NETAR CMLS Blog
August was the best month so far this year for Tri-Cities commercial real estate (CRE) transactions. Web traffic to local listings was also at a 2020 high. But, the number of deals for the first eight months of the year lagged last year’s market performance, and there was a big drop in inventory.
Office sales and leases continue to be the region’s most active sectors. Office deals were 18.6% better than August last year. The industrial sector was 4.2% better than last year.
Shopping centers and retail-commercial transactions continue to be on the negative side of the ledger. Retail-commercial was down 41% from last year, and shopping center deals were down 40%.
There were 35 Tri-Cities CRE sales and leases during August. That’s the combined total for the Northeast Tennessee Association of Realtors (NETAR) Commercial Multiple Listing Service (CMLS) and those on the local Flex Multiple Listing Service (MLS). It does not include transactions on other listing services.
Listings in all CMLS sectors were down 34.8% from July, and Flex listings were down 28.8%.
From a numbers perspective, the local market looks soft. But agents are upbeat about what they’re seeing.
Cassie Petzoldt, TCI Group, said there has been a noticeable improvement in transactions, investor traffic, and listings traffic in the past two months. Petzoldt is the chair of the NETAR Commercial Committee. She said her firm is doing more business than expected. She added she is seeing a lot more interest in restaurant listings.
She also thinks the inventory decline is something you have to expect in the days before a presidential election with a higher than normal amount of indecision about the potential business and economic effects. She also says the market should pick up after the election simply because the uncertainty will be over. “Investors will know that they’re working with.”
Jay Goodson, RE/MAX Checkmate, agreed on the commercial interest level. He said he is seeing more leases than he expected. He added that he been looking at passive income options in the small multi-family sector.
Shannon Castillo, Mitch Cox Realtors, offered some context to Johnson City reports about downtown businesses that have left or closed.
In an interview she pointed out that some businesses relocated and the ones that closed were “spread too thin.” That’s a reality of what happens during a recession, and it hasn’t been limited to downtown Johnson City.
She was quoted saying, we are still selling buildings, we are still leasing buildings, and we’re still doing business. There are some amazing things, some new business that are going to be opening downtown soon, she added.
Kelly Graham, Graham & Associates, was also full of optimism when asked for a Bristol perspective.
He said the Pinnacle continues to add new businesses and there’s increasing interest in other Twin-Cities venues. But most focus is on the upcoming casino election in Bristol, VA.
Graham said investors are positioning themselves in advance of the November election. The casino outcome will have more economic impact on the Twin Cities – and the rest of the region – than the presidential election. Those effects embrace everything from jobs to retail to more expansion of the Twin Cities residential and multi-family sectors.
A recent survey of state business owners and managers found most think the state’s economy will rebound much faster during the next 12 months than the rest of the nation. The University of Tennessee’s Boyd Center for Business and Economic Research said two-thirds of respondents said strong business investment and government leadership would lead to a quicker state recovery.
Some factors in favor of the Tri-Cities economy are:
- The housing market is red hot.
- Consumer spending has increased.
- Interest rates are rock bottom, and the FED has signaled it won’t be raising rates for years.
- Small business optimism is improving despite economic uncertainty
Negatives economy are:
- There were 12,000 fewer jobs in July than in January. The biggest deficits were government and manufacturing, followed by leisure and hospitality.
- Some jobs are returning. There are examples of added jobs, but there are also permanent layoffs due to recession-related business closures and restructuring.
- Some of the returning jobs are for fewer hours and/or lower wages.
- Many businesses are still in distress.
There were 348 listings on the Northeast Tennessee Association of Realtors NETAR) Commercial Multiple Listing Service (CMLS) listing last month compared to 534 in July. The current number of listing and change from July are:
Industrial – 22, down 17
Office - 104, down 60
Retail-Commercial – 72, down 24
Shopping Center – 48, down 7
Vacant land – 101, down 74
There were 346 commercial real estate listing on Flex last month, down two from August last year.
Tri-Cities commercial real estate (CRE) began looking a little more like the residential market in July.
Transactions increased. Listing sank to a seven-month low. And consumer activity increased. But when compared to July last year, the market was down 18 percent.
Cassie Petzoldt said the number of consumer contacts have increased as investors shop the local market for bargains and opportunities. Another positive sign is listing web traffic also increased. Petzoldt is chair of the Northeast Tennessee Association of Realtors (NETAR) Commercial Committee. “Due to nature of the commercial market – which is more closely linked to the economic and business cycle than the residential sector – its recover will be slower and more measured,” Petzoldt said.
The most active transaction sector last month was office, she added. “It led both lease and sales transactions in July and it did in June. And, although land sales didn’t live up to last year’s sales pace, that sector continues to get a lot of consumer attention – especially in the three-county Johnson City metro areas.”
