Some exciting real estate developments are in store for Chattanooga, Tennessee. Enterprise Park South, a major industrial project in Hamilton County, is creating quite a buzz due to its size and potential growth opportunities.

Jay Garner, executive vice president and chief development officer for the Chattanooga Area Chamber of Commerce, notes the importance of Enterprise Park South. “Chattanooga is poised for growth, and we are raising $9 million to promote business development. Enterprise South will play a key role,” he says.

Other sectors of Chattanooga commercial real estate are also enjoying a significant amount of activity. The retail and office markets are seeing new developments take shape throughout the area.

Industrial

After a moderate 18 months, the industrial market has experienced a resurgence of activity. The most significant development is Kenco Group’s 688,200-square-foot food-grade distribution center. This facility is under construction and is located on the western corridor of Chattanooga in the Tiftonia submarket.

A current trend in Chattanooga is the strength of the local industry and owner-occupied properties. Locally owned Frost Cutlery relocated to a new 100,000-square-foot facility off of Interstate 75 in Ooltewah, and Covenant Transport recently built a $4.5 million training facility. Other recent expansions include Federal Express, American Paper and Twine, and Cardinal Health.

There has been no speculative construction in the area due to the abundance of quality space available and stagnant rental rates. Current estimates show that the vacancy rate has increased from 5 percent in 2000 to slightly over 10 percent. Rental rates have remained flat with $3.60 gross being the ceiling.

Chattanooga rests its hopes for major development on Enterprise Park South. The city and county recently purchased approximately 984 acres from the United States Army. This tract is located in the geographic center of Hamilton County with ease of access to both Interstates 75 and 24 from Highway 153. Rob Taylor has been retained by the City of Chattanooga to spearhead this development, and the property is ready to come on line almost immediately.

Office

New activity in the Chattanooga office market includes Chattanooga Land Company’s completion of a speculative office building that has had excellent success in leasing and is now 75 percent occupied. The Electric Power Board (EPB) is developing a downtown block that will feature an approximately 100,000-square-foot office building and 300-space parking garage. The EPB plans to use 90 percent of the building for its own use with the balance designed for retail or office space. UnumProvident announced a $60 million expansion in the downtown area. This consists of a new office building and a parking garage. The Corker Group owns and manages over 700,000 square feet of downtown office space and has a vacancy factor of less than 10 percent.

Downtown is the location for major business tenants, such as law firms, banks and accounting firms. Cigna, TVA, UnumProvident and Blue Cross Blue Shield have large blocks of space in the central business district (CBD). TVA recently elected to put 11 floors on the market for sublease in the Chestnut Towers. This space, totaling 110,000 square feet, will be leased at a full service rate of $14 per square foot.

The Loveman’s on Market is a large downtown building that is being redeveloped for upscale condominiums. The first two floors, representing approximately 30,000 square feet, will be office or retail. Several key tenants have looked at this space due to its attractive location and on-site parking. This project is scheduled to be complete by year-end.

There has been a rise in properties being placed on the market for sublease, and owners are seeing an increase in vacancy rates. “However, there are no large blocks of space available — particularly Class A office space of 10,000 square feet or more in the central business district,” says David DeVaney, president of NAI Charter Real Estate. Additionally, two major suburban office buildings have been developed recently.

Local firm CBL & Associates Properties has completed a 131,000-square-foot, six-story office project and has several major tenants. CBL, Shumacker & Thompson and EMJ Construction Company have executed leases in the building. There is less than 8,000 square feet remaining at $24 per square foot.
Commercial Management of Chattanooga purchased 50 acres and has completed two buildings totaling 70,000 square feet. The 1200 Building encompasses 31,000 square feet and is 93 percent leased. The newest building, completed in February, is 39,000 square feet and is 66 percent leased. Arcadis Geraghty & Miller is the lead tenant with 20,000 square feet.

