large client portfolios. Sophisticated management and accounting systems allow for flexibility in accounting across a large portfolio or stand alone property on a cash or accrual basis, as well as asset management capabilities and consolidated reporting. Grubb & Ellis|Pararmount Commerce Property Management is fully aligned with Grubb & Ellis National, who has preferred vendor agreements with over 30 national firms offering up to 65 percent savings on goods and services related to managed real estate. Similar preferred vendor pricing is maintained on the local level and at all times, the savings are a direct pass through to the managed asset. This includes all facets of property management services, as well as a master policy for property and liability insurance, energy auditing, tax assessment review and cost segregation services. New for 2008 is a facilities and maintenance program that works with banks on a facility basis, as they transition through their loan portfolios. Grubb & Ellis|Pararmount Commerce is poised for 2009 with 18 professionals, who are committed to customer service and satisfaction. We have the tools in place for current, complete and accurate monthly reporting; full service facilities management and in-house 24/7 Grubb & Ellis|Pararmount Commerce Property Management is your partner in success. Grubb & Ellis|Pararmount Commerce has the highest number of Certified Property Managers (CPM) and degreed professionals in West Michigan. In addition, a dedicated staff helps to oversee a mixed portfolio of industrial, office, retail, mixed-use, site condominium and student housing. 2009 is a year to add value, to assist in the challenges, to enhance communication with landlords and tenants to preserve the future value and stability of the investment. emergency maintenance service dispatched in fully equipped, logoed vans with uniformed maintenance professionals. 13 | Property Management RESOURCES Knowledge Resources | 14 MARKET RESEARCH INTELLIGENCE Our research capabilities build on our local expertise in the markets we serve. This expertise starts with advisory professionals who specialize in product types and submarkets. The familiarity of these professionals with the people and the real estate in these submarkets is the foundation of our market research capabilities. Viewed in this way, the maintenance of property databases is a team effort, with knowledge flowing constantly between the research department and the advisory professionals. Background At Grubb & Ellis, we pride ourselves on having the most comprehensive research and data management standards in the commercial real estate industry. More than 100 years of commercial real estate knowledge, expertise and experience was devoted to comprising our standards. G2, our proprietory database, is based upon this set of research standards designed to ensure that the data tracked are comparable across markets. BOMA (Building Owners and Managers Association) has used Grubb & Ellis standards to develop its own set of standards for the industry. Research Publications • U.S. Market Trends: Grubb & Ellis' quarterly 8-page newsletter on national market conditions, including metro-level vacancy and rent comparisons. Office Market Trends is published in May and November, Industrial Market Trends in February and August, and Retail Market Trends in May and September. • Local Market Trends: After the end of each quarter, Grubb & Ellis|Paramount Commerce publishes newsletter style reports on each specialty market - Industrial, Retail & Office. • Forecast Books: In January, Grubb & Ellis Company publishes forecast books in conjunction with its annual Commercial Real Estate Forecast event. Professional Research Staff A cadre of national research staff helps lead our local research professionals, working with the local offices to ensure the quality and depth of the research: Bob Bach, Senior Vice President, Chief Economist Grubb & Ellis Company Chicago, IL As Senior Vice President, Research & Client Services, Bob Bach prepares Grubb & Ellis’ national market publications covering the office, industrial, retail and investment markets. Mr. Bach oversees the preparation of approximately 90 Metro Trends reports covering quarterly market conditions in metropolitan office and industrial markets across the U.S. He works with research managers in the local offices of Grubb & Ellis to ensure their data are accurate. Additionally, Bach works with Grubb & Ellis clients as needed to complete specialized consulting assignments. He is a frequent speaker at national professional conferences. Bach has 30 years of professional experience in real estate market research, consulting and city planning. He has prepared or overseen the preparation of market feasibility studies for proposed development projects, ranging in scope from a 16,000 square-foot retail center to an 800-acre mixed use development. Gary Albrecht, Research Analyst Grubb & Ellis|Paramount Commerce Grand Rapids, MI As Research Analyst for Grubb & Ellis|Paramount Commerce’s full-time Research Department, Mr. Albrecht is responsible for the implementation and maintenance of the company’s leading research tools, programs and services, including Grubb & Ellis|Paramount Commerce’s annual Commercial Real Estate Forecast event and quarterly Market Trends reports. 