Total commercial listings in NETAR’s Commercial Multiple Listing Service (CMLS) and on Flex – the local multiple listing service – dropped to 881 in July - down from 976 at the beginning of the year. Some of that decrease can be attributed to the volume of new listing not being replacing the 206 transactions so far this year because some owners have stepped back to see how the local economy recovers from the coronavirus effect.
Still, there has been a steady small new listing increase every month except May. There were 21 new listings in July.
While July was the best month of the year for local commercial transactions, total CMLS transactions were down 18 percent from July last year. Flex transactions increased from six during July 2019 to nine last month.
Activity varies for each sector of the commercial marketplace.
Compared to July last year, CLMS transactions in the office sector were up 22 percent.
Multi-family transactions were down 80 percent.
Shopping center transactions were down 34.6 percent.
Retail was down 42.2 percent.
Vacant land deals were down 40 percent.
Flex does not report the number of transactions by commercial sectors.
There were 1.1 million square feet of commercial space for sale in the Tri-Cities last month, 391,013 square feet for lease and 1,134 acres of land for sale. That acreage does not include subdivision lots.
NETAR’s Commercial Real Estate Trends Report capsules market conditions in Carter, Greene, Hawkins, Johnson, Sullivan, Unicoi, and Washington counties in NE Tenn. and Scott, Lee, Washington, and Wise counties in SW Va.
So far this year, the only Tri-Cities commercial real estate (CRE) constant is inconsistency. While some of that’s normal during an election year, COVID-19 turned the world upside down. It’s a world where there are no statistical models to explain things.
At mid-year CRE sales, there was one more than the first half of last year, according to the Appalachian Highlands Dashboard for Real Estate Analytics. At the same time, the transaction volume on those 308 sales was 59.7% below last year. The dashboard’s baseline for reporting a deal as a sale is the deed transfer. The year’s top deal so far is the $7.1 million office sale on Sunset Dr. in Johnson City. The next three contenders (two in Jonesborough and one on Boones Creek Rd) are in the $6 million-plus range.
A similar situation can be found with The Market Edge’s commercial permit trends report. There was a 12.7% increase in the number of Tri-Cities new permits, but the value attached to those jobs was 7% below what it was during the first half of last year.
Here’s a quick sidebar to the new permits tally. The Tri-Cities was the only local region that saw a new permit increase. Chattanooga was down 25%, Knoxville was 15% off last year’s pace, and Asheville was down 31%.
Fast-forward to the seven-month mark. The Northeast Tennessee Association of Realtors (NETAR) reports that July was the best month so far for commercial transactions. There were almost 900 listings on both NETAR Commercial Multiple Listing Service (CMLS) and on the regional multiple listing service. That’s down for the 976 listings at the first of the year, but the market is picking up, according to Cassie Petzoldt, NETAR’s Commercial Committee chair. It’s not roaring like the residential real estate market, but even small gains are reason for celebration this year.
Some examples are:
- Total office transactions are up 22% from last year.
-Retail was down 42.2%
-Shopping center transactions were down 34.6%.
-Vacant land deals were down 40%. That does not include subdivision lots.
COVID-19 hit the commercial real estate industry hard, and some sectors are going to recover faster than others. Here’s what some of the analysts think we’ll see.
- Most CRE rents will decline. There were signs of retail rent fatigue, but COVID-19 has and added more fuel to the fire.
- Apartments will do better than other sectors, but the rate for rent increases will slow. Instead, there will be more incentives. Class C apartments are expected to be hard hit. That’s driven by demographic. Class C renters tend to work in hospitality and restaurants and bars and airports. That’s the demographic hardest hit by job losses.
- Some of the shine is coming off downtown redevelopments. While this may be the case in larger metros, locals don’t see any evidence of that here. Momentum continues to build in Bristol and Johnson City.
- Office space – especially those in downtowns – is in bad shape. Again, that doesn’t fit what the data shows locally. NETAR’s July Commercial Trends Report said office transactions were 22% better than July last year. In fact, it was the only sector with year-over-year growth in July. That doesn’t mean there isn’t a local challenge. The region has a glut of office space. The market never really fully recovered from the effects of the manufacturing and coal industries cutbacks. And the recent hospital mergers put eve more pressure on some components of the office inventory.
- Retail space is suffering. It’s a blanket situation across all markets because the current recession has hit the consumption-based components of the economy. A current county by Harvard shows that wages and employment in mid- and low-income Tri-Cities residents were down by a little more than 30% from January levels. The federal supplement to unemployment shored a lot of consumer spending, but that expired at the end of July. The same check on the status of the percentage of businesses that have closed since January shows declines of 27% in Washington Co., 14% in Sullivan Co., and 18% in Greene Co. It also found that employment for workers in the lower-income range was over 30% in most local counties.
- Student housing and nursing homes are sectors that face severe challenges.
Investor and consumer traffic are picking up in the Tri-Cities as investors look for bargains or for the unique ideas for the “next new thing.” That’s a popular topic commercial practitioners are exploring for pitches to investors.
