Chattanooga is situated at aU-turn of the Tennessee Riveramidst forests and mountains,hence the community’s nickname,Scenic City. Two of Chattanooga’slargest employers are Volkswagen,which has a plant here, and Amazon,which runs a distribution center inthe city. Insurance firm Unum Group,a Fortune 500 Company founded in1848, is headquartered here and is oneof the larger occupiers of downtownoffice space.
Long-known for its naturalresources and as a tourism destination,Chattanooga is experiencing a realestate boom fueled by urbanizationtrends and its proximity to Atlanta (2hours south) and Nashville (1.5 hoursnorthwest), as well as its growingrecognition as one of the South’s toptourism and entertainment venues.
Key to the urban renewal is theconversion of dozens of properties —mostly from office uses to residential,retail or hotel uses.
The combination of the GreatRecession and a 2009 move byBlueCross BlueShield into a new $229million downtown facility has led tothe relatively high vacancy rate of17.5 percent that persisted up untilearly 2014. Most of the 600,000 squarefeet of facilities vacated by BlueCrossBlueShield were not suitable formulti-tenanted office use and thespaces would have been difficult todivide. As such, the Gold Building isbeing converted to a hotel while theChestnut Building is being marketedas a data center.
Chattanooga’s downtown officemarket was also negatively impactedby the 2010 downsizing by Cigna, aswell as the 2012 relocation to Atlantaby Krystal Corp. after it was acquiredby a firm the e.
In other conversion examples, the50,000-square-foot Warehouse Rowoffice building was converted toretail/office use. The 121,000-squarefootChattanooga Bank Building(vacant for 10 years) is beingconverted to hotel use, and the294,830-square-foot State OfficeBuilding has been given to Universityof Tennessee-Chattanooga fordormitory use. Combined, more than800,000 square feet of offices in thedowntown, or about 15 percent of thetotal inventory that is not occupied byan owner/user, are being convertedto other uses.
In a market with approximately 5.5million square feet of office inventory,the conversions are putting a dent inthe vacancy rate, which has fallen tounder 15 percent and is expected toslowly trend lower in the next fewyears.
For another example ofrepositioning, McCormick & Co.Commercial Real Estate/CORFACInternational is renovating the threeFleetwood Coffee buildings on East11th Street. When complete, the90,000 square feet of space will havetwo restaurants at the street leveltotaling about 6,000 square feet;30,000 square feet of office space; andthe balance will be apartments andcondominiums. The project is on theouter edge of the central businessdistrict (CBD) and in an area of thecity designated as an InnovationDistrict, which is intended to drawentrepreneurs, tech startups andother creative businesses.
We are also involved in a mixed userenovation of the three-story,65,000-square-foot Lifestyle buildingon Market Street in which the thirdfloor will remain medical offices,while the second floor was pre-leasedto Tech Town, which will bea center for children to learn abouttechnology. The first floor is going tobe a mix of retail, restaurants and amedical clinic.
Class A office rents are commandingfrom $16 to $20 per square foottriple net, while B and C buildings,particularly those further away fromthe downtown, are going for $10 to$12 per square foot.
Urban Living Driving Revival
Chattanooga and HamiltonCounty are growing. The metroarea is surrounded by rural countiesand mid-sized towns includingCleveland, Tennessee and Dalton,Georgia.
The U.S. Census Bureau’s mostrecent data (2013) pegged thepopulation within Chattanoogacity limits at 173,366 residents, a 2.7percent increase from the 2010 Censuswhen 167,674 people lived in thecity. The Chattanooga metropolitanstatistical area (MSA) is the 99thlargest in the United States, withmore than 500,000 residents. Peoplewant to live in the downtown for itsamenities, and Chattanooga is a greatwalking town.
A January 2014 study by nationalhousing consultant Robert CharlesLesser Co. (RCLCO) indicated ashortage in excess of 3,000 residentialunits in the downtown corridor.Adding the 3,000 units with a mix ofconversion and new construction isexpecting to spur the developmentof 200,000 square feet of retail and150,000 to 200,000 square feet of newoffice space during this three- to fiveyear construction boom, according toRCLCO.
The demand for downtown housingruns the gamut from apartments forservice-sector workers and youngsingles through couples, families andluxury-class product. Owners of theChattanooga Choo Choo, downtownChattanooga’s iconic, Beaux Arts designedformer train station turnedhotel, are converting one of its hotelbuildings with 97 rooms into 97apartment units, according to AdamKinsey, principal of development firmKinsey Probasco Hays (KPH). Kinseyis the project manager and visionarybehind the massive redevelopmentand renovation of the ChattanoogaChoo Choo.
The Choo Choo’s new apartmentswill span 365 square feet withkitchenettes and asking rent of $750per unit, which includes all utilities.As of March 2015, the averageapartment rent within 10 miles ofChattanooga was $821, accordingto Rent Jungle. On the other end ofthe housing spectrum in downtownChattanooga, a 3,000-square-footupscale penthouse in a newer condobuilding recently sold for $1.6 million.
Some of the demand for downtowncondos is being driven by second homebuyers, with many of themcoming from Atlanta and others fromas far away as Vail, Colorado, Kinseysaid.
Kinsey added that there aretwo new apartment communitiesexpected to open soon, addingabout 400 apartment homes todowntown’s stock, and there areapproximately 2,000 apartments andcondos in various stages of planning,development and construction.