15 | Market Research Intelligence About GRUBB & ELLIS|PARAMOUNT COMMERCE Grubb & Ellis|Paramount Commerce (G&E|PC) is a fullservice, commercial real estate firm dedicated to excellence. Since its founding in 1995, G&E|PC has quickly emerged as one of the most respected names in the business by delivering innovative results for clients with Office, Retail, Industrial, Land, Investment, Property Management and other specialized property needs. This is achieved by providing unparalleled market knowledge, experience and superior service with offices in Grand Rapids, Kalamazoo, Grand Haven and Holland, Michigan, through Focus Properties, Inc., a G&E|PC affiliate. Customized Solutions From first-time investors to locally-based, international corporations, G&E|PC’s reputation rests on its ability to create effective, customized solutions for a broad spectrum of client needs, regardless of the scope, size, or complexity. Through its affiliation with Grubb & Ellis Company (NYSE:GBE), one of the nation’s largest commercial real estate service firms, G&E|PC is uniquely positioned to leverage the vast resources of its global network of professionals. This ensures clients receive unmatched market knowledge and attention, whether their property needs extend beyond the region - or throughout the world. Specialized Focus, Extraordinary Results Unlike many firms, G&E|PC’s team of commercial real estate advisors specialize in one area of practice; Office, Retail, Industrial, Land or Investment. This dedicated focus allows advisors to assess the full scope of properties in light of ever-changing conditions, including market, zoning, tax, outsourcing, and environmental issues, providing maximum client value. G&E|PC is also one of a few companies to augment its offerings with Property Management, Accelerated Online Auction Services and Corporate Account Service Team (CAST) expertise. Led by a distinguished staff of specialists, our experts provide proven strategies for optimal cost, investment, operational, and location goals. The extent and reliability of our data has made G&E|PC a regular “go to” source within the business, financial, and educational community. For instance, G&E|PC partners with Grand Valley State University’s Seidman School of Business annually to present a community forecast of the commercial real estate market. A Trusted Source G&E|PC believes the best property solutions can only be achieved with precise, accurate data. That is why G&E|PC invests in some of the most sophisticated market research tools in the industry, and employs a full-time staff dedicated to the on-going collection and assessment of property, markets, and trends. About Grubb & Ellis|Paramount Commerce| 16 Best in the Business G&E|PC advisors rank among the highest producers in Western Michigan and hold numerous prestigious designations, such as SIOR, CCIM, CPA, CPM, AIA, CLS, and JD, as well as the coveted Grubb & Ellis “Circle of Excellence” award. Our team approach, strong staff, industry affiliations (ICSC, NACORE, BOMA, SIOR, CCIM, IREM, CORENET and the Michigan Restaurant Association) and exceptional knowledge, affords G&E|PC the reputation of providing the most pertinent advice and results, measured only by our clients’ success. Real Estate Advisory Services • Industrial,Office,Investment, Retail, Hospitality Sales & Leasing • Seller/Tenant Representation • Owner/Landlord Representation • Land Sales/Acquisitions • Investment Properties Strategic Services • Site Selection • Market Forecasts • Research Services • Merger Acquisition Due Diligence • Demographics • Feasibility Analysis • Portfolio Analysis • Investment Analysis Management Services • Property Management • Facilities Management • Transaction Management • Asset Management • Lease Administration We are strong believers in the "team approach". Babe Ruth was quoted as saying, "The way a team plays as a whole determines its success. You may have the greatest bunch of individual stars in the world, but if they don't play together, the club won't be worth a dime." 17 | About Grubb & Ellis|Paramount Commerce About GRUBB & ELLIS COMPANY Grubb & Ellis Company is one of the world’s leading corporate real estate services and investment firms. For more than 50 years, Grubb & Ellis has demonstrated an understanding of the complexities