SOUTHEAST SNAPSHOT, JULY 2006

Chattanooga Office Market

Bryan Rudisill, Vice President, NAI Charter

The majority of the new office development is taking place in the suburban arena as demand in that area continues to drive development of office condominium projects. Office condominium rates have reached $200 per square foot as exhibited in the new development by Pryor Bacon on Shallowford Road. Rental rates are surpassing the $16 mark.

The development by Ken DeFoor will, ultimately, see some office development, perhaps as much as 100,000 square feet. The 40-acre compound will initiate site work as mentioned in early 2007 with lodging, restaurants, retail and some residential included in the initial phases of that development.

When the majority of the assets of the Corker Group were purchased by Luken’s Holdings, LLC in 2005, Luken’s became the largest single private property owner in Hamilton County. Included in the transaction was the largest single component of suburban office product now known as Osborne Office Park, which includes some 500,000 square feet. In the central business district (CBD), Luken’s now owns another roughly 500,000 to 600,000 square feet there as well. According to Russ Elliott, leasing representative for Luken’s, “In the past 17 months we have seen a healthy increase in our leasing activity. Since January, the vacancy rate in downtown properties has decreased from 15.5 percent to 8 percent with approximately 30,000 square feet leased during that time frame. The vacancy rate in the suburban component has decreased from roughly 20 percent to less than 15 percent with approximately 42,000 square feet leased this year alone.”

Across the board, Luken’s reports that rental rates stabilized in the central business district in the Class A towers at roughly $18 per square foot and that is full-service. Luken’s Maclellan Building, an office property consisting of approximately 80,000 square feet on 12 floors is now undergoing a complete renovation with capital improvements approaching $6 million. In the Class B towers, rental rates range from $13 to $16 per square foot. Class C rental rates range from $10 to $13 per square foot.

The CBD office market is still anxiously awaiting the relocation of BlueCross BlueShield to its new office campus, which is undergoing demolition and site reconfiguring at this moment on what was formerly known as Cameron Hill Apartments. The other major new office project downtown is the 401 Chestnut Building, which consists of some 150,000 square feet. The owners were unavailable for comment and it is not known exactly what leasing activity has gone on there.

Amsouth Bank consolidated two downtown offices into one at its main facility located at 601 Market St. Also, FSG Bank is constructing its new headquarters at the corner of 6th and Market streets. Once complete, they will be relocating from their facilities to 817 Broad Street, which was the former Volunteer Bank. Combined, the two moves described above, which will occur in 2007, will add approximately 30,000 square feet to the market.

 Other major deals reported year-to-date include some 20,000 square feet leased by the city in what is known as Warehouse Row. NAI Charter Real Estate was the broker involved in that transaction. The City Hall is undergoing renovations, and it is presumed that those renovations will be completed in approximately 2 years.

In summary, the overall condition of the office market in very healthy. Downtown residential and retail development continues at a very aggressive pace attracting a variety of new concepts from developers. The relocation of major tenants like BlueCross BlueShield and The Electric Power Board will provide unique redevelopment opportunities for their empty buildings. The 401 Chestnut Building will see increased activity as it is the only major product offering floor plates as large as 30,000 square feet. It is difficult in Chattanooga to find much more than 5,000 square feet of contiguous space.

 In the suburbs, steady growth continues. The major economic engine for the suburban market is Enterprise South, a mega site, as defined by the State of Tennessee Economic Development Board for industrial sites of more than 1,000 acres suitable for large manufacturing such as automotive. The city, county and state will be successful, in time, in attracting a major employer to that site. Once successful, the effect will be significant as service providers will follow.

— J. Bryan Rudisill is vice president of NAI Charter in Chattanooga, Tennessee.

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