Sluggish economy slows many projects in Chattanooga area

Sluggish economy slows many projects in Chattanooga area

June 27th, 2012 by Ellis Smith in Business Around the Region

Liberty Tower, at 605 Chestnut St., will be Chattanooga's newest commercial property when the renovation is complete.

Photo by Dan Henry/Times Free Press.

Poor jobs growth may be holding back the Chattanooga-area market for commercial real estate, officials say.

In May, when the economy appeared to be gaining steam, the National Association of Realtors trumpeted upcoming vacancy rates countrywide that would fall to 16 percent from 16.3 percent by the second quarter of 2013.

Rent was expected to increase 2 percent in 2012, and 2.5 percent in 2013 for office units, and a little less for industrial space, according to the NAR.

But that all changed when job creation slowed, said Cleveland, Tenn., developer Gary Rogers.

"The cheese has moved," Rogers said at a recent meeting for commercial developers, lenders and Realtors. "There's not a lot of organized capital for smaller deals."

While Cleveland has seen strong commercial growth, a few developers say Chattanooga has stagnated.

"Maybe everybody's going to wait and see what's going to happen, but maybe things are flat because they're flat," Rogers said.

The success of commercial properties, which usually include a lot of office and retail tenants, ebbs and flows with the jobs market.

Right now, it's a tough sell.

Getting a loan for property priced less than $2.5 million is difficult everywhere, not just in Chattanooga, wrote Lawrence Yun, chief economist for the National Association of Realtors.

"There is very little capital available for small business, which is significantly impacting commercial real estate transactions," Yun wrote in May.

Steve Hunt, who is redeveloping Liberty Tower in Chattanooga with his partner, Republic Parking owner Jim Berry, said he has been cautious, trying to make good deals instead of big deals.

"We've learned how to tread water," said Hunt, partner with Berry & Hunt. "We've learned how to hold on."

But the strong still can survive in the world of commercial real estate by doing what's necessary to keep the money flowing in, said Jay Jolley, head of EMJ Construction.

"Nobody can predict when it's going to turn around," Jolley said. "Our philosophy is not to try to predict it, but just adapt to it."

EMJ built more than 500 million square feet of malls and other commercial projects from 1968 onward. But the latest recession, combined with a shift from brick-and-mortar sales to online distribution, has put the brakes on those types of projects.

Jolley, however, didn't just turn off the lights and shut down the company.

He instead pursued projects like his latest contract to refurbish 67 JCPenney stores. It's a change of pace from EMJ's huge mall and shopping center construction projects, but it keeps them in the world of retail and keeps the company going.

"We're seeing a lot of national retailers invest more in existing properties instead of developing new stores," Jolley said. "They're still developing stores, but on a lot smaller scale than they used to."

EMJ works on renovations about 65 percent of the time now, and about 35 percent of its projects are new construction.

On the other hand, one man's recession can be a woman's gold rush.

That woman is Karen Hutton, CEO of The Hutton Co. in Chattanooga. She has more construction projects on her plate than she ever has taken on before, she said.

The general contractor has built the small company into a juggernaut by developing Family Dollar stores at a breakneck pace. She also has diversified into O'Reilly Auto Parts stores and Tractor Supply franchises.

She'll build 100 stores next year, worth about $50 million, she said.

"We've been very fortunate," Hutton said. "When you're building for discounters, they got better as the economy got worse."

In this economy, Hutton can't build new Family Dollar stores fast enough, she said.

The profit margins aren't huge and she has to personally guarantee the bank loans, but the hard work will be worth it, Hutton said.

"When everybody starts falling off the table and they're down to three developers, I want to be the last one standing," she said. "I work harder."

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