of managing real estate for a veritable who’s who of leading American corporations and built one of the finest reputations in the commercial real estate industry for developing unique solutions for our clients. Indeed, in 2007 Microsoft Corporation recognized Grubb & Ellis as its Vendor of the Year—honored as such from a pool of more than 15,000 contenders. Our goal is to partner with our clients, learn the nuances of their business, and create long-term relationships built upon a true commitment to their business goals through the best possible use of their real estate assets. Grubb & Ellis offers a comprehensive suite of corporate services: facility and property management, transactions, lease administration, project management, strategic consultation, corporate finance, valuations, and investment management. These service offerings are not unique to Grubb & Ellis, of course, but we believe that it is not what we do that makes us different—it is how we do it. Our firm is seamlessly integrated to provide the most efficient and valuable service to our corporate clients; transaction, management and investment professionals work in concert, rather than in competition, with one another to facilitate good decision making. We pride ourselves on the expertise and experience of our professionals, and commit ourselves to recruiting and retaining the industry’s finest. We offer true partnership with our clients—our success is dependent upon yours—and our compensation structure demonstrates this commitment. Combined with our extensive local market knowledge, nationwide footprint and global reach, the service and expertise of Grubb & Ellis offers our clients an unmatched opportunity to maximize the true value of their real estate assets. Facility Management As an acknowledged leader in the field, Grubb & Ellis has built a reputation for maintaining cost-efficient operations and delivering superior levels of service for a variety of owner-occupied facilities nationwide. With experience ranging across virtually all property types, from corporate headquarters to data centers and industrial complexes, Transaction Management As one of the nation’s leading commercial real estate brokerages, Grubb & Ellis offers clients the experience of thousands of successful transactions and the expertise that comes from a nationwide platform. With a comprehensive approach to transactions, Grubb & Ellis takes logistical needs, site selection and needs analysis into account to create buy, sell and lease opportunities for users of commercial real estate. Project and Construction Management Grubb & Ellis provides clients with expert advice and management of the design, construction and relocation process. Offering a wide range of experience and expertise to the corporate user, Grubb & Ellis professionals bring a bottom line focus to the delivery of facility projects. Smart, sound management following a systematic process ensures that projects progress on schedule and within initial cost criteria to make certain that the interests of the client are met. Whatever your need and wherever it may be, Grubb & Ellis stands ready to provide the solution. About Grubb & Ellis Company | 18 Grubb & Ellis provides facility management services at multiple locations for a comprehensive range of corporate clients. Capital Markets Grubb & Ellis assists corporate users with on- and off-balance sheet options, including capital structures that can optimize asset value and mitigate risk. The company combines unsurpassed real estate knowledge with sophisticated capital markets experience to deliver the optimal financial strategy, including assisting with the underwriting and procurement of sale leasebacks, bondable leases and other capital structures. Strategic Consulting Grubb & Ellis assists companies in aligning their business and financial objectives with their corporate facilities plan in order to improve corporate performance and to build competitive advantage. Grubb & Ellis consultants draw on a broad array of experience and competencies to develop integrated strategies that may include: asset optimization, risk mitigation, business continuity, sustainability, site sourcing (on- and off-shore planning), portfolio optimization, as well as organization and process design. Lease Administration A far-ranging portfolio can result in chaos and inefficiencies. Grubb & Ellis actively assists clients in the administration of their leases to control portfolio costs and reduce risks. Regular strategic portfolio analysis through a technological process of data collection, abstraction, input and ongoing maintenance relieves real estate managers of the demands of property tracking, renewal and other non-core administrative tasks. Gubb & Ellis does things differently from its competitors, however, both large and