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VOL. 41 | NO. 17 | Friday, April 28, 2017

Knoxville’s commercial real estate dilemma

Supply trails Nashville, Chattanooga

By Mike Blackerby

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There is an acute shortage of available industrial property in Knox County.

Just ask Bob McCallie, one of the owners of the longtime Knoxville property management firm of Tate and McCallie, Inc. He says it’s just not cost-effective to build new industrial facilities in Knox County, and the outlook for future industrial space in the county is uncertain.

“We’re running out of room in Knox County,” McCallie says.

Meanwhile, he adds, industrial properties are readily available in other parts of the state.

“Nashville is completely different. You go to Nashville and see huge facilities on the outskirts of town. You see warehouses in the 300,000 to 400,000-square-foot range. Chattanooga has done well, too.”

Not so in his market.

“As of right now, industrial occupancy levels are very high in Knox County,” McCallie points out. “We have a good supply of the smaller stuff – between 3,000 and 5,000 square feet – but we have a very limited supply of large buildings totaling 30,000 square feet and up.”

Usually, McCallie says, clients looking for such properties are in the wholesale distributing business, such as plumbing or electrical supplies.

“We probably average three to four inquiries a week,” he adds.

McCallie says his company currently has about 15 listings for industrial properties ranging in size from 3,500 to 25,000 square feet, but that’s nowhere near enough supply to meet demand.

Cost is another issue.

“One of the problems on the industrial end in doing new stuff is construction costs now vs. 10 years ago are very high,” he explains.

McCallie adds, depending on their age, properties between 20,000 and 50,000 square feet, can fetch $3.50 to $6 a foot per year.

“Industrial rents for large buildings have not increased enough for big, speculative warehouse developments.

“There’s not a whole lot of large development going on in the industrial end in Knox County.

“It’s costly to put industrial parks together. You’ve got to get it zoned industrial and get all of that other stuff with it, like utilities.”

A sellers’ market

Commercial real estate demand in Knoxville is trumping supply.

So, says veteran East Tennessee multifamily commercial real estate broker Solange Velas.

Solange Velas, real estate agent for more than 30 years, gazes out over the Knoxville skyline from atop 811 East Downtown Apartments. Velas was responsible for selling the property which now is home to young professionals as well as many University of Tennessee students.

-- Adam Taylor Gash | The Ledger

“The Knoxville commercial market is extremely strong right now,” says Velas, an agent at Goldman Partners Realty who was named Multifamily Broker of the Year at the Certified Commercial Investment Member East Tennessee Awards.

“There are more buyers chasing dollars than actual properties for sale,” Velas continues. “I’ve only got three listings right now. I should have 8 to 10 listings at any time. I have about 40 percent of the inventory I had two years ago.”

Velas, who began her real estate career in Los Angeles in 1984 before moving to Knoxville in 1996, has sold more than 350 duplexes, fourplexes and other multifamily properties.

Her largest sale was a 134-unit property in North Knoxville.

Velas has been involved in the sale of about 275 properties in East Tennessee since moving to Knoxville.

She earned the coveted Certified Commercial Investment Member (CCIM) designation in 2010.

CCIM designation is awarded to commercial real estate professionals upon successful completion of a graduate-level education curriculum and presentation of a portfolio of qualifying experience.

According to the CCIM institute, only six percent of the estimated 150,000 commercial real estate practitioners nationwide hold the CCIM designation.

In 2014, Velas closed 39 transactions, with a total value of more than $10,000,000.

Velas says several factors have converged to make Knoxville a sellers’ market.

“Knoxville doesn’t tend to have the swings that some of the other markets do. Also, our prices are considerably less than what you see in Chattanooga, Nashville or Atlanta. Our cost is much lower.”

Low interest rates have also contributed to the hot local market, she adds.

“I see demand continuing for at least 12 to 18 months, as long as interest rates don’t rise too much. Interest rates are at about five percent for a five-year commercial loan,’’ she says. “If rates rise above six percent, it will affect prices.”

Velas says her dealings with buyers are reflective of their thirst for multifamily properties in the Knoxville area.

“I have a 13-unit property for sale right now. I tried to sell it about two years ago, and couldn’t. Now, we have three offers at a much higher price.”

Likewise, Velas explains that interest was off the charts for a 12-unit property that she recently sold in the Lincoln Park neighborhood in Knoxville.

“It was for sale in a very average neighborhood,” Velas adds. “I sold it over list with at least four offers. Somebody paid all cash for it – $505,000.”

Given the high demand, Velas says she spends much of her time on the hunt for new properties.

“In partnering with my broker, we spend a ton of money on advertising and we’re always looking to get new listings.”

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