Office space for leasing growing slowly

Chattanooga’s downtown office picture is now changing with hundreds of thousands of square feet under construction.

Industry officials, however, report that the market for speculative office space downtown has been presenting a different picture.

“Chattanooga has not had any new construction of speculative space” downtown in decades, said David DeVaney, president of NAI Charter Real Estate. “I can’t say if we’ve lost opportunities.”

One reason for the lack of speculative building, Mr. DeVaney said, is because downtown land is expensive and rents don’t justify new construction in many cases. “Speculative” means the space is built with the idea of offering it for lease.

Virtually all office construction in downtown Chattanooga for several decades has been for specific companies, such as BlueCross BlueShield of Tennessee, he said.

Chattanooga’s downtown Class A office vacancy rate is between three to four percent, he said, while Class B vacancy is at 15 percent.

Class A space should have all amenities like an on-site manager, parking and pristine apperance, he said. Class B space is institutional or service-oriented, and is older typically than Class A buildings.

“Right now we’re healthy,” Mr. DeVaney said. “There’s very little vacancy in ‘A’ space.”

Jimmy Hudson, of Hudson Cos., said he agrees with Mr. DeVaney that downtown office construction is almost nonexistent, minus rehabilitation projects. In addition to expensive land, there’s not enough demand for downtown office space for developers to take the risk of building speculative space, he said.

Class A space is going from $16 to $22 a square foot, Mr. DeVaney said, while Class B is from $12 to $15 a square foot.

BlueCross is building 950,000 square feet of offices on Cameron Hill, with the first phase scheduled to open in February 2009, said spokeswoman Mary Thompson. The five headquarters buildings and parking garage should be completed in June 2009.

The insurer is moving 4,000 workers out of nine downtown buildings, she said. BlueCross’ facilities on Chestnut Street and the Gateway building will be the first buildings to be vacated, she said, as well as parts of other buildings.

“Our investment in the Cameron Hill property will centralize our business process and activities,” Ms. Thompson said.

The tight office market should rapidly take care of the 450,000 square feet that BlueCross vacates next year, said Paul Brock Jr., president of RiverCity Co.

“Downtown is much better positioned to absorb vacant space than it was 10 years ago” when the Tennessee Valley Authority vacated some of its space, Mr. Brock said.

Larry Armour, who owns the 401 Building with Steve Dillard, said he’s not worried about BlueCross’ pending move.

“I really don't think their move will affect Class A office space very much,” Mr. Armour said. “If some of their space is offered for lease, it could be great for downtown. I am hopeful that it will attract new businesses to downtown.”

The 401 Building was renovated two years ago, he said, and 60 percent of 150,000 square feet placed on the market has been leased, Mr. Armour said.

Banks have accounted for most of the downtown leases in the past three years, Mr. DeVaney said. Those transactions include CapitalMark Bank & Trust, which opened an office in March 2007 at Eighth and Broad streets, and SunTrust, whose building was sold in December and leased back to the bank.

TVA Vice President Terrell Burkhart said earlier this year that the federal utility will pay $22 million to purchase the 1.1 million-square-foot complex in January 2011 from the Chicago-based real estate partnership that bought the four-building complex from TVA in a lease-back arrangement in 1986.J

Other happenings on the downtown office scene include:

n Chattanooga Times Building: Walden Security bought the former newspaper office at 117 E. 10th St. and will use two floors for its national headquarters.

n EPB: Opened its new headquarters in October 2006 at M.L. King Boulevard and Market Street. The utility’s old building at Sixth and Main streets is being demolished by Unum Group, the current owner.

n Chestnut Street Tower: Unum Group’s lease on 157,000 square feet expires in August, said leasing agent David Baruetta of David Baruetta Associates, although the company may be open to a lease buyout. The 200,000-square-foot building has spaces available from 200 square feet to 200,000 square feet (after Unum’s lease expires). The rate is $16.75 per square foot.

Staff Writer David Flessner contributed to this report.