Commercial Real Estate Sales Plummet While Price Per Square Foot Reaches Record Highs in the Traverse City Area
From a commercial real estate perspective, 2023 was a remarkable year. We saw interest rates rise to levels above anyone’s prediction, major declines, and defaults in urban office buildings, and inflation go from almost double digits at the onset of the year to much closer to the Fed’s target rate by the end of the year. This has led to a much rosier picture for 2024 as predictions of stable pricing have turned to talks of interest rate cuts. Already mortgage rates have declined almost 1.5% over the past 2 months on these expectations. As I cautiously look forward to a healthy economy in 2024, let’s take a look at the statistics from 2023 to see how northern Michigan trended compared to previous years.
The total commercial sales volume for Grand Traverse County was only $39.3 million in 2023. This was a drop of 38% from 2022’s record $63.3 million in sales. The total number of sales decreased from 98 to 83 as we experienced a significant decline in larger sales in the second half of the year. The average sale price dropped from $646,200 in 2022 to $491,300 in 2023, which corresponded with a decrease in the average building size from 6,300 SF to 3,600 SF. However, when we look at the sale price per square foot (SF), we see that 2023 set another record high, going from $121/SF in 2022 to $141/SF in 2023. This is not entirely surprising since new construction pricing continued to rise, driving more value to existing buildings. With a year of rising interest rates and cooling demand, we also saw the average days on the market increase from 180 days to 212 days.
The surrounding counties of Leelanau, Benzie, Kalkaska, and Antrim also experienced record price per SF rates similar to Grand Traverse County. In addition, these 4 surrounding counties had record sales volume and sale prices that were driven by numerous high-priced restaurants that sold in Leelanau County and one in Elk Rapids.
Below is a breakdown of how each class of real estate fared in 2023 for Grand Traverse County.
After having the largest increase in any of the categories in 2022, the retail sector had the farthest to fall, and sales went from 15 down to 7 in 2023. The average retail building sold was much smaller this year and only 33,000 SF of retail space was sold in the county compared to 207,000 SF the year before. As with the market as a whole, the price per square foot still managed a significant rise from an average of $171/SF to $193/SF. As in the previous year, only one restaurant sold, although a whopping 10 restaurants sold in the 5-county area. This is probably because it remains difficult to get restaurant employees in or near Traverse City whereas employees are more available in the surrounding counties.
Interest rate increases took a toll on multi-family sales, and we saw 66 units sell in 2023 compared to 85 the year before. The average price per unit dropped from $175,800 to $167,500 as expenses increased for landlords. The average price per square foot went up 25% to $211 as smaller apartments were the ones that cash-flowed best for investors who were buying. The surrounding counties had very similar trends with a 16% drop in the number of units sold and a 20% increase in the price per square foot.
This was the only group to show a decline in price per square foot as sales went from an average of $92/SF in 2022 to $87/SF in 2023. Sales continued their downward trend from the 2021 peak and 13 properties traded compared to the 15 the year before. The average sale price of $583,000 was a 28% drop from the year before, however the fact that the average building size sold decreased 43% explains why the price per SF only dropped 5%.
OFFICE & MEDICAL OFFICE
Shockingly our office market bucked the national trend and was the only category to show an increase in sales. We had 17 sales totaling $10,800,000 in 2023 compared to 9 sales totaling $7,500,000 in 2022. Although office utilization dropped about 20% for most office users and we saw a lot of downsizing, companies seemed more confident in the knowledge of how much space they would need and moved forward with purchases. The average sale price hit a record $250/SF, a 63% increase from the year before. Sales were much slower and the average number of days on the market hit 338 compared to only 190 days the year before. 2 medical office buildings sold which is down from last year, but there were fewer on the market. The average days on market for medical office was the only real estate category to decrease with an average of 132 days on the market compared to 412 days the year before. Medical office space sold for an average of $172/SF which was an increase of 6% from the year before.
PERSONAL STORAGE UNITS
After an explosion in small condominium warehouse spaces in 2022, we saw demand start to soften in 2023. Sales went from 41 units to 35 units with the average price decreasing 12% to $125,000 and the average size decreasing by 19% to 1,350 SF. Price per square foot continued to rise and we saw a modest increase of 3% to $92/SF. The slowdown in sales caused the average storage unit to be on the market for almost twice as long as the previous year with an average of 180 days.
VACANT COMMERCIAL LAND
High-interest rates probably hurt the development sector the most, as new projects were harder to fund, and lenders pulled back due to fears of increased building costs combined with a possible recession. 18 parcels sold in 2023 compared to 46 the year before. Price per acre decreased slightly with an average of $223,000/acre which was a 6% decline from 2022. Activity is likely to pick up again in 2024 as interest rates temper and fears of a recession fade.
Leasing activity in Grand Traverse County increased for retail, industrial, and medical office space and decreased for traditional office space. More office users purchased their space in 2023 which was most likely a factor in the softening of office leasing. We had a total of 112 new leases, which was a 7% drop from the year before and the decrease was entirely driven by the declining office leasing market.
OUTSIDE OF GRAND TRAVERSE COUNTY
As expected, 2023 continued to see a drop in the number of sales in the surrounding counties of Antrim, Benzie, Leelanau & Kalkaska as more workers returned to work. There were 55 commercial sales totaling $23,600,000 compared to 88 sales totaling $22.1 million the year before. Although fewer properties sold, the average price was $429,500 which showed a 71% increase in price, and the days on the market dropped to 187 from 302 the year before showing the strength in prime real estate in some of these outlying communities. The biggest sales were numerous restaurants in Leelanau County that sold between $1-2 million and a waterfront restaurant in Elk Rapids that sold for $3.8 million.
As we look towards the new year it is expected that interest rates will decrease and that we will see more strength in every sector of commercial real estate. The volume of sales is likely to increase and the price per square foot will continue to rise, but at a slower pace. As inflation worries wane, look for better times ahead with more transactions and availability than 2023.
Wishing you a Happy and Healthy New Year!
Dan Stiebel, CCIM