Knoxville Region Market Report Q3 2021

Leasing

Industrial leasing activity has slowed in Knoxville since the onset of the coronavirus pandemic, but that slowdown is more due to a lack of available space rather than any weakness in the market. The metro’s vacancy rate of 1.4% is one of the tightest in the region, and large availabilities are rare. While there is some supply in the pipeline, the prospect of large-scale speculative construction is unlikely, so vacancies will likely remain relatively low over the next several quarters.

Knoxville industrial owners are raising rents at a similar pace to the national benchmark, with year-over-year rent growth of 7.2%. Owners are taking advantage of historically low vacancies and minimal speculative development. Given that availabilities remain exceedingly scarce in the Knoxville metro, property owners may be able to continue raising rents at an above-average pace over the next several quarters. Industrial rents in Knoxville are up more than 40% since 2010, essentially matching the cumulative growth in nearby Chattanooga in that time. Average asking rents of $6.50/SF are also roughly in line with those found in Chattanooga, and both metros come at a sizable discount to rents in Nashville.

Sales

Deal volume in Knoxville hardly slowed following the onset of the coronavirus pandemic. In fact, the metro set a record for sales volume in 2020, boosted by a record quarter for transaction activity in Q3. Investment volume has cooled over the past few quarters, but quarterly deal volume has remained right around the metro’s five-year average.

Investment activity has been inconsistent. 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 Q3

– Leased 100,000 SF to Red Stag Fulfillment
– Leased 37,440 SF to Marine Fasteners, Inc.
– Leased 19,977 SF to Insulation Distributors, Inc.
– Sold 5 Acre Land Parcel at Watt Road to Skelly Towing LLC