“Overall, there has been more development in the suburban market than the downtown market,” DeVaney notes. “This has to do primarily with the cost of land and steady growth in the East Brainerd area. In East Brainerd, locally based DeFoor Development has developed over 100,000 square feet of office condominiums in the last 2 years and has had steady success in selling and leasing the property.” DeFoor Development recently announced a major office development in the Hixson/Northgate area.
Landlords are having success in renewing major tenants. The rental rate for Class A space ranges from $16.50 per square foot, full service, to $21 per square foot. New construction ranges from $21 to $23 per square foot. The current vacancy rate for Class A space is 5 percent and Class B space is approximately 20 percent.

Retail

Retail development in Chattanooga is in a wait-and-see mode from the standpoint of neighborhood strip center development. The major grocery retailers are waiting on word from two heavy hitters on their plans for the market — rumors abound that Publix and Wal-Mart will locate stores in the area. “Their anticipated arrival could really shake up one of the most competitive grocery markets in the region,” notes Tom Kale of NAI Charter Real Estate. “Dominant grocer Bi-Lo will have to carefully evaluate its position and anticipate some dramatic shifts if both of these decide to locate here.”

Controlled growth will continue in the suburban mall markets, both of which have been exhaustively studied for land planning purposes by city government. The availability of usable land will continue to be a challenge; it has been made more difficult by the government’s reliance on these studies when zoning changes are requested.

All eyes will continue to be on downtown and the Southside area, where additional residential development may draw the attention of some retailers seeing a unique opportunity to service an under-served population. There are already rumors that one of the major players has been looking in that area. Currently the major retail nodes in Chattanooga are Hamilton Place on the northeast side and Northgate on the northwest side. To close the triangle, most big box retailers would do well to look to the south end of the population area for their next location.

Two major projects have recently been announced for the Chattanooga market. CBL & Associates Properties recently announced groundbreaking for The Shoppes at Hamilton Place, a 130,000-square-foot retail center to be anchored by Marshalls and Bed Bath & Beyond. The center will be built on 12 acres adjacent to Hamilton Place Mall near CBL’s new headquarters building.

“Other retailers at CBL’s new project include Ross Dress For Less and Shoe Dept.,” adds Lynn Leonard, vice president of marketing and content with NewBridge Retail Advisors. “Three sites for restaurants are available along Ring Road near the mall’s Sears store. Home Depot has purchased 26 acres in the Hamilton Place area for a new store to replace its Perimeter Drive location.”

Last year, Wolford Development completed construction on Oak Park Town Center in the Hixson market. Anchored by a Wal-Mart Supercenter, Marshalls, Goody’s Family Clothing and Office Depot, among others, it has further expanded the Hixson retail corridor north on Highway 153 and should pave the way for future development in the area.

“The Hixson-North River community is hot right now,” notes Leonard, “despite the fact that a proposed town center complex near Northgate Mall was recently approved by the city but rejected by the county. Eighty percent of the project is located in the city, so the areas of unincorporated Hamilton County may be eliminated from the plan.”

Specialty retail and restaurant/ entertainment retail have begun to look more seriously at the downtown Chattanooga area. Chili’s recently announced its plans to build a new restaurant downtown, and Mellow Mushroom opened in the past year. Chattanooga’s downtown renaissance should continue as more housing units are developed in the CBD.

Investments

In Chattanooga, like many southeastern cities, investment properties are at a premium and difficult to find. Regional developers are quickly pre-selling their product while local developers are looking at long-term holds. Capitalization rates for these properties range from a low of 8.25 percent to a high of 10 percent. A significant trend in the area has been the purchase of vacant anchor strip centers for redevelopment; these centers are back-filled with another retail user or an entirely new focus.

There have been two major investment sales in the industrial sector, both being in the Bonny Oaks Industrial & Office Park. New facilities for Airborne Express and Federal Express have been developed and sold within the last 12 months.

The ongoing stability of the real estate investment market is continuing to attract new money from sources not normally oriented toward real estate.

Chattanooga, Tennessee-based NAI Charter Real Estate is an organization of professionally trained real estate brokers who consult and manage within the commercial and industrial property industry.


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