Custom report on the commercial real estate market in the Chattanoooga MSA. This covers office, retail, and investment property types.

1. CUSTOM REPORT
2009 | REAL ESTATE FORECAST
Jelena Butler

2. © 2008 Grubb & Ellis
In Chattanooga the initial uptick in office vacancy will show strong recovery by the end of 2009
due to the arrival of Volkswagen Group of America’s automotive production facility.
approximately 200,000 square feet of mainly
Class B space. The Tennessee Valley
Technology Center, a retrofit slated for
completion in the first quarter, will add an
additional 106,000 square feet of which 30
percent is preleased. This opening up of space
within the CBD coupled with limited demand
for this sector will keep office asking rates
down in 2009.
In the suburban markets there is limited new
construction. Pointe Center, a 60,000-square-
foot building in the Hamilton Place
submarket, is the only speculative develop-
ment in the pipeline.
Moving north along the Highway 153 corridor,
leasing activity in the Hixson submarket
remains clustered by office condos and free-
standing single-tenant properties. Further
development of these office submarkets will
await build-to-suit or stronger demand as
proven by diminishing vacancy rates.
Volkswagen’s arrival in Chattanooga has
shifted attention to the industrial sector. The
company’s initial plans to invest $1 billion in
the local economy and bring 2,000 direct jobs
have already been expanded to include addi-
tional Audi operations. There is reason to
believe that further announcements will be
made as the automaker capitalizes on avail-
able acreage at its Enterprise South site
enabling it to achieve economies of scale that
benefit more than the Volkswagen brand.
Projections for incoming automotive suppliers
and ancillary businesses will help lift the local
economy and absorb vacancy in all sectors
including the office market.
While the U.S. economy as a whole continues
a downward spiral at the close of 2008, the
Chattanooga metropolitan area is expected to
do well in coming years. Despite forecasts of
an increase in vacancy and falling rental rates
in 2009, the long-term outlook has been invig-
orated by the announcement of a new
Volkswagen automotive production facility.
In November 2008, Volkswagen broke
ground on its only U.S. automotive facility
with plans to begin production in 2010.
During the construction phase, most of
which will happen during 2009, a myriad of
related industry suppliers will locate in the
vicinity pushing up demand for all types of
space from multifamily to office and indus-
trial. Despite these developments, vacancy
rates are still expected to increase by 180
basis points in 2009 due to large-scale user
shifts within the CBD.
The office market in the Chattanooga MSA will
see increased vacancy led primarily by the
move of Blue Cross Blue Shield of Tennessee
to its new 950,000-square-foot corporate
campus on Cameron Hill. Though the
company is expected to maintain use of two
in-town buildings the relocation will free up
Key Leasing Transactions
2008
Lessee Lessor Property Submarket Size (SF)
CIGNA TVA TVA Building CBD 30,000
US Insurance SouthEast Portfolio LLC SunTrust Bank Building CBD 14,000
GSA Commercial Management Corp The Pointe Centre Suburban 17,500
Shared Health A & D Holdings LLC 401 Building CBD 8,400
Laird Technologies Luken Holdings Krystal Building CBD 7,700
CHATTANOOGA
Office
Absorption vs. Completions
Year-End (SF)
I Absorbed I Completed
Source:REIS
-300,000
-100,000
100,000
09F08P06040200
Vacancy Rates
Year-End
Source:REIS ,Grubb& Ellis|Hudson
0%
10%
20%
09F08P06040200
Asking Rental Rates
Year-End ($/SF/Yr. Full Service)
Source:Grubb&Ellis|Hudson
$12
$13
$14
$15
09F08P06040200

3. © 2008 Grubb & Ellis
The Chattanooga retail environment remains resilient despite the weakened housing market
and sluggish economy. The announcement by Volkswagen Automotive to build its one and only
US assembly plant in Enterprise South has triggered attention from regional and national investors.
of North Chattanooga, a new 386,000-square-
foot retail power center. The center is
anchored by Kohl’s and will have a Cracker
Barrel restaurant on one of several out-
parcels.
West of Chattanooga the Hamilton Place Mall
retail market has begun to mature as growth
expands along Interstate I-75 to the suburb of
Ooltewah. This submarket will be largely
impacted by Volkswagen’s $1 billion
assembly plant. Publix has recently entered
the Chattanooga market with three new
stores opening in 2008.
Retail in Chattanooga should grow at a
moderate pace in 2009 despite the weakened
economy. Retail makes up the second largest
business sector of the overall market behind
services.
Investment
The investment market has cooled substan-
tially due to the frozen outlay of capital by
most lending institutions. Currently,
Chattanooga is experiencing growth and with
Volkswagen scheduled to come online in
2011, transaction volume will favor this region
against most mid-sized metro markets.
Regional and national investors are carefully
keeping an eye on Chattanooga, recognizing
the immense impact Volkswagen’s invest-
ment and its 2,000 immediate jobs will have
on the overall economy for the region.
Capitalization rates continue to hover in the 6
to 8 percent range. Expect these rates to rise
along with the national trend as investment
sales volumes decline.
Retail
Retail development in Chattanooga has felt
the effects of the recent economic downturn.
Nonetheless, 2009 could present opportuni-
ties in underserviced areas such as the
Northshore and Ooltewah as the economy
and consumer confidence begin to rise.
Downtown retail development remains
sturdy. In the CBD, retail center Warehouse
Row is being redeveloped with a $30 million
expansion of multi-use office, hotel and retail.
The developers plan to capitalize on the
massive resurgence of residential housing in
the CBD. The Northshore sector of downtown
has seen several mixed-use projects reach
completion in 2008. Another interesting
development in the market is the resurgence
of hotels. Vision Hotel Groups Clarion Hotel
has undergone a major upgrade and re-
branded to a Double Tree Suites. Vision also
recently completed a Holiday Inn Express
directly across from the newly built mega
campus that houses 4,000 employees of Blue
Cross Blue Shield of Tennessee. In 2009 Vision
plans to start construction on a 140-room
Hampton Inn & Suites in the CBD.
North of Chattanooga, retail development
continues to progress along Highway 153
past Target and Wal-Mart with The Fountains
Key Investment Transactions
2008
Property Sale Price
Buyer Seller Type Property Name Size (SF) (millions)
Industrial Dev. Bd. National Posters, Inc. Industrial 1601 Holtzclaw Av. 122,017 $46.0
Wal-Mart Real Est. Bright-Meyers Retail 501 Signal Mtn. Rd 266,737 $25.9
Ten Docs LLC Park Mob LLC Medical Office 1651 Gunbarrel Rd 60,295 $16.3
Southeast Portfolio American Nat. Bank Office 736 Market St. 268,046 $12.5
Atrium Memorial Atrium LLC Drv. Medical Office 7305 Jarnigan Rd. 63,688 $8.9
CHATTANOOGA
Retail and Investment
Source:REIS
Typical Rent
Rent Ranges by Center Type, 2008 ($/SF/Yr. Triple Net)
$5 $10 $15
Non Anchored
Neighborhood
Anchored
Neighborhood
Non Anchored
Community
Anchor
Community
Source:Claritas,Grubb&Ellis|Hudson
Median Household Income
2008 (in Thousands)
$38 $42 $46 $50
Chattanooga
U.S. Average

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