GEPC April 2008 Newsletter

OFFICEMany suburban office users are seeking to take advantage of the relatively soft general office market and historically low interest rates and are purchasing as opposed to leasing. However, the amount of quality suburban office product available for sale is relatively low…especially for smaller stand-alone office buildings. Owners of office buildings with vacancies may want to consider listing their properties for sale to take advantage of this swell in demand.

INVESTMENT

Investment real estate has been highlighted by increased levels of out-of-state dollars flowing into West Michigan. The Grubb & Ellis|Paramount Commerce team completed over $135 Million in sales in 2007, 80% of which was sold to out of state buyers. Activity remains steady, however, instability of the debt markets has begun to temper investor demand and has led to some price decreases. Lenders and financial institutions are becoming increasingly more cautious on many real estate transactions. The primary issue impacting the marketplace in 2008 will be buyers ability to find adequate financing.

RETAIL

2008 will provide some new challenges and opportunities. While the newest retail sectors will continue to fill-in, the corridors with a glut of 2nd and 3rd generation spaces will find it harder to lure incoming tenants to their centers. New construction will continue but at a very modest rate with a strong percentage of the building being leased prior to breaking ground. Retail investment activity within the West Michigan area will continue with investors being more particular in their purchases.

INDUSTRIAL

Last year, the West Michigan market continued to defy conventional wisdom by showing a net gain in occupancy of almost 1.3 million square feet. While we have seen and will likely continue to see some local businesses shut down, particularly the smaller automotive suppliers, we anticipate that 2008 will also show a net gain in industrial space being filled. 2007 was a banner year for industrial investment sales. While it will be very difficult to replicate the dollar volume of last year's transactions, there are still many buyers and sellers in the market looking for opportunities. While the international credits markets are not as liquid as in the past, local bank financing is at historically low interest rates, creating opportunities for continued market velocity. We anticipate that local industrial market will continue moving forward in a positive direction as it has in recent memory, despite all of the negative factors that exist in the global marketplace.

PROPERTY MANAGEMENT

BOMA Opposes Utility Plan Restructuring: The Building Owners and Managers Association (BOMA) is strongly opposed to the proposed restructuring of the electric energy legislation. The restructuring is being positioned as a route to cleaner energy by promoting increased renewable sources and this is a very worthy goal, however under the proposed plan the cost of these sweeping changes will be born largely by utility customers. Since PA 141 of 2000 – the electrical deregulation act, Michigan has been very successful in maintaining lower utility rates for it’s customers; under the proposed restructuring, a 30-40% utility rate increase is predicted. Commercial real estate owners are already bearing an additional burden because of increased vacancies in their portfolios, an increase in utility rates will only add insult to injury for real estate owners and do nothing to attract new business and create jobs in our state.

TED SPREAD

Written By: Robert Bach
Senior Vice President
Grubb & Ellis Company

One measure of the credit squeeze is the TED spread -- the difference between interest rates on 3-month Treasury bills (“T”) and the 3-month Eurodollar futures contract (“ED”) as represented by the dollar London interbank offered rate (Libor). Treasuries are risk-free, while Libor is a proxy for the credit risk of corporate borrowers. The recent spikes coincide with heightened stress in the capital markets and greater investor caution. Tighter credit is affecting all corners of the economy including commercial real estate, which is seeing slower leasing and investment activity.

Is Chicken Little Right?Written By: Bill Bussey, CCIM

Everyday we see articles in the newspaper and reports on TV as to how bad the economy is and how things can only get worse. We're all familiar with Chicken Little's famous line, but do you think he was really foretelling West Michigan's future when he said, "the sky is falling, the sky is falling?"

The reports we read about everyday are frightening:

Numerous large employers are announcing layoffs
Unemployment is at a 20-year high
Housing starts are almost non-existent
Foreclosures are increasing

We have to be careful, however, that we remain conservative in our business decisions, but at the same time make sure that talk of recession doesn't become a self fulfilling prophecy. Put in prospective, West Michigan certainly has its challenges, but the underlying economy is actually strong and we have some positive signs.

For example, in 2007 commercial construction was up 13% over last year and December was actually double the previous year. These developments are occurring throughout West Michigan, not just in downtown Grand Rapids. Our downtown is very unique in that it is growing significantly ($1.3 billion of current construction).

Much of this development will eventually result in additional employment in the higher pay scale areas such as medical research, creative development and even manufacturing.

A recent study by Manpower indicates that for the 2nd quarter in 2008, 23% of companies plan to hire more employees and 74% expect to maintain current staff levels. Only 3% are expected to reduce their payrolls. The net effect of this, however, is that actual net employment (total new hires less layoffs and anyone leaving the job market) is expected to remain about the same.

