Q2 2012 Chattanooga, Tennessee Office Market Trends

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Q2 2012 Chattanooga, Tennessee Office Market Trends

With 4.6 million square feet of existing inventory, the Chattanooga metro area general purpose, multi-tenant office market is distinctly small; it would hardly qualify by size as a significant submarket in any number of the nation’s larger cities. Lacking generators of vigorous demand, both leasing and development volumes run small. By Reis’ count, no general purpose, multi-tenant office space has completed construction here since 54,000 square feet delivered in 2009. The completion total for the 10-year span ending with 2012 will have produced only 183,000 square feet, including no new space this year. No competitive projects were under construction per the date of this report and none was on the very short list of planned-proposed projects. Net absorption for most of that 10-year period, including the entire four-year span 2008-2011, moreover, was negative.

The year 2012, however, has brought some improvement. With no new supply coming on line, net absorption for the first half of the year, positive during both quarters, was 34,000 square feet. Vacancy ended the period at 15.5%, down 40 basis points for the quarter, down 50 year-over-year and the lowest rate recorded by Reis for this market since before the recession. Moreover, positive net absorption has continued: according to the firm’s First Glance report of its third quarter data, the vacancy rate had fallen to 15.0%. “Chattanooga’s office market is strong,” pronounced local firm NAI Charter Real Estate in a report published by Southeast Real Estate Business in July. “Activity has remained consistent and demand for top quality product in both the Central Business District (CBD) and suburban market has remained high.” Rent growth since 2010 has been positive overall but unsteady. At $14.79 psf and $10.86 psf, asking and effective averages for the second quarter were up 0.5% and 0.6% since year-end following a flat performance in 2011. The third quarter saw a one-cent increase in the asking average, according to the new data.

Downtown Chattanooga has been the focus of considerable recent activity, not all of it favorable. During the second quarter, NAI completed the sale of four properties with a combined total of more than 340,000 square feet of office space (and a parking garage) evacuated in 2009 by Blue Cross Blue Shield in its move into its new 950,000-square-foot headquarters building on Cameron Hill. In addition, “Chattanooga-based Berry & Hunt is making a huge investment in the downtown skyline” with its recent acquisition of the 192,228-square-foot Chestnut Tower (renamed Liberty Tower) as reported by Southeast Real Estate Business. A $20 million renovation was under way per the date of the report (see Special Real Estate Factors). “The ownership is attempting to position the… tower as downtown’s most premier office building,” reports Southeast Real Estate Business. “A lofty goal, but with its ownership of 775,000 square feet of the roughly 3 million square feet of active CBD office space, it’s hard to argue with the company’s successful track record.”

Gains of 1.1% and 1.3% are projected for the average asking and effective rents for 2012. The year 2013 should bring continued progress as the vacancy rate slips below 15.0% and rent growth accelerates slightly. Construction should remain subdued in the period ahead.