Why Downtown Traverse City’s Most Iconic Buildings Are All Selling At The Same Time
Below, please find an interview between Craig Manning of The Ticker and Dan Stiebel of Coldwell Banker Commercial Schmidt Realtors. The original interview can be found here.
Increasingly, 2022 feels like the start of a new chapter for downtown Traverse City. In addition to the impending redesign of the riverfront, plans for Rotary Square, and the potential new affordable housing within city limits, several of downtown’s most iconic buildings are hitting the market or changing hands for the first time in generations. The Ticker sat down with Dan Stiebel of Coldwell Banker Commercial Schmidt Realtors – a real estate pro involved in many of the area’s biggest commercial transactions – to discuss what all the activity means for the future of downtown.
Ticker: It seems like a lot of downtown buildings are on the market, including iconic spots like the Beadle Building and the Masonic Building. Big picture, are we seeing more commercial real estate activity downtown right now, or does it just seem that way because a lot of the bigger buildings are for sale?
Stiebel: I think we're seeing more activity on the sales front. What's happened is, over the last couple of years, downtown pricing and demand for downtown space have both skyrocketed. Downtown is doing well and everybody wants to be there. 15 years ago, everybody only wanted to be on the core two blocks of Front Street. If you were a block or two away, you wouldn't get any walk-by traffic and it was really just more of an incubator until you got onto one of those two main blocks. But then Bubba’s opened, and then Little Fleet, and I think Little Fleet really drew people down East Front Street and opened up that whole side of town. And now you have more businesses on West Front as well, with Barrio opening, and Modern Bird, and Lil Bo changing hands. So downtown as a whole is very strong, and then the main blocks just become that much more popular as the area grows.
I think what’s happening now is that a lot of building owners that have owned for a long time have been watching values go up and thinking, ‘I'm not going to sell; it’s still a good investment!’ But then, for various reasons for different owners, that mindset has changed. We definitely hit a high in the market, and there was a pullback with interest rates increasing. And I think everybody, in all aspects of real estate, thought to themselves, ‘I wonder if interest rates rising are going to bring prices down.’ People didn’t want to miss the height of the market and have to wait another 10-15 years for it to come back – especially if their goal was to retire at some point in the next 5-10 years. So I think we saw a lot of people go through that thought process and decide that that maybe the time is now to put their buildings on the market.
Ticker: Q1 and Q2 commercial sales data shows that commercial sales transactions and dollar value are both up in Traverse City this year compared to the past couple of years, and that average days on market is down. Why the extra interest for commercial real estate? And what are we seeing with office space, given that a lot of businesses are still in remote work mode?
Stiebel: Investors are looking at real estate as a great hedge against inflation. They're seeing stock market portfolios go down, bond values go down, crypto go down. Even precious metals, which historically have been a great hedge against inflation, are going down. But real estate is still going up. So, I do think that's been a boon. And then residential real estate is more affected by higher interest rates than commercial, so the commercial market has benefitted from more investors looking at it as a safer place to have their money. As construction costs get higher, the value of existing buildings goes up, so commercial buildings tend to hold their value or increase their value over time, especially in an inflationary market. The market has been really strong for those reasons.
With regards to office space specifically, Traverse City still has a lot of vacant space. We're starting to see more activity and more people taking some of the larger offices. But there's still this large amount of office space available, and I think some of it will end up getting redeveloped and probably turned into residential. That option just makes sense: We have too much office and not enough residential, and there's really no reason that a lot of downtown office buildings couldn't convert to residential, other than that the economics have to work.
The other thing is that, right now, the small office is the most popular option. If I had a 10,000-square-foot office downtown, converting it into single offices would probably be the highest return on investment right now. There's just a lot of demand from people who work remotely but want to get out of the house and just need something small. Whether that persists over the next 10 years remains to be seen.
Ticker: What’s the inside scoop on the latest sales happening downtown? Again, a lot of major buildings have been on the market lately, including the Masonic Building, the Hannah Lay Building, 101 North Park, etc.
Stiebel: Your headline could be ‘Dan Stiebel puts every corner on downtown Front Street under contract.’ This is kind of crazy, because I always get calls from people who want to buy buildings downtown, and usually I tell them, ‘Ok, I'll put you down a list and maybe something will pop up in the next year or two.’ But right now, all these buildings are going at once. The Masonic Building is under contract and [the buyers] are in the middle of their due diligence. The Beadle Building, Jack Lane [of Real Estate One] has that listed for sale, but I just brought a buyer to it and we put that under contract; they're beginning their due diligence process on that building now. And then on Park Street, the Grand Traverse Pie Company space, that’s a condominium unit on the ground floor and that is under contract as well. So, none of them are officially sold; they're all still available for sale. But we do have buyers lined up and anticipate all three closing in the next couple of months. And then Boyne Country Sports is another condo unit, being used as a 15,000-square-foot retail space, and I've got listed for sale as well, and it is still available. So, if anyone is feeling like they missed the boat and wanted to buy one of the prime corners of downtown Front Street, I still have one of them for sale.
The Ticker: What should locals anticipate for the futures of these buildings?
Stiebel: The ones that I'm working on right now, I'd say all good things; all what the locals want. The leased ones [such as the Grand Traverse Pie Co. space] will remain leased to the tenants who are in there as long as they want to stay. All the buyers are looking to do is get some income and have the tenants stay. All three buyers are local people with local businesses currently in Traverse. The Masonic buyer is looking at potentially someday moving their own business into the space, but in the meantime, all those leases will be honored. And then the Beadle Building, I’ll just say all options are open. What I hear is that the owner of Mackinaw Brewing is looking to retire, so someone could take that over, or it could become a different restaurant. But in general, I don’t think we’re going to see a ton of change [in what these buildings are used for].
The Ticker: Earlier this year, the news broke that Cherry Republic was buying the Arcade building and turning it into their new headquarters. Could we see more of downtown’s flagship businesses buying their own buildings, especially with commercial real estate looking like such an attractive investment?
Stiebel: I’d say that, if you can find a building that somebody’s willing to sell, and then own your own location, that gives you stability in the long term. Because, basically, you're locking in today's pricing, and you can stay there as long as you want. Historically, we have had a lot of building owners who own their own building and business downtown, and that's why they've been able to remain in business, because it really helps them control costs. But there’s also quite a few landlords who like owning their building downtown and will continue to lease it. And especially with landlords that have owned their buildings for a while, they can afford to offer very reasonable rates. Whereas, with some of these buildings that turn over, there's really no choice but to raise rates because the taxes get uncapped.
For example, with the Masonic Building, the family who owns that building right now has owned it for over 50 years. Taxes for the current owner are $20,000 a year; after it sells, it's going to be over $100,000 a year. That’s a plus for downtown Traverse City, because all that money is going into the coffers for the city. But it causes a hardship for the new owner – and therefore for all the tenants who are in the building – because the landlord needs to find a way to make up for that lost income, which means the cost of the uncapped taxes gets put back on the tenants. I think buyers and landlords get a lot of blame for buying a building and raising prices or forcing all the tenants out. But that's not really what I see. Because unless the previous owner wants to sell a building for way less than it's worth, [this issue with tax uncapping] is going to happen every time a building sells.