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• Rick Frazier, vice president of marketing and leasing for Alex S. Palmer & Co., a development, management and brokerage firm in Nashville.
• Larry Jensen, president of Commercial Advisors, a brokerage firm Memphis.
• Joe Petre, vice president of management services of Lawler Wood, a developer and manager in Knoxville.
• Kim White,
president and chief executive of the Corker Group, a real estate operating, development and management company in Chattanooga.

BTN: How do you think your cities’ skylines will change over the next few years?
Kim White: We are very fortunate in Chattanooga with all of the unprecedented development that we’ve had over the past several years. Since 2001, we’ve had over $2.1 billion invested, and we’re just now seeing much of that coming to fruition. This week, we are unveiling the $120 million waterfront redevelopment that has changed the face of the city. It’s brought a lot of new residential development and excitement to our downtown. BlueCross BlueShield will break ground on its $200 million corporate campus in downtown Chattanooga in 2006, and the Electric Power Board is in the process of finishing its 140,000-square-foot building.
Rick Frazier: As we continue to see space absorbed in Nashville, we have several projects that could significantly alter the skyline of our city in the next five years. We’re planning a 900,000-square-foot, mixed-use office complex for West End Avenue—probably the largest project in the MSA, if not in the entire state—consisting of a 550,000-square-foot office tower and 250-key hotel with condominiums. There are several other buildings in the design phase that could significantly alter Nashville’s skyline.

BTN: You both mentioned mixed-use. It certainly seems like it has picked up over the last year or so. What’s driving that trend?
White: We’ve had a lot of pent-up demand for housing downtown. