CITY HIGHLIGHT, NOVEMBER 2007

CHATTANOOGA CITY HIGHLIGHTS
J. Bryan Rudisill, John R. Healy and Arnold Farmer

Chattanooga Industrial Market

The industrial sector of Chattanooga’s real estate market continues to show very positive signs. Suitable zoned land remains in short supply, as are available buildings. Demand remains steady, according to research performed by University of Tennessee economist Bill Fox, who is the director of the University Center for Business & Economic Research. His research reveals that the Chattanooga area led the state during the past fiscal year for percentage job creation. Cleveland, Tennessee, just 25 miles north of Chattanooga came in fifth in that same survey. Recent job gains represent the best recorded in the past 17 years for the area.

Trevor Hamilton, vice president of economic development for the Chattanooga Area Chamber of Commerce, also reports a positive response from a 4-year “Tell the World” economic development campaign. The campaign ran from July 2003 to July of this year, and created a total of 124 new business announcements and expansions that will result in more than $1.3 billion in new investment, while creating over 8,300 new jobs. During that same period, 56 manufacturers announced plans to expand their area operations, which will result in the creation of nearly 3,400 new jobs and an investment of more than $370 million in real estate acquisitions and improvements to existing plants and facilities.

Several major new announcements were made during the last year. Madem SA, one of the world’s largest suppliers of wooden cable drums and reels announced plans to open its first U.S. manufacturing facility in Chattanooga. Madem was founded in Brazil and has four production facilities there, along with one in Spain. The company plans to open a 143,000-square-foot industrial facility in Chattanooga.

Federal Express has announced plans to construct a new facility for its FedEx Ground division on approximately 20 acres in the Southside District. The new site is part of the former North American Royalty property that served Wheland Foundry.

Another major introduction to Chattanooga’s industrial roster is a joint venture by Toyota Tsusho and Hasetora Spinning Company. The joint venture will be called Tuftora Automotive Carpet Inc. and will be located on the city’s west side. Tuftora will produce and supply carpets to meet the Japanese automotive manufacturer’s specification in response to the growing demand for Japanese vehicles in the United States.

Rental rates for quality manufacturing space remain stable, as evidenced by the numbers for a 38,000-square-foot building marketed by NAI Charter at 8920 Transport Lane. The building is listed for $3.75 per square foot triple net. Another example of market rates is the 250,000-square-foot building on Amnicola Highway known locally as the NK building. The building is offered for sale at $5.35 million, or $21.40 per square foot. It can be leased for $2.65 per square foot triple net. 

Warehouse/distribution space is showing a slight degree of improvement over last period. According to Wilson McGuiness of the Kenco Group, leasing activity has increased, primarily in the 15,000- to 40,000-square-foot range. Most of this activity is coming from existing businesses that are in expansion mode. “Although Chattanooga still boasts some of the lowest rates in the south, Kenco has been able to increase rates over the past 12 months, Wilson says.”

Average price per square foot on an annual basis for basic warehouse distribution space is approximately $2.70 per square foot triple net. McGuiness also reports that occupancy rates for Kenco’s portfolio have gone from approximately 75 percent to 92 percent during the past year.

The Cleveland submarket is seeing continued steady, but slow, growth according to Garry Rodgers of the Rodgers Group. Out of an estimated 12 million square feet of industrial inventory, Rodgers cites only two buildings that exhibit vacancy. One is a newly built, 130,000-square-foot building and the other is an older 125,000-square-foot facility. Rodgers reports that rental rates remain stable at an average annual gross rate of $3 to $3.30 per square foot.

Whirlpool remains to be one of the largest occupants of industrial real estate in Cleveland, with more than 1 million square feet under lease. Peyton’s Southeastern is not far behind, occupying approximately 900,000 square feet of high-density distribution space.

In the past several months, General Electric has opened a brand-new 850,000-square-foot distribution center in the Hiwassee River Industrial Park, and Starplex Scientific, a Canadian company, is currently constructing a 67,000-square-foot manufacturing facility in the Cleveland/Bradley County industrial park. Schering-Plough is currently undergoing an $18 million expansion of its existing facility.

The Cleveland/Bradley County Chamber of Commerce estimates that tax revenue could easily triple from commercial and industrial growth in the northern sector of Cleveland, where vacant land is readily available. The only question remaining is whether  there is enough infrastructure available to support such expansion.

Enterprise South, Chattanooga’s newest industrial park, will continue to be the centerpiece of Chattanooga’s industrial future. Of the 6,000 acres in the park, the city and county control approximately 1,600 acres that is shovel-ready and designated as a mega site or suitable for an automotive plant.

The state, the city, the county and the Chamber of Commerce are aggressively seeking a major user for the site. Enterprise South recently was one of two sites chosen as finalists for a Toyota manufacturing facility for its Highlander model. Unfortunately, Enterprise South wound up as runner up; however, it was proven that Chattanooga is clearly on the world’s radar screen and is sure to be a competitive force in future site selection decisions for scores of manufacturers from around the globe.

In summary, the greater Chattanooga MSA is poised and ready for additional industrial growth. As absorption continues on a steady basis, especially in the bigger bulk distribution facilities, and as rates trend up, new construction should follow as suitable land and infrastructure is created to accommodate such growth. Quality of life and affordable living continue to attract growth to the area. Aggressive economic development initiatives also continue to attract employers

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

Chattanooga Retail Market

For an MSA of approximately 500,000 residents, Chattanooga is popping in big ways. Not only is it experiencing solid residential growth, but it is making waves for its job growth potential and amenities that have the power to evolve this good retail market into a great one.

