SOUTHEAST SNAPSHOT, NOVEMBER 2009

Chattanooga Office Market

It seems like every commercial real estate move made in the Chattanooga office arena is directly related to the industrial market. Landlords, tenants and maybe even some office developers are anxiously waiting for three significant manufacturing facilities to make their mark on the area. The coming Volkswagen plant will spur office growth in a huge way, but a $300 million expansion by the power service provider Alstom and the addition of Munich, Germany-based Wacker Chemie AG’s property in Cleveland, Tennessee, will also jump start the Chattanooga office market. 

There’s a lot of industrial activity that’s just starting to really catch its legs. The office is following,” says J. Bryan Rudisill of Chattanooga-based NAI Charter. “There’s going to be support that comes in — lawyers, accountants, engineers — but the office market won’t change over night because of these announcements.”

Office transactions, even with a guaranteed influx of industrial facilities, will be slow to pick up, but office development will be even slower due to trouble in the financial markets. Life insurance companies are on the sidelines, and most bigger banks are reluctant to let developers borrow money. The best bet for financing is regional and local institutions, but these banks need to see an almost foolproof deal before any money is doled out. To find lending in the current market, Rudisill says, developers need to hit a preleasing target of anywhere from 50 to 80 percent. Equity requirements are strict as well. “As opposed to the old days where developers could do the deal with 20 percent equity, lenders, what they’re looking at is a minimum of 35 or 40 percent,” he says. “In most cases, it’s something exceeding 50 percent loan to value.”

Presently, the office market is grappling with overdevelopment caused by freewheeling developers during the real estate boom. Once these spaces are taken, development should start up again. All things considered, however, the area really isn’t hurting because, as Rudisill puts it, Chattanooga never goes through big economic swings. Growth is always slow and steady.

“When things get bad, we don’t really fall off the track,” Rudisill says, pointing out that better times may be around the corner. “There’s been a lot of activity here lately. For a small market, there have been significant changes.”

— Jon Ross

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