Local commercial real estate deals in the slow lane

Don Fenley 

May was another month of pause for local commercial real estate transactions. The FED eased some economic uncertainty with its pass on what would have been the 11th straight interest rate increase. But it’s keeping its finger on the inflation-fighting trigger.

“It continues to be a time of caution as the second quarter comes to a close,” said Jerry Petzoldt, chair of the Northeast Tennessee Association of Realtors (NETAR) Commercial Committee. We’re in a time of transition and there’s varied opinion on where that transition is going. Commercial development – both new and repurposing – is still ongoing in our communities. And commercial practitioners are working on deals. Investors’ interest is also high. In some cases, higher than earlier this year because investors with cash are always active when uncertainty is the mood of business. They’re looking for opportunities, but the full effects of the pulse of the local commercial real estate market are not reflected in leases or sales, yet, he added. That’s a contrast to the contractions in the national commercial market.

One indicator of the business climate is the number of establishments tracked by the Census and Bureau of Labor Statistics. The annual count for 2022 is 13,681 for the Johnson City – Kingsport – Bristol Combined Statistical Area (CSA) plus Greene and Johnson counties. That’s up 839 from the previous year.

There were 41 commercial transactions in May, down from 69 last year. So far, this year 189 sales and leases have been completed. During the first five months of last year there were 246.

Multi-family, office and retail-commercial continue to be the region’s top commercial market segments.

Trends across the multi-family segment include a slowing of new construction and the rate of rent increases. Many local major apartment complexes are scrambling to keep their occupancy rates up with move-in and lease renewal incentives

So far this year builders have pulled 48 multi-family construction permits. This time last year there were 101 that included one, three-to-four- and five-units developments and six for structures with five or more units. During the first four months of last year, there were 15 permits for structures with five or more units and 146 for smaller developments.  

The number of single-family residential permits pulled in the two local metro areas is also down. Last year, the total was 136 during the first four months of the year compared to 114 this year.

So far this year there have been 37 multi-family transactions, 28 office and 24 retail commercial.

Much of the local retail activity has been in neighborhood retail. Despite higher interest rates, consumer spending hasn’t buckled. According to a CNN report, Baby Boomers are living it up, splurging on cruises and restaurants while younger Americans are struggling to keep up.

Bank of American data shows a “significant gap” in spending has opened between the generations. David Tinsley, Bank of America Institute senior economist, told reports if not for the aggressive spending by Boomers the overall consumer spending would be more negative.

Federal officials are hoping consumer spending and the robust labor market will cool off to drive the inflation rate lower.

Locally, the labor market took its first small step toward stabilizing. The number of new payroll jobs declined after a year of increases. There’s still a labor shortage, but wages are also showing signs of slowing their growth roll.

Local state sales tax collections in the two local metros are up $1.6 million from April last year. The monthly regional total was $47.4 million. That doesn’t include local sales taxes. There’s also no local distinction for internet sales to local sales.

New commercial listings were up 32% from April and down 8% from May last year. Active inventory is down 20.5%.

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 1,600+ 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