Photo above: Pickens Bridge Village photo courtesy UDC
By Don Fenley
For the first time since the Great Recession, the Northeast Tennessee – Southwest Virginia real estate industry heads into a new year with more checkmarks in the positive column than the negative. By all measures the market is fully recovered from the recession. The consensus of real estate professionals who spoke to The Business Journal for this report is to expect more good news in 2018.
At the close of 2017, previously owned-single family home sales had posted a second consecutive record year, condominium and townhome sales saw their best year since the recession and new home builders were scrambling to keep up with demand that exploded in the third quarter. That demand is reflected in a 26 percent increase in new home permits.
Although new commercial real estate building permits are down, the number of transactions is pacing 2016. The exception is Bristol. Kelly Graham, agent/broker at Graham and Associates in Bristol Tenn., describes the retail and restaurant sale market in the twin city as “hot, hot, hot.”
• 2017 was the second that year sales exceeded a billion dollars. It was also the year that price appreciation showed bigger gains.
• The fundamentals are in place for more of the same in 2018. While there are no visible short-term bumps in the road, there are challenges on the horizon.
One of Eric Kistner’s first public duties after his installation as president of the Northeast Tennessee Association of Realtors (NETAR) a year ago was to announce that the 2016 existing home market had set a new benchmark. Combined single-family, condominium and townhome closings broke the 6,000-sale mark for the first time. But the jewel in that year’s crown was the housing market became a member of the billion-dollar-a-year sales club.
“Getting that billion dollars in sales was huge for real estate,” Kistner said. It’s the number that affirmed real estate is a major component of the regional economy. “Those of us in the profession look at real estate as an industry. But since it doesn’t have a brand like Eastman or Domtar, the public doesn’t see it that way. To correct that we set a goal to raise public awareness about the nature of the business which led the local economy out of the recession.” Transactions of existing home sales and the economic activity those sales generate in other sectors account for an estimated 15 to 18 percent of Gross Domestic Product (GDP). A drill down identified a local real estate impact of 12.5 percent of the Tri-Cities GDP. “It would have been higher, but we couldn’t put a number on some things like private investments for single-family rental properties.”
The biggest challenge Realtors faced in 2017 was sustaining the market’s momentum. “We thought an increasingly tighter inventory would hold us back,” Kistner said. “But it didn’t. The bar was raised again.”
Single-family sales started out strong but hit a soft patch in the second quarter of 2017. At the same time, condo and townhome sales were on a roll. Double-digit gains were the name of the game. August was the only time they took a breather. Karrom Boonsue, managing broker at Keller Williams Realty, attributes the sales spike to a combination of new financing terms and the health of local home owner associations. “At the end of the recession, there were some homeowner associations with reserves that were not large enough. That made investors and buyers wary of purchases.” When the situation was resolved sales took off.
The fact that residential sales were barely keeping up with the 2016 pace for the first half of this year was overshadowed by something that had been missing since May 2015 when home sales took off like a rocket. Sales were at record levels, but prices were not increasing proportionally. May 2015 is when investors and bargain hunters zeroed in on the lower price tier of the market – homes in the $200,000 and below price range. Cash was king and sales exploded. Combined with a steadily increasing demand from consumers those record-level sales extinguished the excess inventory that had built up during the recession. By the latter months of 2016 tight inventory was the market catchphrase. And it got tighter last year. Tight enough that it unleased higher prices.
One measure of the pulse of the local inventory picture is months of inventory. It simply described the number of months it would take to exhaust active listings at the current sales rate. Six months of inventory is the real estate rule of thumb for normal market conditions. The local norm has traditionally been more like nine to 10 months. But that was yesteryear’s market. At the beginning of 2017, “normal” dropped to five months, then four months beginning in April.
While investors and first-time buyers continued their assault on the lower-market price tier, sales in the higher price ranges began catching up. During the 12 months ending in November 2016 sales in the $200,000 and below price range accounted for 76 percent of all homes sales. During the 12-months ending in November 2017, that share had declined to 72 percent while total sales increased. Sales in the next higher price range – $200,000 to $399,999 increased by 2 percent. Sales the price ranges above that also saw small increases.
