CITY HIGHLIGHT, NOVEMBER 2008

CHATTANOOGA CITY HIGHLIGHTS
J. Bryan Rudisill & Arnold E. Farmer

Chattanooga Industrial Market

The big news this year is the announcement from German carmaker Volkswagen as the latest entrant to Tennessee’s thriving automotive industry. Volkswagen’s $1 billion investment in Enterprise South Industrial Park encompasses 1,350 acres and will create more than 2,000 jobs. The community is awaiting supporting manufacturers, suppliers and distributors who stand to quadruple the number of jobs created by the main production facility. Trevor Hamilton, vice president of economic development for the Chattanooga Area Chamber of Commerce, reports that Volkswagen has set a target operational date for the 1.9 million-square-foot facility in the first quarter of 2011. According to the University of Tennessee Economic Research Department, the new operation will support an additional 9,477 jobs and has the potential to create more than $500 million in new wages in the market.

Another significant but less heralded announcement comes from Alstom, which has a presence of more than 600 employees in Chattanooga already. The giant French energy company plans to invest $200 million in its local facility. It will also add more than 350 new employees to provide increased capacity for the manufacture of steam and gas turbines and other power generation related equipment.

Rental rates for quality warehouse space remain unchanged. Bulk warehouse rates range from $2.50 to $2.85 per square foot. Wilson McGinness of JDK Real Estate supports these figures, adding that prospective users are taking considerably more time to solidify their decisions. Subleasing has little influence overall on the market. It is worth noting, however, that NAI Charter, in a joint project with CB Richard Ellis, is marketing a 500,000-square-foot building that was formerly a distribution center for BI-LO. The improvements are freezer and cooler equipped, but the central challenge is simply the sheer size of the space combined with the challenge of sub-leasing in a very difficult global economic climate.

Industrial sales exhibited little improvement year over year. Two assets located in the Amnicola Highway corridor sold in 2008. The first, consisting of 250,000 square feet on more than 25 acres, sold for $17 per square foot. The other, a newer front-loader spanning more than 350,000 square feet, sold for approximately $28.50 per square foot. Vacancy rates remain low, particularly in case of buildings measuring 50,000 square feet and less. Much of the vacant space in the market now is bulk type space. Overall vacancy is estimated at or below 7 percent from a gross of 40 million square feet.

Hamilton County is poised to market industrial opportunities in land and existing product to incoming Volkswagen suppliers, according to Garry Rodgers of the Rodgers Group. The planning commission has recently approved 150 acres of industrial-zoned land ready to market. Rodgers also mentions that Whirlpool, one of Cleveland, Tenn.’s largest employers, will be adding more than 500 jobs when it relocates a plant in Oxford, Miss., to Cleveland.

Raw land suitable for development continues to be a commodity. With most of the Enterprise South Industrial Park now dedicated to Volkswagen and its first and second-tier suppliers, much of the existing zoned acreage is found only in smaller increments. NAI Charter has 13 acres with 30,000 square feet of heavy industrial improvements immediately adjacent to the park. That asset, known as the Pavestone site, is listed for $2.1 million. Generally, undeveloped land suitable for industrial development in the northern corridor is selling in the range of $75,000 to $100,000 per acre. Recently, NAI Charter sold 18 acres on Bonny Oaks Drive just west of Enterprise South for $1.4 million.

During the last decade, Chattanooga has experienced very little speculative development. Most of the newer product is user driven. Consequently, this market has never been overbuilt. Since there is little inventory, new prospects will find a competitive environment. Don’t expect to find many rental concessions, though. Perhaps the most economical alternative would be those few sublease opportunities.

Quality of life and affordable living continue to attract growth to the area. Chattanooga ranks ahead of any other city in Tennessee except Nashville in population growth since the 2000 census, with a growth factor of 7.8 percent. GDP output also places Chattanooga at or near the top in the region. Local leadership has made a tremendous investment in sustainable growth, complementing high-wage jobs with tourism, creating a vibrant downtown and developing better education initiatives. In a variety of noteworthy publications including US News & World Report and Outdoor, Chattanooga has recently been ranked among the top mid-sized cities in which to live, do business, retire and raise families in the country.

The greater Chattanooga area is poised and ready for additional industrial growth thanks to Volkswagen and the city’s collaborative pro-business culture. Aggressive economic development initiatives from local and state sources continue to attract new business. We expect absorption to accelerate in the next 24 months, despite the current economic climate. Rental rates will remain unaffected in the near term and will seek higher levels due to lack of supply. New construction should follow on a positive growth curve as suitable land and infrastructure is created to accommodate the growth.

— J. Bryan Rudisill is a vice president at Chattanooga-based NAI Charter Real Estate.

Chattanooga Office Market

In 2008, Chattanooga’s commercial real estate market experienced steady overall growth, with downtown leading the way. Due to the increased tourism activity, there has been development and re-development of the hotel industry; the former Clarion hotel has become a Doubletree hotel, which is the flagship hotel for the chain. This relates to the office market because Performance Hospitality plans to renovate the 85-year-old, 12-story McClellan Building into Hotel Indigo. The development will bring 120 rooms with retail on the ground floor to the city.

Another significant project in the CBD office sector is the BlueCross BlueShield of Tennessee development on Cameron Hill. The 950,000-square-foot corporate campus will be completed in the spring of 2009. This will affect the office environment by opening 400,000 square feet of office space in the CBD. Some of the space has already generated genuine interest. The 51,000-square-foot Hub Building recently was sold and likely will be redeveloped into a mixed-use property offering office, retail and condos or apartment space. Additionally, TVA has finalized its home base for the upcoming years. For many years, the company leased the space, in excess of 1 million square feet, before purchasing it this summer for approximately $20 million. Other developers have made their mark on the CBD and the nearby north shore area adjacent to the Tennessee River. Several buildings are either newly opened or soon to be open. The Terrace on Frazier — a four-story mixed-use development with almost 18,000 square feet of office condo space — has a completion date set for December.

The suburban marketplace is a thriving place for developers as well. Adjacent to and near Hamilton Place Mall, CBL & Associates Properties are leasing a new building comprising 74,598 square feet of Class A space. Local developers are also redeveloping former retail properties for office uses. A former Target store and a furniture outlet store in the Hixson area of Chattanooga will soon be redeveloped and used as new office buildings.

A new trend around the city is the lifestyle center concept, which brings together outdoor and indoor elements in an aesthetically pleasing manner. Local developers Ken and Byron DeFoor are a prime example. Their development near Hamilton Place Mall is being billed as the first of its kind in Tennessee. The development is a self-contained neighborhood that will be comprised of hotels, upscale retailers and restaurants and living and office space.

Probably the most important dynamic in the Chattanooga market was the announcement in July of the Volkswagen assembly plant in the Enterprise South industrial complex. The development will initially employ 2,000 workers and will represent a $1 billion capital investment by Volkswagen. Site work is being done now and construction will begin next spring. The project will enhance the Chattanooga marketplace in all sectors of the economy, especially in the industrial and office markets. First and second-tier suppliers of parts and services have been vigorously combing the area for new and existing properties and vacant land for their respective businesses to locate on.

As planned projects in Chattanooga start to get underway, regional, national and international companies will be attracted to the area. This, in turn, will allow the economy and market to grow well into the future.

— Arnold E. Farmer is a vice president at Chattanooga-based NAI Charter Real Estate.

©2008 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.