The commercial market: What’s selling, what’s not? Five experts tell it like it is

REGION – "For Lease" signs in strip malls and office buildings, "For Sale" signs on vacant developable land, a commercial building on the market for two years hungry for a buyer – in a nutshell, this is the state of the region's commercial real estate market. There is no more blatant sign of activity around the area – or lack thereof – than the number of actual signs looking for buyers, lessees and investors.

The TCBN spoke with five local realtors who deal primarily with commercial real estate across the region. Here's what they had to say about the market, what is selling and when they expect to see things turn around.

The Market

James Schmuckal of Schmuckal Realty has spent his entire 30-year real estate career in Traverse City, specializing in commercial for the last half of it. His niche is in working with townships on projects that require rezoning and special land use permits, planned unit developments and he does a lot of work with franchise companies.

"The last one to two years, the pricing of property has been basically flat with modest activity," said Schmuckal. "We've made deals, both sales and leasing, but there is a limited number of commercial construction projects," noting that retail and light industrial are steady.

He, like others the TCBN talked to, predicts much of the same for the next 12 months.

"The train is moving slow, but it's not stopped," Schmuckal said.

Real Estate One Broker Michael Orden said it's "by far the worst market" in the 14 years he's worked in real estate in this region, compounded by what he identifies as the nation's worst financial times in his 25-year professional career.

He sees "a disequilibrium" between buyers and sellers with regard to the valuation of real estate, and says sellers need to readjust the values to the current market – something he has just started to see happen over the last six to nine months. He mentioned one property in the last six months that was listed at 20 percent less than its appraised value. Even so, buyers are few and far between. "We haven't hit that equilibrium that will bring buyers out," he said.

Jerry Keelan, owner of Keelan Commercial Group, Ltd., points to an ever-growing number of available commercial spaces and next to no sales activity with industrial/manufacturing buildings.

"We have been in an increasing vacancy mode for a year and a half," Keelan said. "I do not see that changing for another year and a half, then flat for another year. It's a good time to buy your space rather than rent."

When Bill Sage, owner of Sage Real Estate Services, compares things now to a year ago, "it's worse," he said, and expects more of the same over the next year.

"You typically don't see 'For Sale' signs in front of strip malls," said Sage, who has spent the last 19 years of his local 30-year real estate career focused on the sale, lease and option of commercial real estate. "Some buildings, including retail in Garfield Township, have been vacant for up to two years."

"I see people really struggling with their properties, really on the brink," he continued. He has also fielded calls from appraisers wondering what he considers to be a liquidated price for a particular commercial property.

Mike Schmidt, president, partner and co-owner of Coldwell Banker Schmidt Realtors, cites commercial real estate in the small communities surrounding Traverse City as well as vacant developable commercial land as "challenging" and the industrial market slow. But, unlike some of his fellow professionals, sees the market as "stabilized with a nice balance of supply vs. demand." He currently has approximately 200,000 square feet of buildings represented in the area for commercial leasing or sales.

What Is Selling?

Schmidt says specific pockets of the market – for example, improved commercial properties in prime areas – read downtown Traverse City and M-22 and US-31 – as seeing better activity today than in the last two years. He expects that to continue to improve in the next six months to a year "assuming we don't have any drastic changes in the national economy."

Adding, "Our office and retail properties seem to be getting the most interest right now with probably the most interest we have seen in the past two to three years in the Traverse City market and adjacent areas."

Schmuckal said he's seen a number of people who were renting that have decided it's time to own because of the growth of their business. Both Orden and Keelan have noticed more owner-occupied sales as well.

"Current buyers are grabbing opportunities and they are also businesses that are providing services that are in strong demand," added Keelan.

"No one sector in commercial real estate is lighting a fire," said Sage, with retail "possibly holding its own in certain locations" and the manufacturing sectors (primarily Garfield and East Bay townships) following close behind. The office market is perhaps the worst, he said.

"There are extreme vacancies with deep, deep discounts and concessions being made just to get people and companies in these buildings so at least the mortgage and property taxes can get paid," said Sage.

While price is clearly the main driver in moving properties, Orden said he is hearing "rumblings of land contracts" as a way to avoid getting banks involved in the transactions. Keelan described it this way: "Low price is the name of the game. Unload and stop the bleeding."

On the other hand, Schmidt has seen sellers become "very competitive in the last two years." He said the combination of additional demand entering the market along with very limited new supply, results in prices holding near listing levels – levels that are typically more competitive compared to a few years ago.

Obstacles

As far as challenges to get the market jump-started again, the opinions are many.

According to Schmidt, Traverse City is still on the radar of many investors looking to own leased properties, but "there are not a lot of very good options for them to do that."

Orden agreed that investment transactions are indeed few and far between.

Sage said one area he sees as particularly devastating to the commercial market is property taxes.

"They are killing many of these closely held real estate investments to the point that even one or two vacancies means severe negative cash flows," he said. For example, a building with a $2 million dollar value is now paying close to $50,000 in real estate taxes a year, he noted.

"I am seeing buildings where the property taxes are running between 30 and 40 percent of the buildings' total gross income," Sage said.

With development parcels, Schmuckal said a 40- or 80-acre parcel zoned for commercial, industrial or multi-family that used to generate interest immediately today can sit for months without an inquiry.

All the industry professionals agree that tightening lending standards are playing a significant role in deals getting done.

"I believe the lack of new development is partially because of the new underwriting standards that are requiring a much more substantial equity position as well as much higher leased to vacant ratio on yet to be developed properties," said Schmidt.

"We're going back to that 20 percent down attitude," said Keelan.

Moving Forward

Orden views what is happening as a seven-year cycle and it's only a couple of years into it.

"I think we'll see continued weakness over the next year," he said. "Then it will strengthen in 12 to 24 months, and by 'strengthen' I mean a flat market, where it will remain for another one to two years."

For Sage and others who recalled weathering the high interest rates in the early 1980s, and the savings and loan scandal in the early '90s, this downturn will also have significant historical relevance several years from now.

For one thing, it's causing some realtors to change the structure of their business in order to compensate for the market, including charging fees for some services that they hadn't before.

Orden said he has more listings than he's ever had, which over the short term may not be great, but on the other hand he'll have a lot to offer when buyers come back around.

"You hunker down, work hard and work through these issues," he said. "I'm seeing a readjustment to current market realities and seeing a strong future, but it will take a while to get there." BN

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