CITY HIGHLIGHT, NOVEMBER 2006

CHATTANOOGA CITY HIGHLIGHTS
Bryan Rudisill, Tom Kale Jr. and Arnold Farmer

Chattanooga Industrial Market

The Chattanooga industrial market remains stable with little or no change during the past 12 months. The centerpiece of Chattanooga’s forward momentum in economic development is, and will continue to be, Enterprise South. Jobs have started to trickle into the park with the introduction of TAG Manufacturing and IDSI (Integrated Data Solutions). This certified megasite — an industrial area appropriate for automotive manufacturing — continues to grow in size as the city and county gain control of property released from the federal government. The park now consists of more than 1,500 acres fully served out of a total of 6,000 original acres. The state is completing the new interchange off Interstate 75, which will allow direct access to one of the nation’s busiest north/south routes. The megasite designation, one of the few in the entire Southeast, puts the property in full view of thousands of interested and more than qualified prospects from around the globe.

Chattanooga has a rich and colorful manufacturing history. The complexion of its current industrial base is vastly different from its roots. Gone are the heavy smokestack industries, culminating in the most recent closure of Wheland Foundries and U.S. Pipe. Enduring are the food and beverage businesses. Automotive business is expanding, plastics continue to be solid, and technology, data storage and R & D are all represented here now.

According to Trevor Hamilton, vice president of economic development for the Chattanooga Chamber of Commerce, recent expansion announcements in the market total more than $550 million in announced investment, creating more than 1,300 new jobs in existing business. McKee Foods, Miller Industries, Modern Industries, Steel Warehouse, Coca-Cola Bottling, W.M. Wrigley Co. and Hamilton Plastics all have announced major expansions. Major industrial deals during the past year include the completion of a 40,000-square-foot build-to-suit for Sulzer Pumps. In addition, JMS Metal Services and EV America both represent new square footage and new jobs in the market.

Warehouse and distribution space continues to exhibit a market where supply and demand are close to par. The local leader in this market is Kenco Group, which controls approximately 5 million square feet of space out of a gross 35 million-square-foot market. Vacancy rates in the bulk sector appear to remain in single digits. Rental rates have, in general, seen a small percentage increase into the range of $2.50 per square foot.

Rental rates in the smaller industrial buildings remain steady. Rates in first generation buildings still exceed $4 per square foot and are usually quoted on a NNN basis. Lease rates in older product generally fall in the range of $2.85 to $3.50 per square foot depending upon quality of the location and improvements.

Sales figures for industrial buildings have been as varied and diverse as the buildings themselves. Generically, $30 per square foot is a good representative for sales in this market. Some older product has been selling as low as sub-$20 per square foot. For example, the sale of the 77,000-square-foot, former FLR Hoisery building for $900,000. Newer product, in smaller increments has been selling as high as $45 per square foot. First-generation space in an industrial condominium development, developed and marketed by the Hudson Companies, is selling north of $60 per square foot. Also, while the bread-and-butter deals in Chattanooga remain in the range of 25,000 square feet, there is little or no product available in that segment.

Lease rates, for the near term, appear to be moving upward ever so slightly. There is no speculative development on the horizon. So, inventories are forecast to remain low. Activity, in the form of interested parties looking to expand or relocate, continues to place pressure on supply. Suitable raw land for industrial development (especially in smaller segments of 10 acres and less) remains a challenge in the industrial market. Accordingly, upward pressure on rental rates will be the norm going forward.

The future of Chattanooga’s industrial base, while it has taken a dramatic change of direction during the last 2 decades, appears focused and bright. Most of the heavy foundry industry has disappeared, replaced by cleaner, more technologically advanced manufacturing like Hamilton Plastics, Astec Industries, McKee Baking, Aersyn, Sofix, Miller Industries and many others. Enterprise Park is sure to capture a significant employer, and the satellite businesses that support those new companies will represent a healthy increase in jobs, new construction and tax base benefits to the community.

— J. Bryan Rudisill, SIOR, CCIM, is a vice president with Chattanooga-based NAI Charter.

Chattanooga Retail Market

Retail in Chattanooga is set for a dramatic increase in activity. Chattanooga has long been considered one of the most competitive grocery markets in the country. In fact, Publix skipped Chattanooga on its northward expansion, going straight to Nashville from Atlanta rather than take on dominate area grocer, Bi-Lo. Chattanooga’s retail landscape is littered with the failed attempts by Kroger, FoodMax, Albertson’s, and most recently, Winn Dixie to try to make a dent in Bi-Lo’s kingdom. For the last 15 years, only Food Lion has managed to survive against Bi-Lo, although they, too, have recently closed some area underperformers.

But recently Bi-Lo’s reign has been threatened by the rapid expansion of Wal-Mart and its Supercenters. Two additional Supercenters joined the existing four Hamilton County stores this year and one more is under construction. Save-A-Lot has continued its niche expansion, having little trouble operating at Wal-Mart’s front door. Now Publix has changed its mind and announced its impending arrival into the Chattanooga market. They are planning on occupying the former Winn Dixie on East Brainerd Road and on constructing a new store on Hixson Pike in the Hixson area. Those developments, along with Bi-Lo’s shifting and retrofitting of stores (Bi-Lo just opened a new store in Red Bank and plans a new store near Publix’s site in Hixson), should make neighborhood center development pretty active during the next couple of years.

