Tri-Cities apartment market: Strategic growth, are higher rents reaching tipping point?

At mid-year, the Tri-Cities apartment market is a cauldron of strategic growth, heightened investor interests pushing the upper limits of local average rent market prices and some concerns about rent concessions.

 According to Realtor.com, renting is currently a better economic position that buying across the region. That’s a situation driven by two years of record-level home sales pushing prices higher and a historic low inventory of homes in the affordable range for sale. The most current Census reports show that 42% of renters in the three-county Johnson City Metropolitan Statistical Area (MSA) and 37% of those in the four-county Kingsport-Bristol MSA pay 35% or more of their income on housing putting them in what’s termed a housing-stressed position. That’s a concern for a region where sales tax is a major source of city and county revenue because the more residents spend on housing, the less income they have for retail and services.

Here’s the view from 20,000 feet:

  • The Johnson City market continues to have a good supply-demand balance with some pockets of infill.
  • The Bristol TN/VA market is slowly expanding and heavier on the demand side. Investors are lining up options and waiting for a casino decision.
  • The Kingsport market is the softest multifamily market with increased competition driven by an influx of new luxury apartment communities and class B and C properties where investors are pushing for higher rent potential.

There are ample examples of large investment groups shifting their focus from urban areas to smaller markets like the Tri-Cities. Smaller investors have also stepped up in the small and mid-sized apartment complex classes and single-family rentals.

A couple of noteworthy local big deals involve the sales of The Town Park Lofts in Kingsport and the Monarch 815  in Johnson City. The Town Park Lofts created the most chatter – partly because it’s a high-rent, luxury apartment complex built with a local no property taxes for 20-year incentive. The complex is getting a lot of traffic but has reportedly barely cracked the 30% occupancy level.

The Lofts is a $31 million project at the corner of Clinchfield, and West Sullivan that Kingsport officials believe will energize the city downtown development and economy. They say the 263-unit complex will draw 500 to 600 residents including Millennials and young professionals who currently live in surrounding communities.

Rents range from $820 a month for the smallest one-bedroom unit to $1,345 for its largest two-bedroom models. That’s better than 50% above the average Kingsport market prices.

Before the project was completed its Georgia, developers sold it to Maxus Properties, Kansas City, Mo.  The Maxus website says it has been in business since 1987. “During the 1990s Maxus responded to the change in the rental markets by taking over several struggling public partnerships and capitalizing on opportunities created through syndication of Low-Income Housing Tax Credits. Maxus currently operates rental housing of every income level and continues to have substantial operations with market properties as well as with those under various affordable housing programs. Maxus also specializes in turnarounds. We have taken over struggling partnerships, tenant-in-common deals and REITs, and have also been involved in the purchase of hundreds of millions of dollars in distressed debt.” The firm’s website lists properties – several in the high-end luxury class – in 12 states. Kingsport is its only Tennessee property.

Maxus has also completed the formation of an Opportunity Zone Fund to invest in real estate properties in qualified opportunity zones. The Town Park Lofts are in an opportunity zone, which in concert with the local property tax incentives makes for a very sweet deal for investors.

Another example of investment groups activities is ValCap Investments, Houston, TX. It’s a private-equity real estate investment firm that holds a portfolio of about 6,000 apartments plus commercial spaces. The firm’s website said it focuses on undervalued multifamily assets with good fundamentals that have upside potential. Since buying Brand Mill, Cross Creek, Allendale Falls and The Landings in the Kingsport ValCap has slowly, but steadily increased rents. Currently, all the complexes have weathered the most current round of rent increases and are at reportedly at better than 90% occupancy.

That contrasts conditions at the Overlook at Indian Trail, which is among the newer luxury developments. Its occupancy has reportedly dropped into the 50% range. But that’s not the case with new developments like The Retreat at Meadowview and The Villas at River Bend.

The Villas at River Bend is a Universal Development and Construction (UDC) and Mitch Cox project. UDC is a primary multifamily developer and management company in Johnson City, Piney Flats, Bristol, and Asheville.

Shane Abraham, UDC Founder and Principal, is recognized as an area multifamily market expert. When asked about his plans, he said, “we are playing it pretty slow in hopes of making sure our supply doesn’t outpace demand. I see some rent concessions in both Kingsport and Johnson City, which concerns me a little, but they seem to be more prevalent in the properties that are overpriced for our region. We are seeing a lot of this in Asheville, which is really concerning considering that we are in the peak of the leasing season, but there is a crazy amount of new product that has hit that region.” There is also a lot of population growth forecasted there.

He said much of the attention from investors moving into the tertiary markets are focused on class B and C apartment communities that can easily be renovated with a lot of upside on the rent. That’s basically what ValCap has done in Kingsport, but so far they’ve more focused on the rent upside than upgrades.

The Bristol TN/VA market is the region’s big question mark. Rents in Bristol TN are comparable to Kingsport, but Bristol VA has the largest average rents in the region.  If plans for a casino are approved and it progresses as projected those cities and the surrounding areas will see a significant increase in housing demand in both the rental and ownership categories.







Categories: REAL ESTATE

1 reply

  1. Great work, Don. This is very interesting and informative. Tracey