As COVID-19 swept through the streets and interiors of Chattanooga, windows once adorned with vibrant company logos displayed a single, increasingly prolific phrase: “Available for lease.”
With companies establishing the ability to operate virtually, some experts sounded the death knell for the traditional office. Even skeptics agreed things looked grim.
Two years later, commercial Realtor Benjamin Pitts was mining data from the local multiple-listing service when he noticed something surprising about the Chattanooga office market.
As Pitts swam through the oceans of data available on the MLS while preparing a market report for his clients, he not only was unable to find evidence that the pandemic had killed the local office market, he verified that its cheeks are rosier than they’ve been in the last decade.
“The conventional wisdom said working from home would reduce the space companies need, so there would be a lot of empty offices on the market,” says Pitts, an agent with Herman Walldorf Commercial Real Estate. “But Chattanooga is not lining up with that logic.”
Pitts’ report, which he completed in April, tracks three indicators over a 10-year period beginning in 2012: absorption rates, active listings and the volume of square footage listed for lease. (The report does not consider offices not listed on the MLS.)
All three needles point to the same conclusion, Pitts says: The office market in Chattanooga is alive and well.
During the eight years preceding the pandemic, absorption rates (the number of transactions in a given period expressed as a percentage of the number of listings) in Chattanooga ranged from 1.8% in October 2012 to a pre-pandemic high of 4.4% in July 2019, Pitts found.
Shattering conventional wisdom, absorption has steadily risen from a low of 2.5% in March 2020 to a high of 6.2% in March of this year, Pitts reports.
“People expected absorption to plummet at some point during the pandemic and then stay low, but instead, there’s been a sharp spike. That means more deals are being done relative to the number of listings on the market than at any other point in the last 10 years. Companies are signing leases.”
As a result, Pitts says, office listings are down.
From May 2012 to February 2017, listing volume remained fairly steady, ranging from 1,100 to 1,300 listings a month, Pitts’ report confirms. A moderate period of decline followed and lasted until February 2020, when COVID-19 likely caused a sharp increase in listing volume, Pitts speculates.
But once against frustrating conventional wisdom, office listings have steadily declined since August 2020, Pitts says.
“If the conventional wisdom had held, there would be more listings on the market. But there are about 400 fewer listings today than there were in August 2020 and 300 fewer than in March 2020, when the pandemic began.”
Listing volume has also been below the pre-pandemic low of 921 since April 2021, Pitts points out.
Pitts’ final indicator – the volume of office square footage listed for lease – also has dropped, providing another sign that companies are snapping up Chattanooga’s office space.
The amount of square footage on the market has steadily declined over the last 10 years from a peak of 5.5 million square feet in February 2013 to a pre-pandemic low of 3.5 million square feet in February 2020, Pitts reports.
As the pandemic gripped the local community, the number of square feet on the market climbed to 4.2 million by August 2020, but since then, the number has dropped to 2.9 million – the lowest in the 10-year period Pitts analyzed.
“People expected office square footage to take off because they thought businesses would be letting go of their leases. But that didn’t happen,” Pitts points out.
Although Pitts trusts the data, he says he can’t account for it, other than to offer anecdotal evidence about people moving to Chattanooga.
“The woman who cleaned my teeth a few weeks ago said she saw four people the previous day who were new to Chattanooga,” Pitts offers. “Even when a person moves here and works from home, that individual hires an accountant, a doctor and a lawyer. So there’s more demand for office space due to their presence in the market.”
Data that backs Pitts’ anecdotal evidence does exist. The 2021-22 moveBuddha’s Tennessee Migration Report found that 306 people moved to Chattanooga for every 100 who left. This suggests the quality of life and the employment opportunities available in Chattanooga are attractive to out-of-towners, the moving and storage company notes.
Charles Wood, vice president of economic and talent development at the Chattanooga Area Chamber of Commerce, says several factors are contributing to the bump in office space leases in the city.
Wood spends his office hours coordinating the Chambers’ economic development efforts, which includes recruiting businesses to the city. He says he believes the influx of college graduates in the workforce is part of what’s driving office space leases upward.
