With empty floors in at least a dozen downtown buildings, nearly 1 million square feet of office space is available for rent in Chattanooga's central city.
"We've never experienced this amount of office vacancy in our downtown," said NAI Charter Real Estate President David DeVaney, who estimates that 15.1 percent of all downtown offices are empty.
"Chattanooga is doing better than most markets, but there has been some downward pressure on rental rates and a lot of competition to fill vacant space," he said.
The economic downturn and the addition last year of the $300 million BlueCross BlueShield of Tennessee corporate campus atop Cameron Hill have left seven downtown buildings in Chattanooga empty and at least four other offices only half full.
Downtown boosters, including those at the revamped RiverCity Co., vow to increase their recruitment efforts to fill the empty offices with new businesses. RiverCity Co. President Kim White said some of the vacancies could be used for more retail, hotel and residential units.
"We have a good story to tell with our downtown and, unlike many cities, most of our businesses have stayed downtown," she said. "But it's definitely a challenge."
Nationwide, office vacancies rose at the end of last year to a 15-year high of more than 17 percent, according to REIS Inc., a real estate research firm that surveys most of the major U.S. office markets. To battle the downturn, landlords cut lease rates by the largest amount since at least 1980, REIS reports.
"(The fourth quarter of 2009) marks the eighth consecutive quarter since the beginning of 2008 that office properties registered deterioration in occupied space," Victor Calanog, REIS director of research, said in a statement. "We should not understate the amount of pressure that office properties endured since the recession began."
Steve Hunt, a partner in the real estate development firm of Berry & Hunt, is looking for tenants to fill both the 43,000-square-foot Hub building on Pine Street, vacated last year by BlueCross, and three floors of One Central Plaza vacated by cutbacks by other businesses.
But Mr. Hunt said he remains optimistic about Chattanooga's downtown, noting its recovery two decades ago when the Tennessee Valley Authority opened its 1.1 million-square-foot Chattanooga Office Complex on Market Street.
"Jim Berry bought the (21-story) Republic Center after TVA vacated much of that space, but within three or four years Chattanooga had absorbed all of what TVA vacated," Mr. Hunt said. "That was before downtown had the (Tennessee) Aquarium, the Riverwalk, the theaters or much downtown housing.
"We're definitely positioned now to do much better," he said, "but with the current economy it's probably going to take a few years to absorb all this space."
Ms. White, a former president of the Corker Group that once owned nearly a dozen Chattanooga offices, said the central city maintained an occupancy of more than 95 percent for years.
"We now have an opportunity to market our downtown to new businesses in a way we haven't had in a long time," she said.
Mr. DeVaney, who is listing BlueCross' former headquarters building for $11.4 million, said the John Portman-designed office "is a gateway to our downtown" and "a signature building" that could help attract a new corporate headquarters or other businesses to Chattanooga.
Room at the inn
Some of the vacancies could be filled by boutique hotels proposed for two vacant, historic buildings in the central city.
Last August, a real estate partnership organized by developer Ben Parker bought the Maclellan Building on Broad Street for $3.85 million and is preparing plans for a 12-story hotel. Another building on Chestnut Street that was vacated by BlueCross is expected to be used for parking.
Just across Broad Street along Eighth Street, CLP Development LLC of Atlanta has proposed building a $25 million hotel and condominium complex in the former Chattanooga Bank Building.
Sue Lauffer, senior project consultant for the proposed Crowne Plaza along Eighth, has worked on the project for the past four years and said Monday she hopes the sale of the vacant building will be closed "in a matter of days."
The buyers are working out financing from the sale of historic tax credits and borrowed funds for 142 hotel rooms, first-floor restaurants and retailers and at least a half dozen top-floor residential condominiums, Ms. Lauffer said.
"We think there are tremendous opportunities in downtown Chattanooga," she said.
But getting financing for the projects remains difficult in the current market, according to experts. The two boutique hotels, plus a proposed Hampton Inn & Suites at Fourth and Chestnut, have been stalled for the past two years while developers try to finalize financing.
VW propels growth
Charles Arant, president of the Tennessee Aquarium and chairman of RiverCity Co., said the $1 billion Volkswagen assembly plant taking shape in the Enterprise South industrial park should help boost the economy of the entire region.
"If you look at European and German cities, their main focus is downtown," Mr. Arant said. "I think we're going to see over time some significant Volkswagen investments, not just in the plant, but in our downtown area."
Volkswagen leased 30,000 square feet of the largely vacant Chestnut Tower in late 2008 to house most of its Chattanooga staff until VW's plant is completed later this year.
Chattanooga already has succeeded in keeping most of its major employers downtown, including BlueCross, Unum Corp., TVA's power headquarters and Cigna Health Insurance, among others.
"With Volkswagen and other growth in our town, Chattanooga's market has held up better than most areas, and it's not the bloodbath you are seeing in some other office markets," said Lynda Childress, president of Luken Holdings Inc., the biggest downtown landlord.
"We've been very blessed because we've maintained high occupancy levels in our buildings with long-term tenants," she said. "The space vacated by BlueCross and others hasn't been as attractive to them."