NETAR CMLS Blog
The local commercial real estate (CRE) market continues gaining momentum despite a June transaction decline. The decline from May was the steepest drop in the past three years. But it is not representative of the mid-year trend.
Reasons vary, but most of the decline is a return to a pre-pandemic transaction level in the Retail-Commercial, Industrial and Office sectors. Transactions in those sectors began building late last year as investors and business owners began preparing for the post-pandemic economy. They spiked again in March, April and May this year.
Transactions averaged 30 a month in 2019 and 31 a month in 2020. At mid-year, they are averaging 42 a month and the 3-month moving average is 45.
There were 28 transactions in June, up from 21 June last year. During the first half of the year there were 254 transactions. Last year there were 162. Since that comparison is skewed by last year's pandemic economy a comparison to the first half of 2019 is a better example of how well today's CRE market is doing when compared to a typical year. Mid-year transactions this year were 24.5 percent better than the first half of 2019.
"There's actually a lot more activity in the commercial sector than the data show," according to Cassie Petzoldt, Northeast Tennessee Association of Realtors (NETAR) Commercial Committee Chair. "The volume of investor inquiries, commercial construction and optimism is running high. Several commercial Realtors report the market is the busiest they have ever seen." Activity in the industrial, office space, the retail sector and vacant land continue to grow as businesses and investors ready for a post-pandemic economy, she added.
The local labor shortage is also a headwind for many businesses – especially restaurants and retail outlets. Tri-Cities employers are adding new jobs at an average rate of 560 a month so far this year. At that rate, it will take 10 months return to a pre-pandemic level.
The only sector where transactions increased from May was commercial vacant land. They were up by one. They have averaged four closings a month so far this year. There were also nine new listings for commercial vacant land in June.
Combined with vacant residential land sales commercial vacant land closings totaled 228 in June. That's up 58 percent from last year and a little more than 80 percent higher than the first six months of last year.
Even though Office and Retail-Commercial sectors declined in June, they led transactions for the first half of the year. So far this year, there have been 44 office sales and leases, five more than last year. Forty-two Retail-Commercial deals were completed during the first half of this year, up from 24 last year.
Active inventory made a slight gain over May but was down 7.7 percent from June last year. The year-over-year decline can be attributed to the surge of transactions during the first five months of this year absorbing some of the excess inventory.
There were 78 new listings, up from 43 last year. During the first six months of this year, there have been 410 new listings, up from 309 last year.
“The transaction and new listings growth are welcome signs of the economy beginning to unmask,” Cassie Petzoldt, chair of the NETAR Commercial Real Estate Committee, said. “The activity that begun building during the fourth quarter last year has expanded into this year and is expected to pick up momentum as the economy continues improving.”
So far this year, transactions are 44 percent better than the first four months of last year when the local commercial sector was in the throes of a reaction to the pandemic-induced economic shock.
The office sector continues to be the most robust sector with 34 transactions so far this year. It was eclipsed in April by 13 new retail-commercial transactions. The increase can be attributed to the improving economy and preparations for what some believe will be a spending splurge as summer approaches.
The service sector – especially restaurants – continues to struggle with a labor shortage to accommodate the higher consumer demand.
There were 846 commercial listings on local commercial real estate databases last month. That’s down 10.6 percent from last year, but new listings are increasing. There were 78 new listings last month compared to 23 April last year.
Vacant land continues to be a top listing category. Listings have increased to 488 from 348 during the first four months of last year. Those listing include commercial and residential land offerings. So far this year, vacant land sales are up 125 percent.
Tri-Cities commercial real estate saw its best month in over a year in March. Transactions were up 71.9 percent in the wake of a dramatic increase in office sector activity. And new listings were up nine percent over last year.
The first quarter was equally strong, with a 38.5 percent transaction increase.
Cassie Petzoldt, Northeast Tennessee Association of Realtors (NETAR) Commercial Committee chair, said momentum has been building since the fourth quarter of last year. It finally took off last month. Commercial real estate is typically more aligned with the overall economy and the business cycle, and we're seeing positive movement for both this spring."
Commercial vacant land sales were the lifeblood of commercial transactions last year. This year's transactions are more than double what they were the first three months of last year.
