NETAR CMLS Blog

Strong fundamentals move local commercial market forward

The local commercial real estate (CRE) market continues moving forward despite higher interest rates and inflation. According to the Northeast Tennessee Association of Realtors (NETAR) and the National Association of Realtors (NAR), it's being driven by strong fundamentals in the most commercial sectors and land sales.



NAR's Commercial Real Estate Metro Market Report says neither of the region's two metro areas' commercial markets is as strong as the overall U.S. Commercial Real Estate Condition Index; however, both areas' overall economic conditions are stronger than they are nationally.



Here's the broad assessment of the local metro areas' commercial sectors according to NAR:



JOHNSON CITY MSA

The office property market is about the same as it is nationally
The industrial property market is about the same as it is nationally
The retail property market is not as strong as it is nationally
The hotel/lodgings property market is not as strong as it is
Average weekly wage $707
Wage growth, year-over-year, 14.2%
GDP growth down 1.1%

KINGSPORT-BRISTOL MSA

The office property market is not as strong as it is nationally
The industrial property market is stronger than it is nationally
The retail property market is not as strong as it is nationally
The hotel/lodging property market is about the same as it is nationally
Average weekly wage $761
Wage growth, year-over-year 10.1%
GDP growth down 4%

April transactions were up almost 21%, according to NETAR's April Commercial Market Report. "Activity from out-of-area investors has increased and is now a primary market driver here in NE Tenn. and SW Va.," said Cassie Petzoldt, chair of NETAR's commercial committee. "Most of the out-of-state traffic for listings on NETAR's Commercial Multiple Listing Service (CMLS) website was from Virginia. Georgia was a distant second place followed by South Carolina, California, and Ohio." There were 661 active commercial listings at month's end, down 21.9% from April last year.



Retail-Commercial and Shopping center sales and leases were last month's best performing CMLS sectors.



Here's how CMLS transactions look for the first four months of the year compared to last year:



Retail Commercial – 31, up 2
Office – 30, down 4
Vacant Land – 16, up 1
Industrial – 15, down 1
Shopping Center – 12, up 1
Flex commercial listings are not segmented.



So far this year, there have been 177 sales and leases in the region monitored by NETAR



Strong sales and leases have reduced the region's inventory by 21.9% from April last year. The CMLS inventory is down 25%, and the Flex commercial inventory is down 16.7%.



There were 69 new listings in April. Since new listings outnumber transactions, the market is slowly replenishing inventory.



The local multi-family has also been a strong performer so far this year. That doesn't show up in the local transactions count because most of the multi-family market deals are handled by investors on national commercial listing services.



The multi-family component in NAR's metro area report includes more data and context than what's available from the local sources. It shows rents, demand and inventory increasing. The Johnson City metro area apartment property market is about the same as it is nationally, while the Kingsport-Bristol market is not as strong, according to NAR. A capsule of that report data compared to Q1 last year shows:

JOHNSON CITY MSA

Vacancy rate 2.2%, down from 3.2%.
Effective rent per unit $840, up 4.9%
Inventory, 6,441 units, up from 6,117
Transaction price per unit $38,824, up 44.9%
Market CAP rate 6.5%, down from 6.6%

KINGSPORT-BRISTOL MSA

Vacancy rate 3%, down from 4.5%
Effective rent per unit $872, up 8.9%
Inventory 5,404 units, up from 5,309
Sales price per unit $47,917, up 48.6%
CAP rate 6.6%, down from 6.7%

Local commercial estate expected to do well despite higher interest rates

Local commercial real estate (CRE) transaction activity was slightly higher than February and down 20% from March last year. First-quarter activity was unchanged from last year.

"Transaction activity alone is not a sign of market softness," said Cassie Petzoldt, chair of the Northeast Tennessee Association of Realtors (NETAR) Commercial Committee. She added that the National Association of Realtors (NAR) overall CRE outlook is a good assessment of local conditions.

"According to NAR's outlook, " Commercial real estate can be expected to perform well this year despite the prospect of higher interest rates. While interest rates are expected to broadly rise by about 75 basis points, they will still be low compared to historical levels and should not cause a severe decline in investment activity and the ability of companies to service their debt. 


"Bottom line: CRE's underlying demand fundamentals should more than mitigate the impact of the slightly higher interest rates in 2022, according to NAR's 2022 Commercial Real Estate Outlook report."


A slight decline in office sales and leases and vacant land sales are a departure from previous months. Office transactions have been a local CRE leader for two years, Petzoldt said. And since one of the two local CRE databases does not segment its transactions, the decline is as much of a technical challenge as a market situation.

Overall active inventory was down 19.4% from March last year. Inventory by sector on the NETAR Commercial Multiple Listing Service (CMLS) is down 22% from Q1 last year. Absorption by sector was highest in the Johnson City metro area, up 22%. Kingsport-Bristol's listing absorption was up 19.8%.

Total land transactions are down from the first quarter of last year. Residential lot sales have absorbed much of that inventory sector. It’s expected to increase as the number of ongoing and planned residential development progress.

Lease and sales activity in the local office sector has been better than national performance due to lower costs than the secondary markets and the region's ample inventory of vacant office space.

The number of Q1 office listings is down 78 from last year. Kingsport-Bristol metro had the highest absorption from last year's listings, up 56 transactions. There are currently 48 office listings in Kingsport-Bristol.

Johnson City had an increase of 22 office sales and leases compared to Q1 last year. There are currently 43 CMLS office listings.

