CITY HIGHLIGHT, NOVEMBER 2005

CHATTANOOGA CITY HIGHLIGHTS
Tom Kale Jr., David DeVaney and Bryan Rudisill

Chattanooga Retail Market

The retail market in Chattanooga continues to be on an upswing. The maturity of the Hamilton Place Mall market has slowed development in that area, the Hixson market continues in ascension and the north Georgia market is also strong. There is a continuation of infill in the suburban commuter routes. Though the area enjoys a slow steady growth, there is increasing pressure for developable land along with a huge question mark concerning retail in the central business district.

The Hixson Market has long been sitting in the shadows of the regional mall at Hamilton Place. Hixson is now benefiting from the success of the national retailers who have recognized a need for a presence on the “other side of the river.” Wolford Development, which previously developed Oak Park Town Center, opened the first phase of Town Center North with a Target store last month. Other anchors including Best Buy, Bed Bath & Beyond and PetsMart will follow next spring. General Growth's Northgate Mall is also going to benefit from a new Carmike Theater that opened last month. Additionally The Goodman Company of West Palm Beach, Florida, was actively seeking tenants at ICSC in Las Vegas for a future 689,000-square-foot development called Northpark Commons.

Wal-Mart continues its onslaught on the area as well. Two additional stores are under construction on Signal Mountain Road and Toftonia, and ground should be broken soon for another location. This growth has greatly affected the grocery business in the market. Winn-Dixie closed all seven of its stores. Bi-Lo picked up three of those locations, further strengthening its position as the dominant grocer. The Wal-Mart/Bi-Lo combination may prove too much of a barrier for any other players in the grocery sector.

The biggest sleeper looks to be in the downtown area. Chattanooga's renaissance has produced a thriving district in the north end. However, the synergy has not carried over into the rest of downtown. Despite strong growth on the downtown housing sector, there is not yet enough critical mass for many retailers to justify venturing into the CBD. Warehouse Row Factory Stores, a mixed-use property, is attempting the transition to service retail with mixed results.

Overall, the retail market is strong. Vacancy rates are at an all-time low. Rental rates are strong enough to justify limited new construction in both power and neighborhood sectors.

— Tom Kale Jr., CCIM, is vice president and specializes in retail brokerage with Chattanooga-based NAI Charter Real Estate Corporation.

Chattanooga Industrial Market

Warehouse and industrial activities have continued to expand in Chattanooga this year. This activity is part of a trend that began with a substantial increase in the absorption rate of industrial space in the fourth quarter of last year. With a total warehouse and industrial inventory of 35.54 million square feet, only 1.77 million square feet or 5 percent remains vacant. Only two buildings with a contiguous space of 150,000 square feet remain available.

During the first 6 months of this year, Chattanooga announced several major projects in diverse categories including high-tech and food manufacturers and back-office operations. For example, Aerisyn, a manufacturer of windmill towers, recently leased almost 200,000 square feet of the Alstom manufacturing complex. And TMIO, a manufacturer of intelligent ovens that can be programmed via the Internet or cell phones, leased more than 200,000 square feet of the former Cavalier manufacturing complex. T-Mobile has announced the acquisition of 15 acres for a 75,000-square-foot building, which will hold more than 600 workers. Active food manufacturers in the area include the W.M. Wrigley, Jr. Company and Farleys and Sathers Candy Company.

This broad base of activity demonstrates Chattanooga's appeal to all sectors of industry. “When we launched ‘Tell the World,' which is our 4-year economic development push, in July 2003, we were targeting industries that would be a great match for our region,” says Trevor Hamilton, chief economic development officer for the Chattanooga Area Chamber of Commerce. “During the last year, we have seen strategic plans become actual projects with major announcements by companies in the industries we targeted.” The Chattanooga Area Chamber has announced 13 total projects for this year totaling an investment of approximately $67.3 million, which will surpass the $90.5 investment for last year.

New leases that have been announced for the area include Regis Corporation, a distributor of beauty supplies, which leased more than 100,000 square feet in the Bonny Oaks Industrial Park from the Kenco Group. Also in the Bonny Oaks Industrial Park, Iron Mountain Company, an international document storage company, has leased 62,000 square feet from Walnut Hill Properties. The Kenco Group, the largest owner and operator of warehousing space in Chattanooga, currently operates 4.8 million square feet of space in Chattanooga and reports occupancy of approximately 95 percent.

Rental rates in quality buildings more than 100,000 square feet, which have been decreasing or flat the past few years, have increased 20 percent from a low of $2 net to $2.40 net in the last year. It is anticipated that rental rates will continue to rise. This expansion and absorption indicates that there will soon be an announcement of new projects involving speculative warehouse space. These positive developments will overcome the negative effect of the increases in construction and costs. As with much of the Southeast, the trend currently is the renovation of older buildings.

Major industrial sales include McKee Food Corporation's acquisition of the Turnbull Cone properties on Amnicola Highway and Parmenas Lane along with the acquisition by Architectural Mill Works of a light manufacturing and warehouse facility on the periphery of the central business district. Due to low interest rates and a strong economy, sales represent most of the activity.

