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 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.

 

 

 

 

 

 

Tri-Cities sales tax collections continued lackluster performance in April

Seasonally adjusted sales tax collections in the three-county Johnson City Metropolitan Statistical Area (MSA) are up 0.6%  so far this year while collections in the four-county Kingsport-Bristol MSA are down by 2.9%. Collections for NE Tenn’s  four MSAs were up 1.4% for the first four-months of this year.

The good news for Kingsport-Bristol is April is the first-time collections were better than they were on the year-over-year comparison. Kingsport-Bristol began they year with year-over-year collections lagging Jan. 2018 by a half a point. Then it scored a disastrous 12% drop in February. March improved to a 1.1% decline. This year’s collections – as reported by the MTSU Department of Economics and Finance – is a far cry from last year’s performance. Last year Kingsport-Bristol’s collections were 4% better than were in 2017, which paced the 4.2% annual increase in the Knoxville MSA.

And while the Johnson City metro area’s collections are in the green after the first four months of the new year, they’re lagging the performance of the Knoxville and Morristown metro area by half or better.

Morristown is the sales tax collections golden child so far this year with year-to-date collections 5.3% better than the first four months of last year. It’s the only local metro area with a market share that has been better than its annual 2018 regional share every month this year.

April’s year-over-year collections in Tennessee were up 3.1%, and the month-over-month metric was up 1%. Here’s how the NE Tenn. metro area looked. Month-over-month performance is listed first then year-over-year.

Johnson City MSA – 4.8%, 1.9%

Kingsport-Bristol MSA – 2.4% – 3.3%

Knoxville MSA – 1.4% – 2.3%

Morristown MSA – -0.6% – 9.3%

On the Consolidated Statistical Area (CSA) level Knoxville-Morristown’s seasonally adjusted collections were 3% better than April last year; Johnson City-Kingsport-Bristol had a 2.6% increase; and Chattanooga-Cleveland was up 1.9%.

April’s seasonally adjusted total collections in NE Tenn. was $124 million – $33.9 million in the Tri-Cities CSA and $90.1 million in the Knoxville CSA.

 

Local home flip market sees slight softening from last year; gross median profits up

During the first three months of this year, 115 homes were flipped the four local counties analyzed in Attom Data Solutions Q1 Home Flipping Report. The number of flips as a percent of total sales in Washington and Carter counties was above the U.S. average of 7.2%, but no local county met the state average of 9.3% of total sales.

The total number of flips nationwide was up 6.7% the highest home flipping rate since Q1 2010. The only two counties consistently in Attom’s analysis are Sullivan and Washington. During the first three months of this year, flips accounted for 6.8% of all existing sales in Sullivan and 7.4% in Washington County. That’s up from Q1 last year, but not the biggest share in the last six years for Sullivan County. That peak came in Q1 2016 at 8.1%. This year’s 7.4% share in Washington is the highest since 2014.

While the number of flips has not declined dramatically in the local market, the tight inventory and increased costs have tightened the market.

“With interest rates dropping and home price increases starting to ease, investors may be getting out while the getting is good before the market softens further,” said Todd Teta, chief product officer at Attom. “While the home flipping rate is increasing, gross profits and ROI are starting to weaken, and the number of investors that are flipping is down 11% from last year. Therefore, if investors are seeing profit margins drop, they may be acting now and selling before price increases drop even more.”

The median gross profit from flips in most local counties was higher than it was during the first three months of last year.  Flip sales are an important part of the market because most sell for under $200,000. Over 70% of all existing home sales in the local market are in the $200,000 and below price range. Listing in that price range has seen the tightest conditions for the past two years. Last year most months saw a four-months of inventory status in that price range, which typically points to a seller’s market. The $200,000 to $399,999 price range has seen an increase in sales in the past few years, and it is currently seeing an inventory that in the normal market conditions range.

Here what the median purchase and flipped price looked like in counties in the Q1 analysis.

Carter – $28,900 – $117,450

Hawkins – $43,000 – $109,000

Greeneville – $46,167 – $47,500

Sullivan – $59,960 – $116,000

Washington – $85,995 – $136,500

The average number of days to flip a property compared to last year was:

Carter – 203, up 38

Hawkins – 198, down 6

Greene – 154 – up 45

Sullivan – 176 – up 30

Washington – 171 – down 2

The median gross profit for flips in Q1 was compared to last year was:

Carter – $88,550 – $20,067

Hawkins – $65,900 – $46,600

Greene – $1,333 – $33,250

Sullivan – $56,041 – $27,399

Washington – $50,504 – $67,600

METHODOLOGY

Attom analyzed sales deed data for this report. A single-family home or condo flip was any arms-length transaction that occurred in the quarter where a previous arms-length transaction on the same property had occurred within the last 12 months. The average gross flipping profit is the difference between the purchase price and the flipped price (not including rehab costs and other expenses incurred, which flipping veterans estimate typically run between 20 percent and 33 percent of the property’s after repair value). Gross flipping return on investment was calculated by dividing the gross flipping profit by the first sale (purchase) price.

 

Tri-Cities entrepreneur receipts, how much and average per labor sector

So, there’s a little over 30,000 nonemployer firms with receipts of $1.2 billion in the Tri-Cities. That’s receipts – the total amount received from all sources with no costs or expenses subtracted – not the payroll. And $1.2 billion is a noteworthy piece of the regional Gross Domestic Product (GPD) or total economic output.

The nonemployer firm – a business where the owner is the only employee – with the largest receipts volume is in the Construction Labor Sector followed by the Real Estate.  When you look at the largest average volume per firm Wholesale Trade is at the top of the list followed by Real Estate.

Real Estate looms large in the nonemployer category as it does in the economy. The total receipts in the current report year were $200.3 million. The total sales volume for all residential sales in the same year was $1.03 billion.

The Census Bureau count of these nonemployer firms doesn’t tell us how many are the primary job of the owner and how many are part-time gigs. But the receipts per firm indicate some are side gigs or one of several revenue streams for the local entrepreneur.

Here’s how total receipts, and the average per firm, for those entrepreneurs looked across the region and in the region’s two metro areas.

Nonemployer businesses are the largest segment of local businesses and accounted for the employment of 30,455 in the most current Census Bureau count – 2016. Kingsport-Bristol had the most nonemployer firms 18,209. There were 12,236 in the Johnson City MSA.

 

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