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Commercial real estate in Knoxville seeing an uptick

By Kailyn Lamb, Marketing Content Writer and Editor, PYA

As industries begin to recover from the pandemic, some have weathered the storm better than others. With remote work becoming more and more popular, we at teknovation.biz were curious to see how commercial real estate was faring.

“When we look at the commercial real estate market, there was a significant pause in transaction volume during the pandemic,” said Jerrod Gaertner, President and Principal Appraiser at Scott Collins Company. “It quickly returned and now a lot of folks are playing catch up and transaction volume has increased substantially.”

During the shutdown, retail faced the brunt of the impact. Louise Frazier, President of Blue Ridge Realty, Inc., said they were able to work with clients to make sure they stayed in business.

“We were fortunate with our mortgage companies, we either were able to do interest only or defer payments for three months,” Frazier said. “So, we passed on those savings or were able to work with [tenants] for a period of time.”

She added that limited capacity openings also helped those businesses. Since businesses have started returning closer to normal, all of Blue Ridge’s clients have been able to pay their back rent in full, Frazier said.

For now, the industry remains steady. Some industries, such as medical, have seen a slight boom. In an opinion piece by Michael Honeycutt, Vice President and Principal with PYA’s affiliate company Realty Trust Group, he wrote that several healthcare providers have announced construction projects or have already started building. Read more of Honeycutt’s piece in Knox News here.

Scott Collins Company does commercial appraisal work across the southeast, said Gaertner. The uptick in industrial space demand is not unique to the Knoxville area. “Across the board, there’s been low vacancy, rising rent, higher costs, and difficulty finding move-in-ready industrial space,” Gaertner said.

The Q3 2021 Marketing Report from NAI Koella RM Moore showed similar trends. In the industrial market, the vacancy rate for Metro Knoxville is 1.4 percent, the lowest in the southeast, according to the report. The office market is at a vacancy of 4.9 percent. The annual rent growth is up in industrial, market, and retail in the Metro Knoxville area as well.

Going into the pandemic, Frazier said most Blue Ridge properties were fully leased or at 95 percent. Since then, the company has seen renewals happening for that space. From her clients, she’s hearing that many businesses would like to see their companies return to office spaces. The question now, she said, is not when to return but “how much space are we actually going to need?”

Remote work is here to stay, at least in part, as many businesses are transitioning to a hybrid environment. Frazier said that some clients have looked at downsizing their space but are looking at longer lease commitments. Others are looking at revamping their office spaces. Instead of the open floor plans which had recently become popular, some businesses are looking at transitioning back to having some collaborative space as well as private offices.

“They’re still keeping office space,” Frazier said. “Really in talking with some of our companies, they’re going to end up with the same footprint. They just may come back and do some renovations.”

Frazier said market rates in Knoxville are competitive and range from the mid- to upper- $20s per square foot for a top-rated space. That rate changes when you’re looking at new construction though, she said. Prices there have seen an increase to the $30 to $35 per square foot range for new buildings due to the increased cost of available land and construction.

The value of prime commercial properties, which have new buildings, long-term net leases, and credit-tenants have also edged up recently, Gaertner said. Like many industries, supply chain issues and labor shortages are causing hiccups in new construction. Supply of new prime offerings is being absorbed quickly given the lack of available new product coming on-line, coupled with sustained investor demand, he added. However, assets situated in secondary locations, older construction, shorter leases, or local tenants, may yield a mix of results, taking into account the story and outlook surrounding the asset.

“Although there are a lot of projects on the table, it’s taking a little longer to get to the finish line,” he said.

He added that other supporting service businesses, such as title companies, bank attorneys, and surveyors, also report a significant backlog of work.

Frazier said she thinks part of the reason Knoxville has fared so well in the commercial real estate space is that the area is not overbuilt. Gaertner agreed, saying Knoxville has not historically been a “magnet” for large-scale corporate office users. But that may be changing.

Both Frazier and Gaertner said there has been increased interest in the area from companies looking to relocate to East Tennessee from out of state. One example is Smith and Wesson, which announced in September it would be building manufacturing and office space in Blount County. Read more in this teknovation.biz story. Gaertner added that some of those businesses and investors now have access to new sources of capital to build and buy here, which were not available in the past.

“We are working on projects right now with companies who chose to locate in Knoxville because of lower overall costs when compared to Nashville,” he said. “We have recently worked with investors from Miami and other major metros which admitted they would have previously passed on East Tennessee.

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