Momentum: Commercial real estate follows residential rise

Apr. 25—TRAVERSE CITY — Much of Michigan and a good part of the country took a pause halfway through the third month of 2020.

The first shutdown because of the COVID-19 pandemic claimed the second half of March and all of April for most businesses deemed non-essential. Upon reopening, some businesses thrived when reopening. Some limped along with a partial reopening, others fell victim to the crunch and were unable to reopen.

For the real estate market, the shutdown of non-essential business was just a blip, long forgotten when the economy reopened on May 7. The real estate market responded with a roar in the final eight months of 2020, led by residential market, with the commercial side quickly following.

"We're looking at a real exciting time both residentially and commercially in Traverse City and outside of town," said Marty Stevenson, commercial Realtor with Exit Realty Paramount.

"Interest rates were at an all-time low, plus government and financial incentives made it a good time to purchase real estate and put money in commercial real estate," said Dan Stiebel, associate broker at Coldwell Banker Commercial, who reported his "second-best year" in terms of volume and sales totals. "Commercial real estate is a good hedge against inflation."

Just as it did with residential, the commercial side of real estate ground to a screeching halt in spring 2020.

"I thought I was done for the year," Stiebel recalled thinking in mid-March. "A couple of deals I was working on got canceled. A couple other deals I was working on got delayed.

"But I would say 75 percent of the ones I was working on came back together and ended up closing. A couple of new ones also came together."

"Last year was going to be back-end loaded," Stevenson said. "Developers still have long-term schedules. They still have work that has to be done, it has just been delayed."

The same thing happened in the residential market.

Just 116 homes were sold in May 2020 in Grand Traverse, Leelanau, Benzie, Antrim and Kalkaska counties, according to Aspire North Realtors, formerly the Traverse Area Association of Realtors.

The total of residential homes sold marked a 62.5 percent decrease from the 309 sold in May of 2019 and a 30.1 percent dip from the month before. But consider the fact that the real estate market was virtually closed for business — except for virtual tours and already begun transactions — from the middle of March to when services reopened on May 7.

When the final number on 2020 residential real estate was in, there were 3,455 sold in the five counties, eclipsing the mark of 3,377 in 2019. And 2019 had been an increase from the 3,119 sold in 2018. Even 2017 (3,360) and 2016 (3,386) were exceeded by 2020 totals, despite the springtime hiccup.

The first two months of 2021 have remained relatively unchanged from 2020 in residential real estate. January 2021 saw 184 residential homes sold, a decrease of six from 2020 while February 2021 saw 172 sales, a decrease of four from the year before.

The year 2020 in commercial real estate told the same story.

A total of 82 commercial properties were sold in Grand Traverse County in 2020, an increase of 67 from 2019, as reported in Northern Great Lakes Realtors MLS (NGLRMLS). In the same five counties mentioned above, the number of commercial properties sold in 2020 totaled 150, an increase of 28 from 2019.

The NGLRMLS did see a decrease in the average sales price of commercial real estate, a 28 percent decrease from $516,400 to $371,600 in Grand Traverse County and an 18 percent drop in the five county area. In his monthly email, Stiebel a "a surge in sales of mini-storage condominiums that accounted for 38 of these sales" and their average sale price of $105,000 brought down the average.

As well as the 2020 performance was in commercial real estate in the five-county area, it was mixed across different sectors. It was even mixed within some sectors.

According to the NGRMLS, retail prices dropped 28 percent to $147 a square foot in Grand Traverse County. That helped increase the total square footage sold 48 percent, to 58,000, in Grand Traverse.

It is important to note the NGLRMLS does not track hotels.

"Retail has been the hardest hit other than hotels, which we don't track," said Stiebel, who noted previous retail prices were inflated by marijuana dispensaries seeking locations. "People aren't going to stores and they're doing more shopping online."

"From the business clients I have, some had really good years," Stevenson said. "Some restaurants even had record years; some struggled."

Industrial/warehouse was in demand in 2020, according to Stiebel's year-end newsletter. The price of industrial/warehouse sold increased 30 percent to $79 per square foot, but the total sales volume dropped off 26 percent and the total square footage saw a 43 percent plunge.

The year-end newsletter from Stiebel reported leasing in 2020 was nearly identical to 2019, led by industrial and office. It will be interesting to see how office leasing performs in 2021, depending on what companies emphasize with its remote workers.

"Some people think its the new normal; some think it's coming back," Stiebel said. "The answer is it will be somewhere in the middle. It just depends on your business."

Stevenson said he could see many companies relocating to Traverse City from other parts of the country — but instead of needing 20,000 square feet in a place like Boston, they may require only 1,500 to 2,000 square feet, with more remote work in Traverse City and elsewhere.

Vacant commercial land was in demand, particularly downtown for financial institutions, rental housing and mixed use buildings.

"The future looks bright," Stevenson said. "A lot of redevelopment projects have closed, both in the city and beyond."

Stevenson said he forecasts a strong year both within the city and beyond.

"Garfield is ready for renovation," he said, noting areas to the south like Blair Township, Chum's Corner, Kingsley, Hammond and Three Mile and Acme Township to the east, should perform well. "I think it is the next domino ready to fall. The Meijer corridor (on U.S. 31) has had a lot of action the last 5 to 10 years."

Stiebel also sees a strong 2021, his only hedge being the low inventory of commercial spaces.

"So far it looks like it will be more of the same," Stiebel said. "Prices will continue to go up. Interest rates have gone up a little bit, but people still want to invest in commercial real estate."

Stevenson said organizations like TC Tourism, the City of Traverse City, the Downtown Development Authority and even Pure Michigan have promoted northern Michigan as a great place to live. He said commercial real estate will follow the residential trend toward more demand.

"TC's inventory is small enough, it will be filled by the demand created simply by people moving to the area," Stevenson said. "The value of our area is undeniable by local developers, downstate developers — and it won't be long before we're known by national developers."

The residential real estate market already has shown that more people are moving to the area from outside the region. Since March 2020, some 1,000 additional households from areas that do not have Zip Codes starting with 496 (the first three digits for most of northwest Lower Michigan) have requested mail forwarding services from the U.S. Postal Service than the same time period in 2019, according to a Sept. 27 Record-Eagle article.

That amounts to a 2.5 percent increase in out-of-state migration for the summer of 2020 — and a 50 percent increase during the months of July and August.

The average price of a home sold in 2019 in the five-county area was $303,4968, the median price $237,900. Those figures jumped in 2020 to $353,260 and $260,000, respectively. In 2020, slightly more homes were sold in the $300,000-$399,999 range than in the $200,000-$249,999 range.

Stevenson said that's another indicator of more people from outside the region moving in: spending more money for residential real estate.

"The word is out about northern Michigan," Stevenson said. "The world knows about us. People are moving here."