A new 1,600-acre, TVA-certified industrial mega site, for example, has Chattanooga courting major industrial employers. And because Atlanta’s Hartsfield International airport is busting at the seams, there’s talk of expanding Chattanooga’s Lovell Field, which would have enormous impact on the local economy. Even without these factors, however, Chattanooga’s retail market is holding its own. Vacancies are between 5 and 10 percent, and rents are at $10 to $15 per square foot for big box space and $16 to $25 for boutique retail.

With enough demand to justify construction, Chattanooga is following the national trend and unveiling its first true lifestyle project next summer. The 50-acre Waterside development is being brought to the market by locally based DeFoor Brothers Development. Phase I of Waterside includes a 35,000-square-foot H.H. Gregg, which is new to the market, and 20,000 square feet of smaller shops. The project is located along Interstate 75 in East Brainerd, one of the area’s most active submarkets along with Hixson (to the northwest) and Ooltewah (to the northeast).

There is a lot of growth in these outlying communities — Cost Plus World Market now occupies 30,000 square feet at Hamilton Crossing in East Brainerd and Chattanooga-based Wolford Development’s new 250,000-square-foot Town Center North is home to Target, Best Buy, PetsMart and Bed Bath & Beyond. Similar to the Wal-Mart Supercenter in Ooltewah, Town Center North has been a catalyst for new, smaller neighborhood centers. Florida-based Publix Grocery, which has been making its way north and already has opened stores in surrounding Tennessee metros, will be opening new stores in East Brainerd, Ooltewah and Hixson.

As for the future, all eyes are on downtown, where 500 new high-end housing units have provided tremendous opportunity for retailers to enter and succeed in the city’s core. To enhance this process, ZHA Inc. out of Maryland has been hired to help recruit downtown retailers and promote the submarket’s strengths, including its high-end housing boom, its ingress of people coming downtown to work and dine, and its thriving local and national retail tenants.

In the interim, retailers and developers are active in projects that border downtown. At Two North Shore, local builder CS & Associates has opened the first phase with a 28,000-square-foot Green Life natural foods grocery and a 9,300-square-foot Rock Creek outdoor outfitters, and will complete a 36,000-square-foot second phase this summer. A few miles south of downtown, local owner Perimeter Properties is studying the potential for a 100-acre high-density, Atlantic Station-type project that would include housing, retail and office.

By steadily adding regional and national retailers, Chattanooga has taken big steps toward keeping its local shoppers, and their shopping dollars, in town. Combined with affordable rents, reasonable buy-in pricing, and a promising future, this modest community is finding solid footing as a breakout Tennessee retail market leader.

— John R. Healy is managing director of Chattanooga-based Sperry Van Ness/Elder Healy Commercial.

Chattanooga Office Market

The central business district (CBD) office market in Chattanooga is similar in scope and growth to last year, with a modest amount of new product available. A new office building at Third Street and Georgia Avenue will be finished in the fourth quarter, and will feature approximately 40,000 square feet of Class A space, with some owner-occupied residential space in the penthouse.

BlueCross BlueShield of Tennessee is building its new 900,000-square-foot corporate campus on nearby Cameron Hill. The project should be complete in the spring of 2009. In preparation, the company has listed for sale its current corporate headquarters, the Gold Building on Pine Street, a Class A, 183,662-square-foot building. Additionally, BlueCross BlueShield has listed for sale two other properties: the Hub Block, which comprises 51,000 square feet of office and retail space on a city block at the corner of Seventh and Broad streets, and the Miller Building, an approximately 153,000-square-foot property located at 629 Market Street. The two buildings will likely be marketed as mixed-use properties offering office and retail space, as well as some residential space, for opportunistic developers.

The suburban office market is thriving, with at least five new projects on the drawing board or nearing completion. Near downtown and the CBD, there are two developments underway on the north shore of the Tennessee River. The Terrace on Frazier, with a completion date set for September 2008, will be a four-story mixed-use building with retail on the first floor, 17,845 square feet of office condos on the second floor, and residential condos on floors three and four. The 417 Building on Frazier Avenue, which overlooks Coolidge Park, has approximately 10,000 square feet of office space leased on the first floor.

Adjacent to Interstate 75 and near Hamilton Place Mall, CBL & Associates Properties has almost completed the CBL Center II, which offers 74,598 square feet of Class A office space on four floors.

Also adjacent to I-75 is the 1206 Building, within Commercial Management’s The Pointe Centre office complex, which presently has approximately 96,000 square feet of leased product. The newest of four buildings, the 1206 Building totals 48,000 square feet and will be ready for occupancy in January.

A trend that has gained traction in the past few years is the office condominium concept, which was first introduced to the market by Defoor Brothers Development. The movement’s success has other developers entering the fray; on Gunbarrel Road, also near I-75 and Hamilton Place Mall, the Concorde Creek development has a 42,000-square-foot building nearing completion with space for another 126,000-square-foot available on the same pad.

Rental rates vary from $18 to $27 per square foot on a full-service basis for all buildings mentioned; condo rates begin at $190 per square foot and go up to $230 per square foot for medical office product.

Coupled with the many tourist and entertainment venues around the Tennessee River in the CBD and the visibility and accessibility in suburban areas, the ongoing office development activity gives Chattanooga as strong and opportunity to grow into a fully developed live/work/play environment as any similar-sized city in the nation.

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

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