After high activity in Q1, investment market faces unknowns
Out-of-area investors and firms continued to generate a high level of activity which kept positive pressure on values for commercial real estate in West Michigan in Q1. With inventory low, we saw steady activity across all asset classes, with the only constraint being a lack of inventory as available capital remains incredibly abundant.
Interest rates continue to remain extremely low, as many debt vehicles are available from high two percent to mid four percent. Q1 continued to experience a high level of refinances as investors who entered the market early post-recession secured new long-term loans, many pulling out significant capital for redeployment.
In Q1, the City of Grand Rapids issued its annual property assessments that showed a booming real estate market. Commercial, residential and industrial all showed increasing valuations of over seven percent, with commercial and residential over ten percent. This is indicative of a market with a long run of continued above market growth across residential and commercial assets due to low unemployment, fair cost of living, and a robust, productive economy.
The COVID-19 pandemic began impacting West Michigan in mid-March and has caused great unknowns for investors. Many factors have put investors on the sidelines with a wait-and-see mentality. Whether investors are focused on protecting current assets and shoring up weaknesses in a portfolio, or just simply do not know what tenants will be around to pay rent in three months, it is clear capital will remain tentative until we see the economy open back up. Then, only after seeing what an open economy looks like, will we see pricing at the level experienced merely a month ago. It is our assumption and belief that interest rates will remain low relative to historic times. However, inefficient bond markets will keep interest rates volatile in the near term, another factor we anticipate remaining in the short term until confidence returns to the market. For those looking to refinance, it will be a daily or weekly exercise to check with lenders on current terms and rates.
In summary, we have entered unchartered waters and will certainly feel the pain for months to come as the economy slowly opens up. There will be businesses that do not re-open, families that will suffer financial hardship and many forced to pivot careers. However, West Michigan is a community that works hard, takes care of its stakeholders, and will no doubt come out stronger, more robust, and find ways bring new business production into our market as the global market slowly changes in reaction to lessons learned through this pandemic.