The lack of inventory continues to be an issue in meeting local demand in the industrial sector.



Feb. was soft month for commercial real estate

Commercial real estate transactions were flat last month, according to the Northeast Tennessee Association of Realtors (NETAR).

“There were seven fewer leases and sales than January and three fewer than February last year,” Cassie Petzoldt, Chair of the NETAR Commercial Committee, said. “Compared to the first two months of last year, transactions are up 17.1% and the outlook remains positive but likely a little subdued by geopolitical and inflations concerns.” Commercial practitioners are as busy as ever, and investors – both local and out of area – continue to check out the Tri-Cities, she added.

Analysts expect secondary and tertiary markets like the Tri-Cities to continue reaping the benefits of migration away from major metro markets. Markets that are and should continue growing fastest are those where jobs are available and attracting new residents.

February’s transactions decline includes fewer office sales and leases for the first time in almost two years, and active listings show it. There were 93 listings last month, down from 119 last year. It’s noteworthy that there are currently fewer office listing in the Kingsport-Bristol metro area than in the Johnson City metro area where transactions have been most active.

The only two sectors that saw monthly transaction increases were Industrial and Retail-Commercial.

Active inventory for the region is down almost 17% from last year but up 22 new listings from January.

Web traffic to the NETAR CMLS site was down 5% from last month down 12% from last year.

Local commercial real estate up 51%, good outlook for 2022



The Tri-Cities commercial real estate market kicked off the new year with a 52% increase in transactions as last year’s growing demand extended into the new year.

Cassie Petzoldt said the market’s pulse and type of deals look a lot like how it wrapped up last year. Petzoldt is the chair of the Northeast Tennessee Association of Realtors (NETAR) Commercial Committee. “So far, the Office and Retail-Commercial sector are out-front of leases and sales.” She added that January’s active inventory and new listings are down from last year. That’s more of a reaction to increased transactions putting a strain on existing inventory than a slowing of the market’s pace, she added.

At month’s end, 41 leases and sales had been completed in the Tri-Cities’ two metro areas. There were 27 transactions during the first month of last year. That starting point was a low for 2021. Transactions picked up every month and finished the year, totaling 571, an all-time high and 115.5% increase from the 2020 total.

There were eight transactions in both the Office and Retail-Commercial sections last month. That’s consistent with last year.

Multi-Family saw three deals completed. That total isn’t totally representative of the region’s overall multi-family market. It includes what happened with properties that were listed on the two local commercial market listing services. Some of the larger local multi-family complexes are owned by investment groups and investors who live outside the area. They tend to patronize the national commercial listing services. At the same time, much of the current market activity has centered on new construction in the wake of increased demand.

Active commercial inventory was 32% lower than last year. Listing totaled 684 at month’s end, up from 499 in December.

Last month, there were 75 new listings, up from 59 in December and down from 80 last year.

Office, Retail-Commercial, and Vacant Land sectors dominated last month’s active listings.

The outlook for this year is positive despite some uncertainty over potential COVID impacts and other risks. The CBRE outlook says a growing economy will fuel demand for space and increased investments across all property types.

The current local recovery trends are especially good for downtowns.

Local commercial real estate up 44.1%

November’s regional commercial real estate market continued its recovery momentum with a 44.1% increase over last year’s transaction performance. So far this year, all but one sector has surpassed market performance during the first 11 months of both 2020 and 2019.

“So far this year, the market has recorded 512 transactions – 191 more than last year,” according to Cassie Petzoldt, Northeastern Tennessee Association of Realtors (NETAR) Commercial Committee chair. “Since late summer, the retail sectors – both commercial retail and shopping center – have seen leases and sales gaining strength. It hasn’t outperformed activity in the office sector, but grouped they account for 41% of all transactions so far this year.”

Office transactions have been steady all year. The sector’s performance is counter to what is being reported on national sources. Most of that data is based on the top metro regions and doesn’t include drill-down to the rural metro markets. So far, there have been 87 office sales and leases from NETAR’s Commercial Market Listing Service (CMLS). The second local commercial database does not segment commercial listings or transactions.

A Cushman and Wakefield report suggests that most companies will employ a hybrid office model and the full impact on the future demand for office space is still a question mark. A third-quarter Crexi market analysis says secondary and suburban centers have driven a significant amount of office leasing.

There were 44 office listings in the three-county Johnson City Metropolitan Statistical Area (MSA) at the end of November and 40 in the four-county Kingsport Bristol MSA. The Kingsport-Bristol inventory has averaged 53 listings a month, while Johnson City has averaged 43.

The retail-commercial sector has posted 81 CMLS transactions so far this year. They are evenly divided between the Kingsport-Bristol and Johnson City metro areas.

The CMLS inventory in the industrial sector has dropped from a monthly average of 21 listings to 16. Demand – there have been 49 transactions this year – has depleted much of the inventory, and there has not been much new product added in the past several years even though there is a lot of warehouse demand among companies competing for the growing “last-mile” capacity.

Vacant land sales have also remained constant so far this year. So far this year, that sector has accounted for 40 transactions from both local commercial databases. The monthly average listings volume of 163 was down to 147 in November.

Last month, there were 48 new commercial listings, down two listings from last year and 25 fewer than October’s new listing.

Last month’s active inventory was 766 listings, down 7.2% from last year.

NETAR is the largest trade association in the Northeast Tennessee, Southwest Virginia area representing over 1,500 members and 100 affiliates involved in all aspects of the residential and commercial real estate industries.
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