SOUTHEAST SNAPSHOT, JULY 2004

Chattanooga Office Market

Chattanooga, Tennessee’s office market is soft, as is the recent experience of most second-tier cities; however, momentum in a positive direction is felt both in the central business district and the suburban market. As competition for tenants increases, property owners do appear to be in an aggressive mode in attracting tenants to their properties.

New product, mainly in the form of single-story condominium-style product, has been developed over the last few years and is coming on line in the suburban market. A single principal developer, Ken DeFoor of DDC, is responsible for providing the majority of this product to the market. DDC is currently under construction with at least three different developments that, once completed, will comprise more than 100,000 square feet of new product. Principal interest in DeFoor’s offerings has been on the purchase side. The purchase price for office condominiums in the developments range from approximately $140 per square foot completely built out at the Corporate Image business park in the Hixson submarket up to as much as $200 per square foot for medical buildout at the Corporate Image business park on Gunbarrel Road.

Rex Allen of Commercial Management states that he is 87 percent leased in his office campus, The Pointe, a Class A development with easy access and visible to Interstate 75. Commercial Management was a pioneer developer in the suburban market and is offering a Class A office campus environment.

The Corker Group, which owns more than 1 million square feet total in the CBD and the suburbs, reports that its occupancy across the board is just below 90 percent.

In the CBD, the Electric Power Board of Chattanooga (EPB) is under construction on approximately 100,000 square feet of improvements to a property located at MLK Boulevard and Market and Broad streets. The company will move from its current facilities, which are located adjacent to the UnumProvident campus. The city completed a trade with UnumProvident for the old EPB building for surface parking lots, which UnumProvident owns along First, Second and Third streets.

There has been substantial activity, thanks in part to some very attractive incentives, for owners and developers to renovate older buildings in the CBD. In the most recent favorable interest rate market, the buy decision, even in the CBD, has far outweighed the lease decision.

Vacancy rates in Chattanooga seem to lack continuity, but for the most part occupancy does seem to be holding steady, especially in the Class A buildings. It is estimated that in most of the Class A buildings in both the CBD and the suburbs, vacancy rates are at 10 percent or less. It has been reported by Steve Hunt that activity in the Republic Parking headquarters building (Republic Centre), which consists of more than 200,000 square feet of Class A space, has been at a pace equivalent to that of the mid-1990s. Vacancy rates there are reported to be in the single digits. Rental rates — depending upon the credit of the tenant, the length of the term signed, and the amount and quality of the buildout — are in the range of $16 to $19 per square foot. These numbers are generally reflective of the rates most commonly seen in the CBD for Class A office. We know of leases that have been signed for more than $20 per square foot; however, because of the lack of fresh tenants into the market, competition is increasing for those tenants making lateral moves. Thus, there seems to be some downward pressure on rental rates in the form of negotiated incentives.

In the suburban market, with the exception of CBL & Associates Properties’ headquarters, most of the leasing activity has occurred in the rental rate range of $16 to $18 per square foot, full service, for Class A. Some space has been leasing in single-story buildings at $12 to $14 per square foot, triple net or modified gross.

Some of the more noteworthy office deals include Morgan Stanley’s taking approximately 10,000 square feet in the Volunteer Building in the CBD. Cohutta Bank, now located in downtown Chattanooga, signed a lease for 5,000 square feet in the AG Edwards building, which is owned by Chattanooga Land Company. There was a 22,000-square-foot deal cut in Brainerd Village on Brainerd Road for ACS for a mail handling facility. UnumProvident absorbed roughly 100,000 square feet of space in Chestnut Towers under a sublease from TVA for a short term.

There are two critical areas that are worth watching in the future, one of which is the Hamilton Place Mall area off I-75. CBL & Associates Properties continues to develop its land holdings in that area, which continues to create more interest while drawing more office, retail and residential activity to the area.

The other area to watch is the CBD. The Aquarium district and the North Shore have recently announced major investments underwritten with local and state funds. The CBD continues to draw interest, from both retail and residential standpoints. The Loveman's Building announced that it has sold all 25 of its residential units.

It is my opinion that Chattanooga will continue to offer a highly attractive area in which to live and do business. Real estate values are lower relative to what we see in the larger markets around us. With the world-class attractions, theater, museums, and the beauty of the river and the mountains, Chattanooga will continue to experience steady growth over the next 5 years. The political and economic climate is very conducive for attracting new business while catering to the expansion of existing business.

Compared to the early 1980s, before the Tennessee Aquarium was constructed, downtown Chattanooga is completely different. It is a friendly place to walk, shop and entertain. It remains an attractive place to do business. People and businesses in the region are finding Chattanooga an attractive place to relocate. This trend is increasing and Chattanooga should be a place to watch going forward.

— Bryan Rudisill, SIOR, CCIM, vice president, NAI Charter Real Estate Corporation


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