The remainder of the retail market, anchored by CBL & Associates’ regional mall Hamilton Place and General Growth’s more locally oriented Northgate Mall, should continue the slow steady growth that has certainly reflected not only the retail real estate sector but the Chattanooga economy as a whole during the last few decades. Hamilton Place Mall and its supporting mix of lifestyle, power, and big box retail tenants continues to be the center of the retail market in the area. Having seen exponential growth during the last decade, this market has reached maturity in terms of new construction. The only new major project announced is a mixed-use development north of Shallowford Road at Interstate 75 by Defoor Developments. CBL & Associates continues to refresh the tenant mix in and around Hamilton Place with the addition of Big River Brewery, P.F. Chang’s, and Cost Plus World Market. With little available land left for new product, the current trend of changing the tenant mix and remodeling the storefronts should continue.

Long a sleepy suburb with the smaller Northgate Mall as its anchor, the Hixson market has suffered in the shadows of Hamilton Place. During the last couple of years, with Hamilton Place’s maturity, developers have started looking at Hixson as a logical progression. Wolford Development has led the way with the development of Oak Park Town Center, anchored by Wal-Mart, Marshals, Goody’s, Office Depot, and Petco; and Town Center North, anchored by Target, Best Buy, Bed Bath & Beyond, and PetsMart. Additionally another local development group is seeking tenants for another power/lifestyle center in that market.

The Chattanooga central business district (CBD) is poised for the return of service retail. Characterized by mainly dining and entertainment operators, primarily in the aquarium district, the CBD lost its last major retailers 5 years ago. Warehouse Row, once a gleaming gem as a factory outlet store concept, is now mostly empty on the retail side. The chamber of commerce and other downtown development groups are expending the necessary dollars on research and studies focusing on attracting new retail business to downtown. Though there is a dramatic increase in housing in the area, that critical mass needed to justify most national retail brands is still a few years away. The impending move of BlueCross BlueShield to its new headquarters on the outer edge of downtown by 2008 has created additional uncertainty.

But changes create opportunities. Chattanooga’s CBD is by no means a ghost town after 5 p.m. Restaurants continue to prove sustainable retail. Newer office buildings, such as the new headquarters of the Electric Power Board, are offering upscale-looking retail space on street level. Warehouse Row has a new potential buyer (Jamestown Properties has announced its intention to purchase the office/retail complex from Prime Retail possibly closing before the end of 2006). The public and private sector entities that have a stake in making downtown retail thrive are willing to step to the plate to make it financially worthy to take the risk and locate in the CBD. Truly, downtown Chattanooga is poised for the next stage of its renaissance.  

— Tom Kale Jr., CCIM, is a vice president with Chattanooga-based NAI Charter Real Estate Corporation.

Chattanooga Office Market

The stable office market in Chattanooga is undergoing mild growth with current properties being transformed or revitalized into new uses, and new product being placed on the drawing board or coming out of the ground. For example, the Fletcher Bright Company is currently remodeling the 40,000-square-foot former Sears automotive retail space, located downtown, into new office product that is set for completion in early 2007.

The central business district (CBD) remains strong and vibrant with occupancy rates in the mid to upper 90 percent range. Steve Hunt, a partner of BH&Y, which owns and manages four CBD buildings, states that when a tenant leaves for any reason, the space is generally backfilled very quickly in this market. Recently AmSouth bank did not renew its lease in the 801 building. Subsequently, the vacant 12,560 square feet of first-floor space was leased to Capital Mark, a new banking entity in the Chattanooga market. Another remodeling project, according to Russ Elliott, CCIM, SIOR, of Luken Holdings, is the Maclellan Building, in which all 70,000 square feet is now vacant but undergoing a complete transformation to bring this nearly 100-year-old building back on line with all new building components and amenities.

Other new office products are located near the CBD across the Tennessee River. These projects have taken a mixed-use approach with residential condominiums on the upper floors and office and retail space on the ground or second floors. In the Maddox Building, tenants include the CBC bank, a real estate firm, physician offices among others. This trend will continue with the Hudson Companies proposed mixed-use project, the Terrace at Frazier, and the Defoor Brothers site, both on Frazier Avenue across the river.

The previously announced move of BlueCross BlueShield of Tennessee to its new campus atop Cameron Hill in downtown Chattanooga will not be completed until mid 2008 at the earliest. The impact of companies departure in the several buildings will not necessarily adversely affect the overall occupancy rates as many of its sites are prime for redevelopment into residential and office condominium opportunities.

Also, The Tennessee Valley Authority (TVA) has announced its plan for RFP’s for new office quarters when its lease expires in 2011. This will undoubtedly produce opportunities not only for present nearby land owners and developers but also for the current landlords as well, as TVA’s goal is to reposition itself into a more competitive office environment.

The suburban office outlook is positive as well. In the Hixson area of Chattanooga, there has been new development by the DeFoor Brothers near Northgate Mall. Near the Hamilton Place Mall, Chattanooga-based CBL & Associates Properties has announced plans to build a four-story 78,000-square-foot building adjacent to its CBL Center. The plan is mostly for absorption from within CBL’s own employee base, with some space for lease to other office users.

Along and adjacent to the Interstate 75 corridor is Rex Allen’s and Commercial Management Corporations’ The Pointe Centre complex. The facility currently has three fully leased Class A buildings, all of which have nice amenities and visibility to I-75. The 1208 Building, the fourth building in the complex, came on line last January and is presently 73 percent leased. Full occupancy is expected for the building by this January. Also, by the end of the first quarter of 2007, Allen expects to start construction of a new 40,000-square-foot two-story building also in The Pointe Centre complex.

In summary, both the CBD and suburban office markets in Chattanooga look upbeat and promising for next year and beyond. This outlook is tempered by the realization of the BlueCross BlueShield impending move and the possible TVA relocation in 2 to 3 years, which will probably offer more opportunity than peril.

— Arnold Farmer, CCIM, SIOR, is a vice president with Chattanooga-based NAI Charter Real Estate Corporation.

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