COVID-19 turns Tri-Cities commercial real estate market upside down

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 there was one more commercial real estate sale 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.

Data source: The Market Edge mid-year Commercial Building Permit Trends Report

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 demographics. 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.
  • Data source: The Market Edge mid-year Commercial Building Permit Trends Report

    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.

©2020. All rights reserved. – Donfenley.com

“The Market Edge is a building permit compilation service based in Knoxville, TN. The company compiles data from 325 code enforcement offices in 158 counties. The Market Edge provides free trends to industry contacts on a quarterly basis. Sign up for their free trend reports at The Market Edge.

Categories: REAL ESTATE

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