“A number of companies are hiring recent college graduates for entry level positions, and they want these employees in a room where they can learn together, share information and feed off each other with few barriers between them.”
Wood says a team environment is especially crucial in sales organizations and points to Chattanooga’s freight brokerage market as a prime example.
Located along one of the main arteries of Freight Alley (the channels through which freight traffic moves throughout the southeastern U.S., particularly in Tennessee), Chattanooga-based companies like Steam Logistics and Trident Transport are experiencing unprecedented growth.
To accommodate its dramatically expanding workforce, Steam Logistics has progressed from pushing its walls outward to preparing to move to a larger base of operations.
Steam Logistics’ future home will be the building at 328 Broad Street. Previously known as the John Ross Building, the structure was an aging, boarded-up eyesore when Noon Development purchased it and began renovating its four stories and 60,000 square feet for its tenant.
Steam Logistics’ marketing and public relations manager Marissa Smith says the company desperately needs the extra room.
“We were located next door and rapidly outgrowing our space. We had part of the second floor, and then the entire second floor, and then we had to rent part of the third floor, and then we asked, ‘Where are we going to put everyone?’” Smith says. “So we started working on the new facility.”
Due to a boom in the logistics market, Steam Logistics expects to hire close to 400 employees for its Chattanooga facility over the next five years, Smith adds.
Instead of separating them into cubicles and offices – as some commercial real estate gurus predicted would happen as companies prioritized safety in the wake of the pandemic – Steam Logistics is tailoring an open floor plan to facilitate instant connections between workers, Smith says.
“We pride ourselves on having an open space, where our leadership is on the floor and everyone is accessible. We do better when we’re collaborating and feeding off each others ideas.”
That said, Smith adds that allowing for ample elbow room between work stations will be a staple of the company’s new layout. “We won’t be packing people in like sardines,” she assures.
As Steam Logistics eyes a December transition into its new headquarters, many small Chattanooga businesses are feeding the local office lease market by bringing their teams within a single set of walls, Wood says.
“Big corporations are questioning whether or not they need all of their office space and how much they need their people to be in the office. But most small businesses prefer to have their team together, as their employees have multiple roles and are more reliant on instant communication.”
Not only that, but the Chamber has noted that some small companies are gearing up offices where they previously employed only a small number of remote workers.
“We’ve seen companies with one or two workers in this market say, ‘Maybe this is a place for us to hire more people,’ and then move into an office,’” Woods says.
Although the numbers Pitts excavated from the local MLS might give local landlords a reason to celebrate, he says there’s still time for the conventional wisdom to be proven correct.
“Companies that signed a 10-year lease in 2015 had five years left when the pandemic hit. And businesses that signed a five-year lease in 2019 are 60% of the way through their lease. So we might see some companies letting go of their lease and moving into a smaller space, although we’re getting a little late in the game for that to have much of an impact.”
Pitts also says some of Chattanooga’s larger employers might be consolidating their space – much like Unum did – and putting their vacated square footage on the market. But again, he believes the conventional wisdom is near the end of its tether.
Wood generally agrees with Pitts but counters that large corporations could still change their plans and reverse the fortunes of the office market.
“Amazon built one tower in Nashville and has a second tower under construction. We don’t yet know what companies that were in the middle of building large footprints will do.”
One way to stimulate continued growth of the Chattanooga’s office market is to recruit and retain talent, says Wood.
“Talent is the currency of the day. Being able to recruit and retain folks from other markets is critical.”
Smith says Steam Logistics is doing its part to attract skilled workers to the Scenic City by foregoing noncompete agreements, cultivating a top-tier company culture and offering an attractive compensation structure.
“We’re not just investing in a new space, we’re invest in our people.”
Meanwhile, Pitts wants to see steady, predictable growth and stable prices.
“There are people who benefit from rapid increases in rates and there are people who are positioned to take advantage of rapid declines in rates. So brokerage work is there in good and bad markets. But a balanced market is better for the overall economy.”