Boonsue thinks that market dynamic will carry over into 2018. “I don’t see anything in the near term that will hurt us. In fact, rising interest rates will help us in the short run” because rising interest rates tend to push both buyers and sellers who have been sitting on the fence waiting for something better back into the market.
At the same time, “I don’t see any massive growth,” Boonsue added. There’s room for some owners in the middle price ranges to move up, but many of the folks who say they would like to move are holding back because they can’t find what they want in the existing inventory. “It’s a continuing saga of what has been going on for a year or so.” We are in a strong seller’s market in some price ranges, but it’s not universal.
Two concerns Boonsue has about the market are beginning to be heard more often these days. They are the affect of wage stagnation and the lack of product for first time buyers. “Our lower end inventory was boosted during the recession and investors and individuals bought many of those properties to flip and put back on the market or for rentals.” The problem is when you flip a home and put it back on the back market at a higher price it raises the ante for the first-time buyer, and many of them are saddled with the area’s wage stagnation and the area’s chronic underemployment problems.
NETAR’s incoming president Aaron Taylor says the top market challenge he sees for 2018 is a continuation of the squeeze on inventory. “We don’t have a lot of new product in the most affordable price ranges, and if first-time buyers get squeezed too hard, there’s a danger it could drive them into renting instead of buying. There’s no fast or easy solution.
“Realtors did a good job of managing the inventory crunch in 2017, and I’m confident they will do the same this year, Taylor says. “We are seeing a little relief because new listings are beginning to trend higher.” That should continue as the market gears up for the prime buying and selling season, “but I suspect inventory will be one of our top issues in 2018.”
Renting vs. owning and the affect the region’s rising inventory of apartment complexes may have on home sales was and remain hot-button real estate topics this year. Several big complexes have come online in Sullivan County, and more are in the construction or planning phases across the region. The most recent is Crossgate Partners’ Town Park Lofts in Kingspsort. The $32 million development is on the old Supermarket Row site in downtown Kingsport. According to Randy Moore of Crossgate, when completed the development is expected to be a 263-unit housing complex on seven areas with one and two-bedroom apartments, along with 8,000 square feet of retail space on the ground floor. The development features what in becoming a staple for new apartments in the region – a resort-style swimming pool, clubhouse, and fitness center. Construction began in November and is expected to take 18 months.
City officials in both Bristol and Kingsport eye the new apartment complexes as incentives to attract new residents. City and civic officials want to attract Millennials. It’s a top issue for localities trying to come to terms with the region’s aging population and population decline. Northeast Tennessee has an older population than the rest of the state and nation. The Tri-Cities region is on the leading edge of the trend by five to six years. The demographic reality is for every 10 live births the region records there are 13 deaths. The only population growth has been new residents, and in recent years Washington County, Tenn., has attracted most of it. The hope in Sullivan County is more new, high-end apartments will help Kingsport and Bristol retain some of the immigration, plus attract apartment dwellers from outside the area to relocate. So far, the results in Kingsport have been a redistribution of occupancy from the older apartment complexes to those that recently opened. There’s also been a slight increase in the number of elder homeowners who have elected to move to apartments when they sell and downsize for retirement.
Shane Abraham, founder and principal of UDC, says the supply-demand mix for apartments in the Washington County area is the best he’s ever seen it. He adds there is almost always room for infill in some areas. An example of that infill is a 175-unit expansion to UDC’s Pickens Bridge Village in Piney Flats. Occupancy rates are also reportedly high in the major Washington County complexes. Abraham isn’t as confident about the supply-demand mix in Sullivan where most of the recent construction was centered. Other real estate professionals are also wondering if the rapid increase of so many apartment complexes in areas that are not seeing population growth is a good idea.
New Home Market
• New home demand exploded in the third quarter. Demand continues to exceed inventory capacity.
• The outlook for 2018 is positive, but with some pragmatic considerations.
• Rising building material costs and higher interest rates could put a damper on growth.
• Builders continue coping with the scarcity of ready-to-build lots, skilled workers and credit.
Local builders entered 2017 with a projection that new home construction – as measured by new residential building permits – would increase by a little over 7 percent. That would have made it another year of painfully slow growth. And there wasn’t a lot of reason to question the projection. The region’s population picture was flat at best, jobs were being created, but chronic underemployment and wage stagnation had a chokehold on traditional growth. Things went according to the projection for the first half of the year, then the world turned upside down – in a good way – for many builders.