There is anticipation of attracting a major employer due to the availability of large land tracts in the Enterprise South Industrial Park, which has been recently classified as a mega-site through the Tennessee Valley Authority's accreditation program. This superb site encompasses 6,000 acres with more than 1,900 acres available for immediate development. Major features include interstate access with all industrial infrastructures, including rail. The availability of this site, coupled with the Chamber's “Tell The World” campaign, will continue to bring positive results to industrial exposure for Chattanooga through the balance of 2005 and future years.

— David DeVaney, CCIM, SIOR, is president of Chattanooga-based NAI Charter Real Estate Corporation.

Chattanooga Office Market

The office market in Chattanooga appears to have stabilized across the board. Class A space, in particular, is exhibiting signs of shortage of availability. The major Class A properties are all reporting occupancy rates in the high 90's. The 280,000-square-foot Republic Centre, owned by The Jim Berry Company and located in the central business district, is leading the way with only 1,600 square feet vacant, according to Steve Hunt of BHY Real Estate, representative for the owner. Even in the suburbs, the Class A mid-rise buildings are all reporting full or near full occupancy. For example, The Pointe, owned by Rex Allen, is reporting 97 percent occupancy, and he is breaking ground on an additional 40,000 square feet that is 50 percent pre-leased to a national tenant.

Downtown remains vibrant and is a key catalyst for the overall growth of the greater Hamilton County area. The commercial activity supersedes the office activity; however, all of the office buildings in the CBD are reporting substantially higher activity than 2 years ago. Class B buildings are reporting lease-up improving with most reporting 10 percent or slightly less vacancy rates. For example, One Central Plaza is reporting 100 percent occupancy. The Krystal and Tallan Buildings are reporting 95 percent occupancy. The Volunteer Building is reporting 100 percent occupancy. The James Building is reporting approximately 85 percent occupancy. The 160,000-square-foot Pioneer Bank Building recently lost AmSouth Bank, one of its anchor tenants, whichs was leasing two floors that are now vacant.

Building owners are looking for strong percentage increases in operating expenses, which are presently running approximately $6 to $7.50 per square foot. Owners say they foresee a minimum of a 4 percent to 5 percent increase in the coming calendar year due primarily to the increase in energy costs. “Opportunity” now is the new key word across the office development market. Announcements of new incoming office opportunities have been few and far between in the last several decades. Only recently, T-Mobile announced that it was purchasing 15 acres upon which it is going to construct a 75,000-square-foot suburban office. Plans are for the new offices to provide space for up to 600 employees.

Further defining the suburban office market, DeFoor Development, Inc., which has contributed some 300,000 square feet of mostly single-story office condominium product in the market during the last 5 years, continues to seek opportunity and is seizing the chance with a 32-acre mixed-use development at Shallowford and Gunbarrel roads. The project will include 150,000 square feet of new office product comprised of a planned mid-rise facility and mostly single-story buildings. According to DeFoor, the market continues to be good. Rates will remain strong and he sees values for the office condominiums appreciating.

A major shift in the CBD is on the horizon with BlueCross BlueShield of   Tennessee announcing its purchase of Cameron Hill, an apartment development upon which it plans to relocate its office campus. That project remains several years away and is still in the planning process, but some office owners in the market fear that this move will leave a high amount of vacant space previously occupied by BlueCross. However, it is presumed that the impact across the market will not be nearly as dramatic as most fear. Several of the buildings the company plans to vacate have a high degree of potential for being developed into alternative use, primarily residential.

A few of the office building owners do see rent growth due primarily to the Chattanooga Chamber's “Tell the World” marketing campaign, as is evidenced by the T-Mobile location to this community. With the present market as tight as it is, most of the office owners do see appreciation in lease rates in the near term. There are mixed feelings about office rates climbing to the point to support new construction, however. With very few leases in the market exceeding $20 per square foot, it is safe to assume that there will have to be some significant rent growth before one could contemplate new construction, especially in downtown where land costs are so high. Nevertheless, with the explosive growth in all of the major markets around Chattanooga, including Atlanta, Birmingham, Nashville and even secondary markets like Knoxville and Murfreesboro, it is safe to assume that there will be some desire from tenants in those markets to perhaps relocate as they seek economies of scale and/or satellite locations.

Chattanooga is a community that places a premium on quality of life issues. Manifestation of this underlying principal is the revitalization of downtown. The city and county's acquisition of the former Volunteer Army Ammunition plant was a strategic move to control 5,000 acres suitable for mixed-use development. Approximately one quarter of that site, now known as Enterprise South, has been designated as a mega-site. Economic Development officials are targeting that site to the automotive industry. Success there is sure to propel Chattanooga in a new job growth campaign as quality of life and opportunity cross paths.

In summation, the office market in Chattanooga is fundamentally sound at this moment. The only significant openings for space include the 401 Building and the offices at Warehouse Row in the CBD (a combined 100,000 square feet) and some Class B properties in the suburbs. With the addition of more office space coming in the Hamilton Place Mall area, at least for the near term, market rates will probably stabilize and hold their own for the upcoming year. There should be no material changes to vacancy rates next year. Also, no new construction in the downtown market is expected. What new construction is planned for 2006 is suburban and will probably not be delivered until the following year.

— Bryan Rudisill, CCIM, SIOR, is vice president with Chattanooga-based NAI Charter Real Estate Corporation.


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