Headwinds blunt commercial real estate transactions

Don Fenley 

Early fourth quarter commercial real estate transactions typically signal the close the year and a preview for the coming year’s strong start. But not this year. The region is engulfed in a perfect storm blunting a commercial real estate data even though investor interest and economic growth in the Tri-Cities region remains strong.

Despite strong fundamentals, leasing velocity continues retreating, according to the National Association of Realtors (NAR) Commercial Insights. The retreat is at both the national and local levels. “We are still in the throes of the late COVID era, and disruptions have yet to run the course,” according to NAR’s report.  

“The two major head winds we face are the reset of commercial interest rates made 4-5 years ago when money was cheap, creating positive cash flow for investors,” said Jerry Petzoldt, Northeast Tennessee Association of Realtors (NETAR) Commercial Committee chair. But since those rates were only good for five terms, they are about to skyrocket to 7%-8% depleting investor cash flow. “This is a big worry for both the banks and investors.”

The second head wind is higher commercial construction cost, causing commercial rents to skyrocket. Business and tenants have been slow to absorb and pay the higher rents. “The combination of these headwinds is slowing the number and feasibility for some commercial new projects and a lot of existing commercial investments.” 

From the strong local fundamentals side of the situation, Tri-Cities employers continue adding jobs. The growth rate has slowed, but for all practical purposes the region is at full employment and continues to have a labor shortage.

Local consumers have not closed their wallets. Seasonally adjusted state sales tax collections in the region continue increasing and well above pre-pandemic levels.

Private sector wages were also up from last year, and there are ample examples of a growing economic climate. New housing and commercial projects are under development, and new businesses are setting up shop across the region.

Much of the uncertainty in the market is the full impact of the Federal Reserve’s higher rates have not have fully working their way through the system yet. New inflation rate reports have also tipped the FED toward resuming interest rate increases. And recession fears are again increasing.

Local sales and leases continued retreating in October. All sectors are trailing last year’s performance levels, according to the NETAR Commercial Real Estate Report.

Multi-family continues as the region’s best year-to-date performer, but lags where it was during the first nine months of last year by 45%. Seventy-two transactions have been logged so far this year. On the positive side, there’s some initial major apartment community activity in both Johnson City and Kingsport.

Deals in the region’s retail sector are down 55% even though strip mall demand has increased to the point where vacancies are limited.

Office leases and sales are down 62% and vacant land transactions are down 14%.

The only data point that increased last month was a 22% increase in new listing from the previous month. When compared to last year they’re down 9%.

NETAR is the voice for real estate in Northeast Tennessee. It is the largest trade association in the Northeast Tennessee, Southwest Virginia region, representing over 1,800+ members and 100+ business partners involved in all aspects of the residential and commercial real estate industries. Weekly market reports and information for both consumers and members are available on the NETAR website at https://netar.us