Tri-Cities new residential permits outperformed both the Knoxville and Chattanooga metro areas in the third quarter. New permits rose 28 percent, and all but one county saw double-digit increases. Washington and Sullivan counties led the expansion followed by Greene, Carter, and Hawkins counties in Northeast Tennessee and Washington County in Southwest Virginia.
Washington County, Tenn., and Washington County Va., dominated new permits for high-end homes with 29 and 20 new permits followed by 15 in Sullivan County. During the first nine months of the year, there were 74 new permits for homes that were more than 4,000 sq. ft. or had a construction cost of more than $400,000. During all of 2016 there were 77 high-end homes built in the area.
The explosion of the new home sales handed Lisa Luster, executive officer at the Johnson City Area Homebuilders Association, a headache and a good problem to have. In the final weeks of preparations for the associations’ Builders’ Showcase of Homes, the number of homes to showcase began dwindling. She had a lot of interested consumers and fewer models to show because builders were “selling new homes faster than they could build them.”
Washington County, Tenn., continued its domination of new home construction and high-end permits in 2017. Michael Garland, 2017 president of the homebuilders’ association, said demand now exceeds supply. Those conditions mesh well with his expansion at Garland Farm Estates. “As long as job development stays strong we’ll continue to grow. The bottom line is it always comes back to the strength of the jobs market.”
Tim Hicks of Hicks Construction, a former association president told The Business Journal that on a scale of one-to-10 “I’d say the market is probably an eight. I’m getting a call a day, and that’s about as hot as I’ve seen it.” His comments came just weeks before the Builders’ Showcase of Homes. Conditions haven’t let up.
Kelly Wolfe, Wolfe Development, agrees, adding, “We’re pinching ourselves about just how good it is and how good it feels to not have the anvil of a poorly performing economy and high gas prices hanging over our heads. Things are as good as we’ve seen since the recession hit in 2008.”
While the region’s new home industry is dominated by Washington County, Tenn., and Sullivan County, growth isn’t limited to those counties. Hawkins and Carter counties have seen spikes in new home construction. The same goes for Greene County. It’s a welcome reversal for a sector that has been performing at a little better than half its pre-recession capacity. The challenge is sustaining the momentum.
While new residents to the area make up part of the new home buyers, most of them are local residents. And the mix of buyers is across the board. Matt Lorencen of the Gouge/Lorencen team at Re/Max Checkpoint handles many of Orth Homes’ sales. “We have seen and worked with all kinds of buyers – retirees and empty nesters sizing down and couples sizing up.” Washington County builders say they’re seeing residents from other local counties relocating to the new home hot spots in northern Washington County.
Travis Patterson, Patterson Homes, Kingsport, has targeted the Surgoinsville area for a new home development intended to attract buyers in the $200,000 price range. Why Surgoinsville? Simple, Phipps Bend is seeing a growth spurt, and job creation is high. Hawkins County is also one of the two counties in the region showing population growth. The development is a Patterson-Petzoldt Build Fund LLC project. They acquired 20 lots from Appalachian Credit Union’s foreclosure inventory in the Allenwood development. The $200,000 price point is a base the partners hope will attract buyers who are put off by much of the new home inventory in the $300,000 price range.
Like the Washington County builders, Patterson says he’s seeing demand exceeding supply. During a recent Chamber of Commerce after hours event, Patterson said that at the beginning of the year he said he would be happy with 12 builds in 2017. “So far we have 23. I’ve never seen new construction demand as high as it is now.”
Kistner, who is also a contractor, auctioneer and broker at Bridge Pointe Real Estate, said even with the major ground that has been gained “we’re still not building enough new homes. All year we’ve seen people who want to downsize but they couldn’t because they couldn’t find the new home they wanted. That keeps their existing home off a market that’s hungry for fresh resale inventory. It’s a cap on sales and higher equity of all residential.”
Kistner thinks the key to more new homes lies with the area’s major employers’ employment plans and the pending merger of the region’s two health care providers. The merger will position Ballad to attract research grants that will dramatically expand the health care delivery, education and research components of the regional economy, he said.