Industrial properties also continue to be stable. Last year there were 34 transactions. During the first three months of this year, there were 11 transactions compared to nine last year. The strongest headwind is lack of inventory.
With the economy beginning to open, activity in both the shopping center and retail-commercial sectors is coming to life. This year, retail-commercial transactions are up more than 40 percent, and shopping center transactions are up almost 40 percent.
Commercial markets and the overall economy turned down in 2020 due to an external shock – not an internal weakness. The effects of that shock are beginning to wear off, releasing the pent-up demand that built up last year.
New commercial real estate construction is also expanding. There were 563 commercial permits pulled last year, according to The Market Edge's Commercial Real Estate trends report. That 8.5 percent increase over 2019 was the best year since 2016. Construction value for last year's permits was $199.1 million.
The local commercial market is beginning to respond to anticipation of a consumer spending splurge and an improved business cycle as the retail and service sectors open up, said Cassie Petzoldt, chair of the Northeast Tennessee Association of Realtors (NETAR) Commercial Committee. Things are improving, but commercial real estate is more dependent on the business cycle, which is picking up, than residential real estate, which is booming.
Commercial vacant land listings were the lifeblood of February’s local listings. They were 20 more than last month but 52 fewer than the first two months of last year. That’s consistent with the increased sales of commercial and other land sales during the past 12 months.
There were 37 commercial transactions last month, six more than last year, according to NETAR’s Commercial Sales Report. Listings There were 875 listings, down 135 from January and 206 fewer than February last year.
Listing web traffic increased 25.5% from January.
Nationwide the industrial sector continues to be the lifeblood of the commercial market. Locally, industrial listings were down from the first two months of last year. That’s not unusual since industrial transactions were among the leading group last year, and there hasn’t been a rush to upgrade inventory.
Listing for retail commercial and shopping center increased over the first two months of last year. So have investor inquiries. Some of that can be attributed to the trend toward lower rents for retail properties. The National Association of Realtors (NAR) forecast calls for a 2.5 percent decrease in retail rents this year.
The 2020 year-end report on commercial building permits is scheduled for release next month. It’s projected that it will increase the number of new permits from the 2019 total.
The Tri-Cities’ commercial real estate (CRE) market continued eking out a slow recovery in January despite continued economic challenges. Transactions and new listings were up from last year, and the Industrial, Office, and Vacant Land sectors continue to be the market’s lifeblood.
There were no transactions for Shopping Center properties in January and only two in the Retail-Commercial sector. Both lag the Jan. 2019 sector performance.
There were 26 transactions last month, three more than in January last year, according to the Northeast Tennessee Association of Realtors (NETAR) Commercial Sales Report. There were 1010 listings, up 206 from December and 34 more than last year. Listing web traffic increased 19.4% from December.
Economic conditions have a heavy impact on commercial transactions, and the labor market is at the top of the watch list. The overall Tri-Cities job market is still weak. Job creation continued its three-month slowing and moved into negative territory in the most recent report. Although employers have reclaimed about 10,000 of the 18,500 jobs lost during the April crash, there are almost 10,000 fewer jobs than this time last year. Since April, most of the gains have been in the Leisure and Hospitality sectors, which suffered the hardest hit when the pandemic struck.
The latest Bureau of Labor Statistics (BLS) report also shows the unemployment rate has increased to 6%, and employment is down by almost 4,000. At the same time, the Jobs4Tn website lists 3,800 jobs being advertised in the Kingsport-Bristol metro area and another 2,498 being advertised in the Johnson City metro area.
Investor inquiries, more traffic to web listings, and plans for new construction add some luster to the otherwise dire commercial outlook.
- Commercial Realtors report they are getting more inquiries from California and New York investors – especially in the Kingsport market.
- The Bristol market continues moving ahead on the momentum provided by approval for a casino.
Johnson City plans to start the West Walnut Street project this spring, and work at Exit 17 continues to fuel interest in Gray’s eastward commercial and residential real estate expansion. When the Exit 17 interchange is completion, the area will be more attractive for retailers to move in. There are two retail projects – the Boones Creek Development project and the Promeade at Boones Creek – planned.
- There has also been an uptick in investor interest in rental housing – both short and long-term.
The 2020 year-end report on commercial permits is scheduled for release next month. It’s projected that it will show an increase in the number of new permits from the 2019 total.