While commercial building permits are a product of the business cycle, they’re not always a good indicator of economic health. That’s what the first half of this year looked like on a Tri-Cities regional basis. A drill down to the county level is another story.

New commercial building permits in the Tri-Cities metro area were down 16% during the first half of 2017 and permit values declined from $178.7 million to $114.8 million. Sullivan County saw the lion’s share of the regional decline, while activity in Washington County was flat. The other counties in the region – except Washington Co. VA – saw new permit increases.

The only East Tennessee metro region monitored by The Market Edge’s Commercial Building Permit Trend Report that had a permit and value growth was Knoxville. Permits were up 6.6% and permit values up 5%.

Chattanooga permits were down 28.7% while values were down 31%.

The Tri-Cities region had 301 new permits compared to 360 during the first half of 2016 – a 16.4% decline.

The nearby Asheville market saw an 11% decline in permit value and a 43% drop in the number of permits.

If new commercial permits seem to lag the economy consider this.

Real Gross Domestic Product in the three-county Johnson City Metropolitan Statistical Area (MSA) is approaching its pre-recession high while it’s declining in the four-county Kingsport-Bristol MSA. The most recent measure by the National Association of Counties (NACo) listed economic output recovered in only one NE Tenn. county – Washington. In the SW VA portion of the Tri-Cities Washington, Wise and Lee had a recovered status. That doesn’t mean local economies are in the tank. But some are still in the recovery stage and continue to wrestle with the conversion of a manufacturing based economy to a service economy.

Here’s a quick, broad recap of just two sectors that are drivers for commercial real estate property and permit activity.

RETAIL

Retail sales – as measured by retail sales tax collections – have steadily increased in the Tri-Cities. Much of it fueled by lower gasoline prices.

Like most of the U.S., the Tri-Cities has an abundance of retail space – five time the average in Europe. But much of it isn’t where retailers want to be, or it isn’t suitable for what they want. This has accelerated with the increasing dominance of national retail outlets. E-commerce has taken a toll on brick-and-mortar outlets and retailer are become pickier and picker.

In Sullivan County, the Pinnacle effect has shifted retail activity and demand away from Kingsport to Bristol. Simply put, the Pinnacle had prime sites available and the retail traffic to support them at a time when some retailers were cutting back on the number of stores due to the e-commerce pinch. It has had very little effect on the Johnson City metro retail market. And now that the first phase of the Pinnacle is built out, developer Steve Johnson says it’s time to look at something other than more retail for Phase 2.

Jerry Petzoldt, CEO and General Manager of the TCI Group, said national companies continuously look at our area, but they won’t accept secondary sites. He thinks some of the lack of retail expansion is a direct result of the local lack of prime sites.

Consumers are expected to continue powering the local economy because unemployment is low and many households are in decent shape. Rising home prices, a booming new home sector, strong job growth and higher wages are making a big difference in Washington County. But even outside that growth area, many people feel better about local economies. Nationwide retail spending growth is expected, but not enough to prevent more brick-and-mortar stores from closing.

However, there are signs of consumer fatigue while low private sector wages and underemployment continue to take a toll on the region – especially the Kingsport-Bristol MSA. That doesn’t mean retail in Kingsport-Bristol is not expanding because it is.  But the expansion has taken a backseat to the region’s growth centers.

APARTMENTS

New construction took off with Sullivan County’s late entry in the what Washington County and Johnson City has enjoyed for the past three years. Currently, that market looks stable. Shane Abraham, founder and operating principal of Universal Development & Construction, says the Washington County, Johnson City apartment supply-demand situation is more balanced than he’s seen. Of course, there are some small pockets of underserved demand, but the balance looks stable. The biggest challenge he sees for the region is wage stagnation.

That’s something where the Johnson City MSA has an edge on its neighbor to the north. Private sector wages in the Johnson City metro area have increased at a higher rate than the national rate increase every month this year. At the same time, Kingsport-Bristol is experiencing a steep decline. The primary drivers are wage stagnation, underemployment and a rapidly aging labor force adding to an already waning lower labor participation force.

Unlike Washington County, the Sullivan County’s apartment supply-demand situation is anything but stable. Property managers are dealing with the infusion of new units. Even though the trend toward renting is strong, some complexes are seeing lower occupancy rates and attractive incentives are being offered by newer projects.  There’s no indication that the expanded apartment inventory is attracting new residents as intended, but there has been a shift of residents from one complex to another. Some managers think the real affect is too much apartment inventory for too little demand.

Here’s a comparison of new commercial permits during the first half of this year compared to the same period last year:

Carter – 21, up 3.

Greene – 44, up 4.

Hawkins – 12, up 7.

Sullivan – 85, down 57.

Washington TN – 102, down 1.

Scott VA – 7 – up 1.

Washington VA 30 – down 16.

Categories: CORE DATA, REAL ESTATE