2018 was a booming commercial real estate year in the Tri-Cities

If you look at just the building permits and Northeast Tennessee Association of Realtors (NETAR) Commercial Market Listing Service (CMLS) transactions 2018 was a so-so year for commercial real estate in the Tri-Cities. But last year was one of those times when the numbers didn’t tell the whole story.

Here’s what two of the primary data sets looked like:

NETAR CMLS transactions

There were 71 fewer new commercial building permits than 2017, but the permit value increased from $243.5 million to $247.9 million. Chattanooga had the biggest value increase (57%) compared to the 2% Tri-Cities increase and a 6% decline in the nine-county Knoxville area.

Sullivan and Washington counties saw the most Tri-Cities area permits – Sullivan with 168 and 146 in Washington. Sullivan and Carter were the only counties with more permits last year than during 2017.

The CMLS showed 115 lease transactions for the year, compared to 113 the year before. There were 103 sales transactions compared to 110 in 2017 and the sales transaction volume declined from $79.1 million to $63.3 million. That’s only properties listed on CMLS, but representative of the local market. That representation is growting. NETAR’s CMLS is driven the Catylist and that network is growing.  The Nashville Realtors Association joined Catalyst this year and it expected that 400-600 commercial brokers will join from their 5,000 members. The Catylist network now includes the Tri-Cities, Knoxville, Chattanooga and Nashville in Tennessee. The network comprises over 65 local real estate assocations in the U.S. and Canada. It's the #1 CIE/CMLS provider in the U.S.

Source: The Market Edge, Knoxville

While those numbers seem to point to a flat commercial real estate marketplace 2018 was a year of a booming local economy, and local CRE firms reporting some record deal volumes. Unemployment in the region dropped to record lows and full employment became the norm. According to the Bureau of Labor Statistics the region had a net increase of 500 new nonfarm jobs. The existing home market had its best year since 2008 and consumer confidence was strong. Wages in most counties also increased in most counties. Sullivan saw the best increase – 6% - while Greene, Washington TN, Carter, Unicoi and Scott Co. VA recorded 4% increases.  Lee County was the only county with a wage decrease (down 2%) and wages is Wise were flat.

Kelly Graham, Graham and Associates, said last year will be recorded as the point when the Bristol TN/VA area began evolving into its new future. “There is more activity than I have seen in many years. “The sky is the limit in 2019” and that limit will include major announcements in several commercial real areas.

While plans for the redevelopment of the Bristol Mall, a casino and the next phase of the Pinnacle dominate discussions expansion in multi-family residential has been noteworthy and ongoing. Redevelopment is also strong.

“Bristol is getting a lot of attention from outside the area. People are seeing the untapped demand,” Graham added.  

Jerry Petzoldt, TCI Group, mirrored Graham’s assessment and expectation for the Twin Cities’ potential. “The beacon in our market is Bristol.” And while Bristol is in the spotlight that outside area hasn’t been restricted to the Twin Cities. There’s increasing interest in the Boone’s Creek and Piney Flats areas, which continues to see expansion of the residential real estate sectors. Much of it is being driving by the upcoming expansion of the Exit 17 - I26 interchange. Several commercial practitioners and developers said they’re seeing more client interest in the area. A major call center and new school are also in the works. And there’s speculation that once the Exist 17 project is completed it will make the Boone’s Creek area a prime competitor to the State of Franklin.  

Petzoldt said 2018 was a stable year with many people re-engineering how they will do business in tomorrow’s climate. For example, office vacancies are steep, so existing office space is being repurposed to accommodate and appeal to new technologies and generational preferences. “The rational is getting close to where millennials want to work.” Clients say the need to readjust to what Millennials want or they can’t find anyone to work for them, he added. “Everything is still built around demand, and human capital is driving that demand.”

John Speropulos, Development Partner and President of Mitch Cox Realtor Inc. said he doesn’t see the local economy slowing down in the short term. Local businesses are doing well.  He said 2018 was a good year for his firm and cited increased in “the number of clients we were able to serve, the number of transactions and deal volume.” There may be some fear and angst about events in Washington, D.C. but dollars are still flowing and the local economy is thriving despite a labor crunch and higher construction cost. One of his focuses is the office market, which is a little soft when compared to past years. “We have a lot of inventory for a small market like ours.” He also said, we continue to see fairly strong demand for industrial product and that market segment is pretty tight.  “0ne worrisome development is the growing division between the haves and the have-nots in the local economy,” he added.

The office sector led CMLS lease transactions last year. There were 45 of them, which was down 10 from the 2017 total. Sales transactions in the office sector totaled 26, which was two better than the previous year.

Michael Green, Green Commercial Realty, said 2018 saw some of the greatest deal volume and deal sizes for investment properties I’ve seen my 25 years in business here. “That’s likely to continue given the national focus on smaller markets like ours.”  Of course, that assumes quality properties are brought to market, he added.

Green believes the retail landscape will continue to transition away from big boxes to smaller strip sites and specialty stores. He also thinks there will be some new grocery-anchored projects as well as additional opportunities in re-purposing of prime spots like the old Kmart building in Johnson City.

Like Speropulos, his assessment of the office sector is a mixed. The surplus created by the hospital merger will likely start to manifest in more repurposed building and potentially more aggressive rents this year. “All told, I suspect 2019 will look a lot like last year. It’s a good time to renegotiate a great rental rate, a good time to finance an acquisition and a smart time to lock in a mortgage.”

Joe Fillers, Preferred Properties of East Tennessee in Greeneville, says that’s a lot of potential at reasonable prices in the Greene Count. “Leasing is more attractive than sales,” he said. Fillers, Speropulos and Green cities demand for larger industrial deals could be on the horizon.

NETAR CMLS Chair, Kelsey Bartley, TCI Group, she is seeing an increase in the number of clients interested in investments focused on downtown development. The potential is there, but an issue is many downtown buildings are out of code. Investors must handle that cost so there’s a need for more incentives to offset that cost. She said some of the interest in downtown retail and restaurant development is going unmet due to the cost of build out.  Like several other commercial practitioners in this report, she said “we are seeing interest from investors coming from outside out market.”

Gary Sproles, TCI Group, said one of his current focuses is on bank and medial properties. “While there’s a lot of concern about local consolidations, there’s also a lot of transactions on the shrink side. Right now, we have a remarkable amount of good branch bank sites available.”  Sproles said both the Kingsport and Johnson City markets have limitations in their hot retail areas. “Many want to be there until the see what the price tag is going to be,” he said.

Left-to-right, Kelly Graham, Jerry Petzoldt, John Speropulos, Michael Green, Kelsey Bartley, Gary Sproles, Joe Fillers