When asked about the disparity of new home development in Washington and Sullivan counties Kistner pointed out that topography is a big advantage for Washington County. “Drive down the highway and pay attention to the lay of the land as you get into the Gray, Tenn., area,” he said. Flat land is one of a developer’s best friends, and the Washington County homebuilders have it.
Commercial Real Estate
• Commercial real estate transactions were slightly higher than 2016, but new construction permits were down 19%.
• Bristol’s retail and restaurant markets are hot
• Renovation and repurposing continue as the main drivers in commercial properties
• Everyone is waiting and watching what will happen after the hospital merger
Graham says there’s no question about the status and outlook for commercial real estate in Bristol. “Riding on the success of the Pinnacle and other developments we’re seeing a lot more activity,” he said. “Several new restaurants are looking or have announced they are coming to Bristol. Retailers who have thought of Bristol as the third sister now realizing it’s a player at a major retail and restaurant crossroads. Bristol is hot. It’s our turn for things to happen,” and there’s still an opportunity for infill in both the retail and restaurant sector of Bristol proper.
John Speropulos, president of Mitch Cox Realtor, Inc. in Johnson City, isn’t quite as animated as Graham but adds 2017 was a banner year for him and his colleagues. “There’s not been a lot of new commercial development, but we’ve had one of our best years.”
Tri-Cities new commercial real estate construction permits were down 19% in the third quarter. The Knoxville metro region was the only area that saw an increase. By way of comparison, Chattanooga permits were down 20 percent.
Speropulos points out that renovation and repurposing of existing commercial inventory continues driving much of the local sector as it has for several years. “There’s not a ton of inventory out there. For example, when I look at medical office space there’s not much to choose from.”
The cost of construction is up, and several trends are holding new construction at arm’s length, Speropulos added. Technology has given employers the ability to work with fewer employees, retailers are consolidating multiple outlets and constantly looking for a way to maximize the use of their space. “It’s not entirely a ‘is the glass half-full or half-empty property issue.’ The real issue is we need a bigger glass.”
Jerry Petzoldt, general manager and principal broker at the TCI Group, also cited the technology factor. “many businesses have decreased the space they need by 20 percent solely because of the way they do business with technology.” In some ways technology is the biggest headwind facing the commercial real estate inventory, he added.
“Some of the Johnson City retailers I’ve talked to say sales are up,” Speropulos added, “but I do think there are a lot of people sitting on the sideline waiting to see how things shake out with the hospital’s merger before they commit to major investments.” That’s an observation shared by Boonsue. He thinks the region is poised for growth of slightly larger physician’s groups and that will create churn in demand for medical office space. “In the near term, we could see some development of new space.”
Boonsue also echoed Speropulos’ observation on the repurposing and renovating of office and retail space. “For small businesses or startups, the question is how do I compete with the national franchises and how space is utilized is a big part of that decision,” he added. “We have a lot of inventory that has to be absorbed before we see much expansion.”
Petzoldt said the main barometer for the health of retail and office inventory is the vacancy rate of existing space. Unfortunately, that’s a metric that isn’t available on a city or regional basis. He thinks the occupancy rate for office space is high now and it could get warmer because of the medical demands after the merger.
Confidence got a big shot in the arm with low gasoline prices since they act as a virtual tax cut – what’s not spent at the pump goes directly into other consumer spending. “But in the long run, we won’t see a whole lot in commercial retail until we see population growth,” Petzoldt said.
Population growth was also on Graham’s mind, with Southwest Virginia as his focus. “What we need is for the people in the areas of Southwest Virginia who took it in the teeth in the coal industry downturn to migrate into the Tri-Cities area – Bristol in particular. We have a place for them here. New apartment complexes have been built – another is under consideration – and there are jobs,” he added.
Several studies estimate that the coalfield region of SW Virginia will lose 9 percent of its population by the end of the decade. It’s the nature of commercial Realtors to pay close attention to the business cycle since it drives commercial real estate. They also keep a weather eye on what happens with governance. There’s optimism among local commercial Realtors that regulatory reform and the new tax code will release some of the reservations of investors in 2018.
“I’m more optimistic now than I have been at any time since the Great Recession,” Petzoldt said.