Total transactions for the first half of this year were down 22.5% compared to the first half of last year, according to the Northeast Tennessee Association of Realtors (NETAR). Sales of listing on the NETAR Commercial Market Listing Service (CMLS) were down 30.7% from last year’s mid-year total while leases transactions lagged by 16.1%.
CMLS Committee Chair Cassie Petzoldt said there has been an increase in traffic and interest – both on the internet and in-person – but there’s more “checking things out” than actual deal-making so far.
The full impact of the pandemic on the Tri-Cities CRE market is still unknown, but there’s little doubt it will reshape parts of the commercial sector because while the recession is expected to be short, the recovery will be slow. There’s also little doubt that some local CRE sectors won’t behave like the national sectors.
For example, most analysts predict a tough time for office space thanks to the explosion of the remote and working-from-home trends escalated by the pandemic. The local office space inventory was not exactly healthy before the pandemic. It hasn’t recovered from the coal industry’s decline, the transition of the local economy from a manufacturing to a service industry base, and the merger of local hospital systems. But while there is still an abundance of inventory, office sales and lease transactions were the only sectors outperforming last year.
Sectors taking the biggest hits were retail-commercial (down 51.7%) and shopping center (down 43.5%). This aligns with the massive job losses in the region’s Leisure and Hospitality job sector. Restaurant properties have seen increased interest, according to local practitioners. While there are new restaurant announcements and re-openings reported in the news, analysts think a loss of about 25% in the restaurant industry is possible before the shakeout is over.
Compared to the first half of last year, the biggest local transaction decline was in the multi-family sector. It was down 75%.
Land sales are off by a third, while industrial sales and leases are down 5.3% from mid-year 2019. That was one of last year’s hot items.
Despite the big declines in local sales and lease transactions, there are some CRE green shoots. A major downtown Bristol project, continued expansion at the Pinnacle, and expansion in West Kingsport are examples.
A softening of the commercial market was well underway before Covid-19 showed up in the second quarter.
During the first quarter, there were $60.8 million in CRE sales, according to the Appalachian Dashboard for Real Estate Analytics. The Dashboard data is more compulsive of the market because it tracks sales by deed transfers instead of transactions of CMLS listings. Those sales were down 15.3% from Q1 2019, and the volume lagged by almost half. But to put that in context, Q1 2019 was the best Tri-Cities commercial sales quarter in four years.
At the same time, there were 147 area commercial permits with a permit value of $44.9 million. Sullivan led the seven-county region with 55 new permits followed by Washington Co. TN with 45 new permits.
Mid-year reports on commercial permits and from the Dashboard will be available early in the third quarter.
There are currently 307 commercial properties listed on the NETAR CMLS site for sale or lease in the three-county Johnson City Metropolitan Statistical Area (MLS). That area includes Washington, Carter, and Unicoi counties in NE Tenn.
There are 241 listings in the four-county Kingsport-Bristol MSA. It comprises Hawkins and Sullivan counties in NE Tenn. and Hawkins and Washington Co. in SW Va.
There’s no significant change in the number of listings from May.
Tri-Cities commercial real estate (CRE) transactions continued laboring with the economic fallout of COVIX-19 in May. The short-term numbers are about what you would expect.
May sales were down 40% from last year while lease transactions were down 67%, according to the Northeast Tennessee Association of Realtors (NETAR) Commercial Multiple Listing Service (CMLS).
The longer-view is a little more encouraging. Year-to-date sales were 29% lower than the first five months of last year, and leases were down 29%.
Total transactions were down 32% from the first five months of last year.
But while transactions have slumped, listing traffic to local listings increased 17% from April. At the same time individual traffic and inquiries on listings has increased.
According to Deliotte Insights, “over the past century, external shocks such as an epidemic or a pandemic followed by an economic downturn have had an immediate to short-term impact on CRE asset prices, but minimal influence on transaction activity. However, the industry recovered from these events at varying paces: While event-oriented downturns showed a quicker rebound, longer-term events, such as the 2008 recession, resulted in a more protracted recovery. As a rule of thumb, the industry has historically lagged the broader economy by six months in terms of experiencing the effects. But the expansiveness, depth, and unprecedented reach of this pandemic has started impacting the CRE industry much sooner.”
As the listing traffic shows, there is increasing interest from investors who look past the headlines for opportunities. And there have been some noteworthy transactions – more about those when the deed transfers are completed, and the Appalachian Dashboard for Real Estate Analytics issues its mid-year report.
There were 547 listings at the end of May down from 586 in April.
Commercial space for sales in the Johnson City Metropolitan Statistical Area (MSA) 76,128 sq. feet. Down from 787,642 in April.
Commercial sales for lease totaled 487,295 sq. ft. down from 515,671 in April.
Commercial space for sales in the Kingsport-Bristol MSA was 1.3 million sq. ft. drown from 1.4 million in April.
Commercial space for lease was 435,821, down from 492,934 in April.