small. Local market expertise, nationwide footprint and glocal reach Grubb & Ellis offers a unique combination of local market knowledge, an unrivaled nationwide footprint, and the global expertise to serve the real estate needs of any client. Seamless integration of a full-service firm Despite its size, Grubb & Ellis maintains a seamless integration among its disparate service lines. The company takes great care and effort to bring all of its resources to bear on behalf of each client. Rather than operate in a vacuum, the various business lines of Grubb & Ellis work in concert to deliver the finest corporate real estate solutions. Specialized knowledge and expertise Grubb & Ellis knows that it must be the best if it is to thrive in the competitive corporate real estate arena. The company takes great pride as an employer of choice in the sector, attracting and retaining respected industry leaders and experts. Exceptional customer service and partnership Corporate clients traditionally exhibit allegiance to Grubb & Ellis. The company is proud of the fierce loyalty of its clients, many of which have been with Grubb & Ellis for more than a decade. This loyalty is borne of true partnership and concern for the success of its clients. Compensation model based upon value provided to Valuations Grubb & Ellis’ expertise can determine the true value of a corporation’s real estate holdings, a necessity for the proper use and application of this locked wealth. Of course, the modern corporate climate also requires accurate valuations for accounting purposes and corporate reporting requirements. Determining the fair value of what may be a far-ranging and complex portfolio requires specialized knowledge and experience. clients Much of the commercial real estate industry is commission based. Grubb & Ellis believes a compensation model for corporate services should be based more upon successfully realizing the business goals of its clients, and its fee structure reflects this. Corporate Headquarters 1551 N. Tustin Avenue, Suite 300 Santa Ana, California 92705 714.667.8252 Key Corporate Information Website: www.grubb-ellis.com Year founded: 1958 New York Stock Exchange Symbol: GBE 19 | About Grubb & Ellis Company Grubb & Ellis Company OFFICE LOCATION MAP Grubb & Ellis Company Office Location Map | 20 CONTRIBUTING SOURCES Grubb & Ellis|Paramount Commerce • Gary Albrecht • Chad Barton, CCIM • Chris Beckering • Earl Clements • Tom DeBoer, SIOR, CCIM • Lori Eastman • Kent Hildebrand, CPA • Derek Hunderman, CCIM • Colin Kraay, CCIM • Ray Kisor, SIOR • John Kuiper, SIOR, CCIM • Steve Marcusse, CCIM • Kerri McCabe • Jodi Milks, CCIM • Scott Morgan, JD, SIOR • Mike Murray, CCIM • Debby Roberts • Elizabeth Slane, CPM • Duke Suwyn, SIOR, CCIM Grand Rapids, MI Contributing Sources • Bureau of Labor Statistics • Claritas • Grand Rapids Business Journal • Michigan Economic Development Corporation • www.home.gov • www.woodtv.com Research Analyst Vice President|Investment Advisor Office Advisor Vice President|Retail Advisor Vice President|Office Advisor Graphic Designer Vice President & CFO|Investment Advisor Vice President|Managing Partner Vice President|Investment Advisor Executive Vice President|Office Advisor Vice President|Industrial Advisor Vice President|Industrial Advisor Database Coordinator Managing Director, Kalamazoo|Retail Advisor Vice President|Office Advisor Vice President|Retail Advisor Office Administrator, Kalamazoo Vice President|Director, Property Management President & CEO|Industrial Advisor Kalamazoo, MI Contributing Sources • City of Holland Website • Grand Rapids Business Journal • Holland Convention & Visitor’s Bureau • Holland Sentinel • Michigan Economic Development Corporation Holland, MI Contributing Sources • Kalamazoo Gazette • Michigan Economic Development Corporation • Western Michigan Business Review • www.mlive.com Grubb & Ellis|Focus Properties - Holland, MI • Josh Bauman • Kris DePree • Jason DeWitt • Tom Postma, SIOR Property Manager|Research President|Industrial Advisor Sales Associate Vice President|Industrial Advisor Printed by: 2000 Oak Industrial Drive, Grand Rapids, MI 49505 616.459.4142 ph | 616.459.7469 fx | www.integrausa.com LAND | OFFICE | RETAIL | INDUSTRIAL | INVESTMENT | PROPERTY MANAGEMENT | CORPORATE ACCOUNT SERVICE TEAM GRAND RAPIDS OFFICE 300 Ottawa Avenue NW, Suite 400 Grand Rapids, Michigan 49503 616.774.3500 ph 616.774.3600 fx KALAMAZOO OFFICE 125 S. Kalamazoo Mall, Suite 203 Kalamazoo, MI 49007 269.978.0245 ph 269.978.0244 fx GRAND HAVEN OFFICE 233 Washington Avenue, Suite 207 Grand Haven, MI 49417 616.847.4600 ph 616.296.0854 fx www.gepc.com HOLLAND OFFICE 44 East 8th Street, Suite 510 Holland, Michigan 49423 616.394.4500 ph 616.394.0035 fx www.focusproperties.com TEAMING | S P E C I A L I Z AT I O N | KNOWLEDGE | INTEGRITY