2019 Mid-year CRE data shows market increases, Realtors have some reservation about outlook

The Tri-Cities commercial real estate marketplace has been and continues to see varied performance so far this year.  The number of new commercial permits, lease transactions and commercial sales all outperformed the first half of last year. But several commercial practitioners reported doing more business for less return during the first half of the year. Activity increased in the third quarter.


Data source - Appalachian Highlands
Dashboard for Real Estate Analytics

Mid-year reports from the Market Edge, Northeast Tennessee Association of Realtors (NETAR) Commercial Multiple Listing Service (CMLS) and the first reports from the Appalachian Highlands Dashboard for Real Estate Analytics show more new commercial building permits, more lease transactions, and more commercials sales than the first six months of last year. 

At mid-year, the value for new commercial permits in the seven-county region totaled $113.2 million, up 52% from the first half of 2018. That was the strongest six-month performance among the neighboring markets in Chattanooga, Knoxville, and Asheville, according to the Market Edge – a Knoxville firm that compiles building permit data from 299 code offices in 113 counties.  This somewhat follows a pattern seen in the mid-year residential permits reports. That prompted suggestions that the reason the Tri-Cities was leading was the other markets had peaked in their cycle, and the local market is not quite there, yet.

A total of 267 new permits were pulled during the first half of the year compared to 213 last year. Sullivan and Washington counties – the region’s largest markets – accounted for the lion’s share of new permits, while Greene Co. Tenn. and Washington Co. Va. saw noteworthy increases in the number of permits. The Washington County market saw the highest construction value gain from mid last year - up $22.3 million – while the Sullivan County increase was $8.9 million. Together new permits for those two counties totaled $83.5 million.

Transactions reported by the Northeast Tennessee Association of Realtors’ (NETAR) Commercial Multiple Listing Service (CMLS) outperformed the first half of 2018 by 33.3%. It was the best half-year showing since 2015

Transactions do not include lease data from other commercial listing sources.


Data source - The Market Edge

The Appalachian Highlands Dashboard for Real Estate Analytics’ mid-year report shows commercial real estate sales increased by 8.7% while the sale volume was down 28%. There were 22 more commercial sales the first half of this year, while the total sales volume was down $50.6 million.

The leading sales so far this year was the $20 million deal for the Monarch Apartments in Johnson City and $13.7 million for Court Yards by Marriott in Bristol, Va.  The top mid-year sales last year was $71.3 million for the current Ballad’s Urgent Care Center on Stone Drive in Kingsport.

According to the Dashboard’s 2018 data, the total Tri-Cities sales volume for commercial and residential real estate was $1.9 billion. The dashboard is a new data solutions service enterprise by Don Fenley, supported by TechPoint’s Austin Ramsey, TCI Group’s Nina Heffner, and underwritten by Jerry Petzoldt, TCI Lifestyle Investments.  Its metrics are based on title transfer data.

Observation from commercial practitioners on the state of the market at mid-year was mixed. Since then activity has picked up. But there's still a surplus of some types of commercial property and locals are maneurvering to make the most from an economy that is bifricated in many ways. Like the national economy - much of what’s happening locally is squarely in the court of the consumer. Nationally, manufacturing is in recession, and analysts are anxiously watching the economic slowing in both Europe and China. The local exception is the local existing residential housing market. It continues curning out record monthly sales and home price increases.

Kelly Graham, Graham & Associates in Bristol, is optimistic that the Twin Cities will continue on the upswing. “It’s the region’s beacon.  The Pinnacle is continuing toward build-out, and there are also some good things happening at the Falls.” He also cites progress with the repurposing of the old K-Mart building, another Bristol market-grade apartment complex by Mitch Cox, among a host of other development gains.

Although there were more CMLS land transactions so far this year, Michael Green, Green Commercial Reality, thinks that market segment is slowing. “Commercial development is sporadic isolated to niche users not yet represented.” Gary Sproles of the TCI Group added that “many of our communities require redevelopment of sites to provide a desirable location.” Stone Drive in Kingsport is a prime example.” 


Data source - NETAR CMLS. Mid-year lease transactons

Green said retail vacancies are at all-time highs in most of the submarkets. “Certain anchors are still unrepresented in our markets, but e-commerce has everyone morning very cautiously, including the previously unshaken grocery and furniture sectors. Both lease terms and rates are diminishing for all traditional retail users and leverage is increasing for tenants immune to the internet such as service providers or specialty entertainment and food and beverage.”

Sproles said retail leasing is almost at a standstill. “Kingsport is affected by the Pinnacle more than predicted.”

John Speropulos, president of Mitch Cox Realtor in Johnson City also cited some retail rent fatigue. Some of that fatigue is fueled by increased activity in prime retail locations. Both Johnson City and Bristol continue to see increased downtown activity. Market watchers in the Washington County area are also closely watching plans to develop a destination recreation and retail complex in Boones Creeek.

Almost all of the commercial practitioners contacted for the mid-year update reported that the office sector is stained by oversupply and little new demand. Sproles pointed out that medial space was overbuilt even before the Ballad-Wellmont merger. Graham said he sees “plenty of office inventory” but not much movement.


Kelly Graham, left, Michael Green, John Speropulos, Gary Sproles

The industrial sector, which saw the biggest lease transaction increase during the first half of the year, remains the strongest sector, and most practitioners think it will be that way for a few years. “Our markets have finally absorbed the glut of space created by NAFTA and incentivized globalization. We are finally approaching a balanced market where space users and providers have equal negotiating leverage,” according to Greene.

Graham added that land has been prepped on the Bristol beltway in anticipation of industrial and that he’s noticed more site selector visits. “But no one is pulling the trigger yet,” he added.