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Knoxville Market Report Q2 2021

Leasing

Leasing activity slowed in 2020, as the coronavirus pandemic disrupted economic growth and placed financial pressures on many companies. In fact, leasing activity slowed to a multi-year low, but at 1.5%, industrial vacancies in continue to hover around a historical low. Currently there are only 260,000 SF of speculative construction underway in the Knoxville metro area, with 50,000 SF of space pre-leased by Baker Realty Company.

Rents continue to grow at a steady pace. With year-over-year growth of 5.7%,
owners in Knoxville are raising rents at a similar pace with the national
benchmark. While Knoxville hasn’t benefited from outsized population or job
growth, owners are taking advantage of historically low vacancies and limited
speculative development. But, rent growth may face additional headwinds in the
coming quarters. A slowdown in demand, aging assets, and heightened levels of
economic uncertainty could make it harder for owners to raise rents at a steady
pace moving forward.

Sales

About $150 million traded in 2020, a record for Knoxville. Favorable market fundamentals and an improving local economy have kept annual investment above the metro’s 10-year historical average. However, deal volume cooled through the first half of 2021, with only about $40 million worth of industrial properties changing hands.

Investment activity has been inconsistent in recent quarters. Outside of one major deal, a handful of smaller industrial assets have traded hands throughout 2020. Inconsistent investment trends may continue into the near term, as the coronavirus causes disruptions to capital markets across the country. Additionally, many investors are holding onto cash to evaluate future growth plans, at least for now. While there has been an uptick in out-of-state investment in recent years, local and regional buyers are still the most active players in Knoxville. Owner/user deals made up nearly half of the investment volume in 2019. This marks an increase from the 10-year average of closer to 30%. Market pricing trends indicate that SF pricing increased by 6% in 2019, with cumulative growth of more than 70% being achieved since 2008. Additionally, cap rate compression has slowed in recent years, with the figure sitting in the low-7% range.

Notable Baker Realty Company Transactions in Q2

– Leased 360,000 SF to Westrock
– Leased 100,000 SF to Red Stag Fulfillment
– Leased 40,000 SF to Conklin Metals
– Leased 36,000 SF to Marine Fasteners
– Leased 25,380 SF to Optimas Solutions
– Leased 19,000 SF to IDI Distributors
– Leased 7,600 SF to Spartan Safe
– Sold 5 Acre Parcel at Watt Road to Skelly Towing LLC – Leased 1.09 Acre Parcel at Western Avenue to Sonic