COVER STORY, JANUARY 2009

CHATTANOOGA’S DRIVING FORCE
Volkswagen plant boosts commercial real estate market.
J. Bryan Rudisill, SIOR, CCIM

A bird’s eye rendering of the Volkswagen plant in Chattanooga, Tennessee.

In the middle of a growing economic storm, the Chattanooga real estate community has found shelter. In the next 2 years, Volkswagen will spend $1 billion to build a 1,340-acre plant in the area, making Chattanooga the site of the most significant recent deal in the Southeast. The project’s economic impact is expected to exceed $500 million annually to the state. Benefits of this deal will encourage commercial property growth in all sectors.

Construction has already begun on the 1.9 million-square-foot facility in the Enterprise South Industrial Park; the first cars are expected to roll off the assembly line in 2011. The city’s Industrial Development Board has issued $51 million in bonds for a variety of projects. The production facility will employ 2,000 workers, 1,600 of which will be part of the assembly process. The Tennessee Economic Development Commission estimates that more than 9,000 jobs will be created from the Tier 1, Tier 2 and Tier 3 suppliers to the main plant.

Boost to Industrial Demand

Volkswagen’s Tier 1 suppliers, component manufacturers that require a site in close proximity to the plant, will soon flood the market. These firms produce the seats, headliners and instrument panels that are integral to the car manufacturing process. There are plans for a Tier-1 supplier area within the Enterprise South Industrial Park, where Volkswagen has optioned on an additional 1,200 acres, but more space will have to be found. Many companies will search for sites within 30 miles of the plant.

According to reports from realtors, requests are beginning to trickle in from a variety of suppliers seeking space in the 50,000-square-foot to 250,000-square-foot range. All of these suppliers are aiming to move into these new spaces by mid-2010 at the latest. Initial interest centers around the Amnicola Highway corridor, the Highway 153 corridor and on Interstate 75 in Ooltewah. Cleveland will also garner interest. An influx of suppliers will help bring down Chattanooga’s current vacancy rate of 10 to 15 percent and ensure that the current rental rates of $3 per square foot increase. Commitments on supplier leases are forecast to commence in the fourth quarter and on into the second quarter of 2010.

Snatching Up Space

In late November, Volkswagen leased 30,000 square feet of office space in downtown Chattanooga’s Chestnut Tower to house Volkswagen’s top leaders until the plant opens. These early arrivals, coupled with construction workers from out of town, are fueling a demand for short-term residences. The real estate community is watching with interest; the northeastern corridor of the market will certainly garner most of the interest from incoming employees because of its proximate location. Commercial development has exploded at the Ooltewah interchange with the placement of the retail anchors Wal-Mart and Publix.

Without question, the Volkswagen plant is the biggest news in the Chattanooga community in the past 50 years. Volkswagen is making a considerable commitment to expand its market share worldwide, focusing on improving its sales volume in the United States to 1 million units per year, more than triple its current volume. The Chattanooga facility is expected to generate more than $55 million in state and local tax revenues annually. It is further estimated that for every dollar the state invests in incentives, it will receive approximately one dollar in benefits. In comparison, BMW opened a plant in Greer, South Carolina, in 1992. Today, state officials estimate that BMW is generating roughly $9 billion in total annual economic benefit to the state and currently employs more than 5,400 workers. When the plant opened, there were 20 BMW suppliers in the United States. That number has skyrocketed to more than 140. 

Securing the Volkswagen plant in Chattanooga is the biggest thing to ever happen to this tertiary market. The statistics are overwhelming, and it is easy to see why the real estate community is so excited. In an otherwise bleak environment, this deal is making local real estate professionals seem more optimistic than their neighboring counterparts.

J. Bryan Rudisill, SIOR, CCIM, is a vice president with Chattanooga, Tennessee-based NAI Charter.

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