Real estate market is promising, except the parts that aren’t
UM/ULI report shows less optimism than in years past.
West Michigan and Metro Detroit should continue to see excellent real estate opportunities next year.
Aside from those submarkets, however, real estate professionals are less optimistic about the outlook of Michigan real estate than in the previous few years, according to the latest Michigan Real Estate Trends Report from the Urban Land Institute and the UM/ULI Forum.
Twelve cities appear to have an above-average outlook, including Grand Rapids, Kalamazoo, Ann Arbor, Detroit and Traverse City — the state’s most promising market.
“The Michigan real estate market continues to grow, but that growth continues to be slower than expected and uneven,” the introduction of the report reads. “Real estate professionals continue to be cautiously optimistic about the future, but are less optimistic this year than last.”
The survey found there are several segments in real estate slated to grow during the next five years, while others are still working through their recovery from the Great Recession.
Among the promising statistics in the report is the lowest unemployment rate Michigan has had since June 2001, at 5 percent. Michigan bottomed out in economic health in 2010 and 2011, but no measures of income, population or employment are back to pre-recession levels, according to the report.
The state’s population at 9.9 million is No. 10 in the nation, down from No. 9 last year but stable over the last 40 years. Michigan’s median income was $51,411 last year, up 1.3 percent over 2013, but more than $12,000 less than the all-time high of $63,708 in 2000.
Employment also grew 1.8 percent in 2014 with 4.4 million jobs, but it’s 10 percent off the all-time high in 2000.
In terms of demographics, 25- to 54-year-olds make up a third of the population, with another third falling in the 40-64 age groups.
“Younger populations continued to be on the decline, which in absence of migration from other states, will reduce demand in this segment,” the report reads. “The empty nesters have shown strong growth, and with their disposable income, will continue to be an important segment.”
In a regional breakdown, the report shows West Michigan’s population dropped 1.3 percent since 2013, with median household income dropping 5.7 percent. Total employment increased 5.3 percent, with the number of households dropping 2.4 percent.
Southwest Michigan saw the largest gains with a 7.9 increase in population, 14.9 percent increase in employment and a 10.7 percent increase in households.
Multi-family units is one of the strongest segments with a sales volume of seven times above the lows of 2009. It has regained pre-recession values, where retail and industrial segment values are at about half their pre-recession value, according to the report.
In 2015, overall sales volume returned to similar levels of 2013 and most of 2014, following a surge in the fourth quarter of 2015. Sales volume per square feet sold has increased in retail, industrial and multi-family for at least the past six quarters, according the report.
Kent County was one of three counties to experience between $135 million and $260 million in industrial real estate sales in 2014.
The report includes three industrial real estate trends to look for: efficient layouts, clear heights and column spacing, and infill development.
Industrial space has seen its value increase from $8 per square foot in 2010 to nearly $23 per square foot in 2015.
“With the auto industry back on track, suppliers are healthy,” a respondent said. “Firms from around the world continue to move pieces of their businesses here so, as the suppliers are healthy and the businesses are healthy, they need manufacturing and warehouse space.”
Similarly, office and retail real estate also have seen a surge in sales.
Next year should be an even better year than 2015, according to the report, led largely by general construction, multi-family and financing segments.
“By and large, the interviewees indicated that profitability in 2015 had been good and that significant projects already in the pipeline should make for an even better year in 2016,” the report reads.
A good number of segments are in recovery, including single-family lots, land for development, full-service motels, moderate apartments, neighborhood centers, farm ground, luxury housing, townhouses and condominiums, and medical offices.
Several other segments are in the growth stage, including limited-service hotels, self-storage, general industrial, bulk distribution space, student housing and tax credit apartments.
No segments are in peak stage, but two are in advanced decline: power centers and regional malls. Three additional segments have bottomed out: suburban offices, single-family homebuilding and central business district office.
The report indicates interest rates and inflation will rise substantially during the next five years.
Still, profitability also should continue to rise.
“I expect profitability to continue to improve,” a survey respondent said. “Prices are getting to a point where it’s not like you can come in and get a steal, but rents are at a point where it makes sense to come in and buy a property. People aren’t buying purely on gut.”