Other factors adding to this area's stability are:

We generate the 5th largest number of patents per capita of all major cities in the US.
We have the highest level of charity per capita of any city other than Salt Lake City. Our population is generous with regular charities and also with donations that help our area grow, such as new educational buildings, new museums, new convention centers, etc. This has been a very important factor in making Grand Rapids as successful as it has been.

In 2008 we need to watch net employment growth, residential sales and foreclosure rates. These indicators should give us good information about the real direction of our economy. Regardless, West Michigan should continue to do what it does best. Be conservative, work hard and be creative.

Property Management in the 21st Century

Written By: Anne Ficeli, CPM

What does a commercial property manager look like in the 21st century? Answer: a whole lot different than they did 25 years ago. Today’s commercial managers are dealing with clients who are much more sophisticated than ever before. Real estate investors, particularly commercial investors, have very specific goals and objectives in terms of their real estate investments. They know what they are looking for in long and short term financial goals, value enhancement, return on investment and cash flow. These investors are looking for more than a “building manager”; they want a well-rounded professional who can bring strategic, financial expertise to the table and help drive the economics of the property.

To meet the increasing expectations of property owners, the job description for property managers has evolved into one closer to that of an asset manager. Key responsibilities often include: evaluating and analyzing lease transactions to ensure that they are in line with short and long-term goals for the property,

identifying and implementing strategies to add or preserve value, determining where and how improvements can be made to improve performance and mitigate risk to name a few.

In addition, today’s property managers must be able to react to change quickly, but more importantly, they must have a knack for anticipating change. Commercial property managers must play a part in helping property owners increase revenues and glean the most value out of a property, which is always a primary objective for an owner.

In addition to the performance of a property, owners have other expectations for their senior property managers. Due to the complexity of all of the relationships involved, real estate can be very high risk in terms of regulatory compliance. This has been heavily influenced in recent years by the likes of the Sarbanes-Oxley Act and Stark regulations. Both of which were designed to monitor transactions between closely related entities as well as to ensure key internal controls are in place and monitored. Although a property manager may not be responsible from a compliance standpoint, many are held accountable for monitoring certain controls.

As this evolution continues, the lines between a senior property manager and an asset manager are becoming more and more blurred. Property management professionals are being challenged to “step up” to meet the needs and expectations of today’s real estate investors. Overall, this is great news for our profession. As managers take measures to gain the knowledge necessary to take their services to the next level, owners are gaining a new appreciation for the role a property manager can play in the success of their investment.

Leadership in Sustainability

Written By: Christopher Beckering

The City of Grand Rapids and the entire West Michigan region have taken a national leadership role in the growing green building movement. Grand Rapids has completed the highest number of LEED® (Leadership in Energy and Environmental Design) Certified projects per capita in the country. Following the example of office furniture manufacturers (such as Steelcase, Haworth, and Herman Miller), universities (such as Grand Valley State and Michigan State), institutions (Grand Rapids Art Museum- the first LEED® Certified museum in the world) and philanthropists (such as Peter Wege and the Grand Rapids Community Foundation), retailers, office users and manufacturers are beginning to recognize both the environmental and economic benefit of sustainable development. While most people have a general understanding of “green building”, even industry insiders are still learning the new alphabet soup, buzzwords and advantages of the phenomena.

Chris Beckering is a certified EcoBroker®. He is the first and only commercial broker in Michigan to achieve this coveted designation as of February 2008.

Market Overview

Written By: Gary Albrecht

Industrial vacancy decreased 9.4% from Q1 2007 indicating that the industrial market is moving in the right direction. Office vacancy increased slightly from 16.2% at the end of last year, mainly due to 82,000 square feet of new construction completed during the first quarter of 2008. Retail vacancy rate decreased from 7.9% in 2007 to 7.4% in the first quarter of 2008, indicating continued interest from national retailers.

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Industrial Close-ups

The Grubb & Ellis|Paramount Commerce industrial team of Duke Suwyn, Steve Marcusse, and John Kuiper are pleased to have had the opportunity to represent L&V Development with its recent land acquisition, industrial property acquisitions, tenant renegotiations, industrial property leasing, and industrial property sales.

"I have worked exclusively with the Industrial Team at Grubb & Ellis|Paramount Commerce for all of my commercial real estate needs over the last six years. Their specialized team approach, unparalleled knowledge of the market, and personal integrity make them the clear choice for me. Their work has been an integral part of my success and it continues to be essential in helping me make the best real estate decisions possible."

Larry Kerkstra, L&V Development

For further information on Grubb & Ellis|Paramount Commerce, click on links below and you will be directly connected: