CITY HIGHLIGHT, NOVEMBER 2004

CHATTANOOGA SHOWS SIGNS OF IMPROVEMENT

Chattanooga, Tennessee, has seen signs of improvement throughout 2004. The office market isn’t seeing a high amount of new development, but the central business district is seeing favorable occupancy rates. New retailers are planning to open locations in Chattanooga, and several new industrial projects are in the works.

Office

Overall, the office market is stable in Chattanooga. Several new products have been announced, although no new product has been delivered, as these projects are still moving through the approval process. Absorption is slow but parallel to historical norms. Rental rates seem to be holding steady. Tenant incentive packages, which were reported as aggressive last year, seem to have tapered off. Most of the shadow space known to us has been negotiated and now appears to have been absorbed or at least under investigation by active prospects.

All the Class A owners in the CBD report high or certainly favorable occupancy rates but the overall occupancy rate for this category on average is approximately 90 percent. Chris Crimmins, a partner at Chattanooga Land Company and developer of Market Center, reports 100 percent occupancy in his 40,000-square-foot office building with the introduction of its newest tenant, The Maclellan Foundation. The partnership is now contemplating the construction of a sister building on an adjacent site. Russ Elliot of The Corker Group reports that “the pipeline” for prospective tenants has substantially improved over same time last year.

Progress of the 100,000-square-foot Electric Power Board tower is progressing rapidly now. New owner Steve Dillard is completing renovation of Chestnut Center, which comprises roughly 150,000 square feet at the corner of Chestnut Street and Fourth Street. The building’s floor plates, 30,000 square feet, are a unique advantage in that some tenants demand large blocks of contiguous space, a difficult commodity in the Chattanooga market.

Competition for suburban office tenants continues to be fierce among the three major players, The Corker Group, Ken DeFoor Development and Rex Allen of The Pointe. Allen is aggressively seeking the opportunity to build another Class A mid-rise in his development. Allen reports that The Pointe is 95 percent occupied and rental rates range from $18 to $20 per square foot, full service. The Corker Group reports that rental rates in its Osborne Office Park range from $10 to $16 per square foot, modified gross and full service, respectively.

Chattanooga’s largest office users, TVA, UnumProvident and BlueCross BlueShield, all seem to be holding steady as regards their lease exposure. Earlier in the year, TVA had announced some attrition with the sale of the 100,000-square-foot Haney Building in addition to the expiration of some 30,000 square feet of leased space in Warehouse Row in April. UnumProvident is not, at present, announcing any major expansions. BlueCross reports that its office needs, at the moment, are satisfied.

Ken DeFoor of DeFoor Development has positioned his company as one of the leading local developers of office space. In addition to Shallowford Commons, DeFoor Development has two more significant developments, one at North Gate Mall and another at Hamilton Place Mall. DeFoor has a multi-story office project planned for the “North Shore.” His niche in the marketplace is providing single-story office condominiums for sale at a rate between $125 and $180 per square foot. His leasing activity is supported by rental rates, which range from $14 to $19 per square foot, triple net. Most activity in the market consists of requirements of 10,000 square feet or less.

Chattanooga still enjoys a robust development environment, particularly in the CBD where residential and retail activity continues at an impressive pace. The 21st Century Waterfront Plan is an ambitious $121 million, 5-year development plan of the waterfront in downtown Chattanooga. Kinsey Probasco Development is under construction on a 55,000-square-foot residential/retail project next to the Aquarium. The ground floor has 17,000 square feet dedicated to retail and the balance is residential condominiums. Adding to the activity in that immediate area is a $30 million expansion of the Tennessee Aquarium. More downtown residential activity has been announced in the vicinity of the Aquarium along the northwest extremity of UnumProvident’s surface parking lots.

Business recruitment is finding a new gear supported heavily by city and county government. Local, state and federal initiatives have been put in place to provide a more attractive environment for local businesses to expand and outside interests to locate under favorable economic conditions into this community. The area known as the Southside is of particular interest with several different government-based incentives available for users to renovate older buildings and locate their businesses in that particular area just south of the CBD.

Going forward, 2005 would appear to be a period of moderate growth. With high occupancy rates in most of the major projects and interest rates still below historical norms, new projects should begin to come on line. Absorption has been slow to static over the past 12 to 14 months. State and local incentives are finally a known commodity and effective in delivering incentive-based development. Rental rates have stabilized and should not make any upward movement. Class B projects should experience positive absorption as availability in Class A space will remain tight. Vacancy in some Class B properties is as high as 20 percent, and this will slowly move in a positive direction. Lateral movement will continue to dominate the leasing environment. Most of the corporate downsizing is complete. Chattanooga should see a resurgence in the number of service-oriented businesses that cater to our major employers.

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

Retail

Due to stronger retail sales and declining unemployment nationally, the economic outlook for Chattanooga remains positive. The national economy is growing at a rate sufficient to create new jobs and reduce unemployment, which has allowed Tennessee to achieve a broad-based business recovery. Since second quarter 2003, Chattanooga MSA retail sales rose 5.1 percent to $1.2 billion. Adjusted for inflation, sales volume in Chattanooga increased 2.1 percent during the same time period.

Germany-based Aldi has announced plans to enter the Chattanooga market next year. By the end of 2005, the value-oriented grocer will open supermarkets in Hixson and East Brainerd, among other sites in the region. One possible site is the former Albertsons store in the Gadd Crossing shopping center on Highway 153. Grocery store sales in metro Chattanooga totaled $630 million in 2003. Top grocers in Chattanooga are Bi-Lo, Food Lion, Winn-Dixie, Pruett Food Town and Wal-Mart. Winn-Dixie closed its Hixson location on Highway 153 in September and is selling the 56,963-square-foot store. Winn-Dixie previously closed one of its East Ridge supermarkets.

A new Target and other big box retailers will anchor the new $30 million Towne Center North in Hixson, slated to open October 2005. Wolford Development is building the 225,000-square-foot center, located off Highway 153 near Cowart Drive, less than a mile from a Wal-Mart Supercenter. It is unclear what will happen with the Northgate Target, owned by the Lebovitz family, major shareholders in CBL & Associates Properties. The new shopping center is expected to generate $50 million in annual retail sales.

Greenville, South Carolina-based developer Windsor Aughtry is planning two multi-million-dollar condominium and townhouse projects in downtown Chattanooga. Both buildings will include retail space — 3,500 square feet (possibly a restaurant) in the first building and 4,000 square feet in the second building. The new housing and retail units are located off First Street between Cherry and Walnut streets. Valued at $30 million, the project will begin in February 2005 and take up to a year to complete. More than $100 million in new housing is underway or planned for downtown Chattanooga.

CBL will redevelop Hamilton Corner into a 70,600-square-foot lifestyle shopping center. Located at the eastern entrance of the 1.4 million-square-foot Hamilton Place regional mall, the newly designed center will offer retailers such as Chico’s, Coldwater Creek, Ann Taylor Loft, Bombay Company and Bonefish Grill. A grand reopening is scheduled for October 2005. The Hamilton Place shopping complex produces more than $300 million annually in retail sales.

Warehouse Row, the 246,000-square-foot retail and office development on Market Street, was sold in June in a foreclosure sale. Formerly owned by Prime Retail, Market Street Ltd. and Warehouse Row Ltd., the development is now owned by private investment group Novelle Real Property Investments IV LLC. Prime Retail will continue to manage the outlet mall.

Developers Diversified Realty re-tenanted the former Kmart located on Gunbarrel Road with Hobby Lobby and Fresh Market. Fresh Market opened in April and Hobby Lobby opened in July.

Sears bought the East Ridge Big Kmart and plans to open one of its new, off-mall stores at the site next year. In addition, a new Rave movie theater is under construction at the East Ridge site.

— Lynn Leonard Roth, NewBridge Retail Advisors

Industrial

Chattanooga has dramatically increased the activity of its industrial and warehousing sector from the economic slowdown of 2002 and 2003. Through August, as reported by the Chattanooga Area Chamber of Commerce, the city has announced projects totaling $90.53 million. This is 25 percent ahead of its August 2003 total. One of Chattanooga’s strengths is the success of local and existing industry that comprises 17 expansions to date and industrial development dollar value of $59 million. Existing company expansion includes Tennessee Rand, Koch Foods, McKee Food Corporation and Kenco Group.

Kenco Group recently completed a 680,000-square-foot food-grade distribution center in Chattanooga.

There has been little to no speculative warehouse or manufacturing development in the last 3 years; hence, the build-to-suit market is starting to regain the momentum it lost in 2002 and 2003. The developers that speculated on land are reaping the benefits of this expanding sector. Rental rates for institutional-grade facilities that bottomed out at $2.30 per square foot, triple net have started to improve to $2.65 per square foot, triple net.

Kenco is the largest operator of warehouse space in Chattanooga with more than 4.8 million square feet. It recently completed a state-of-the-art 680,000-square-foot food-grade distribution center build-to-suit project. Kenco reports a 95 percent occupancy rate but can make available up to 300,000 square feet.

Enterprise South is a 1,200-acre mega-site permanently buffered by 2,800 acres of forest. Co-owned by the city of Chattanooga and Hamilton County, Enterprise South will gain an additional 400 acres during 2005. The park recently announced the first land sale to Tag Manufacturing, a manufacturer of sub-assembled steel parts. Another occupant is Espin, a manufacturer of state-of-the-art nanofibers. According to Trevor Hamilton, chief economic development officer for the Chattanooga Area Chamber of Commerce, Enterprise South positions the area to attract major industrial projects. “Enterprise South is the complete package,” Hamilton says. “It is a bona-fide mega-site with industrial utilities and multi-modal transportation options, surrounded by a large workforce with a strong manufacturing tradition.”

There appears to be a lack of quality buildings available in the 20,000- to 75,000-square-foot range. This segment was hit the hardest by the slower economy and had very little market activity over the last 2 years. Several buildings that were vacant have recently been absorbed. Now users are looking for quality product. We may see speculative land developers transition to building a few speculative warehouse facilities.

— David DeVaney, SIOR, CCIM, president, NAI Charter Real Estate Corporation

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