SOUTHEAST SNAPSHOT, AUGUST 2005

Huntsville Office Market

Bart Smith Managing Broker Graham & Company

Office development has increased dramatically in 2005, mainly centering upon Cummings Research Park (CRP), a 9 million-square-foot office complex. In effect, many of the new office developments in the Huntsville area have been build-to-suits for tenants in the CRP. Home to 23,000 employees, the CRP includes a mix of tenants including Fortune 500 companies, local entrepreneurial start-ups and award-winning small businesses. Tenants include Northrop Grumman, Lockheed, Boeing, Raytheon, SAIC, Dynetics and Adtran.

Rental rates for Class A office space range from $16.50 per square foot to $18 per square foot, and the overall vacancy rate for the Huntsville office market stands at 8.49 percent, a noticeable improvement from 2004’s rate of 10.34 percent.

The dynamic increase in development throughout Huntsville has effected several significant projects. Northrop Grumman has planned a campus development in Research Park, which Colonial Properties Trust is set to develop; the 110,000-square-foot office building breaks ground this summer. Dynetics recently broke ground on a four-story, 160,000-square-foot corporate headquarters in CRP West, which will consolidate the company’s Huntsville campus. The project is scheduled for completion in summer 2006, and the 950-employee company is the first to locate in CRP West. Starwood Hotels & Resorts has agreed to operate a 200-room Westin with O&S Holdings LLC in the World Famous Bridge Street development, which is a 100-acre center located in the CRP that features shops, restaurants, office buildings and apartments. O&S Holdings is a new developer in the area, and the World Famous Bridge Street mixed-use project overall encompasses 2.2 million square feet and costs $210 million. Also within CRP West, Westar Aerospace & Defense Group Inc. has planned a two-story, 85,000-square-foot building. And in Thornton Research Park on Old Madison Pike, CAS recently completed an 80,000-square-foot building that provides offices for roughly 700 of its 850 employees.

Many of these new endeavors have been consolidation efforts and will add new office space to the market, yet the absorption of this space should not be a lengthy process as the vacancy rate for both Class A and B office space is very low.

A majority of the new office development has been centered in the Research Park where most of the area’s job growth is being created, but the downtown area, which is dominated by legal, banking, accounting and brokerage firms, also has seen some new development. For example, the Big Springs Summit, a 76,000-square-foot office building, and the 10-story Embassy Suites Hotel both broke ground in 2005. In addition, several office conversion projects are underway in this submarket.

Expansion in the research and defense related companies has created much of the recent absorption. Several large blocks of space have been leased to large companies such as Boeing, SAIC and Lockheed. Also contributing to this expansion are many local start-up companies that are adding office space as they are awarded government contracts or supporting contracts with larger companies. While these smaller companies specifically don’t absorb the larger blocks of space, their expansion is cumulative in the market.

DirecTV has leased 65,000 square feet in Thornton Research Park, and BAE has signed a 50,000-square-foot lease on an expansion to its existing building located within the CRP. The only other major leases were signed by Northrop Grumman, Westar and CAS for their build-to-suit projects currently being developed or in the planning stages.

The CRP submarket should continue to expand, and the presence of Redstone Arsenal and NASA should continue to add research and defense related jobs to the market. Additionally, development should remain strong as the defense spending remains healthy, and NASA’s presence should offset any drop in that defense spending for the immediate future.

— Bart Smith, managing broker, Graham & Company

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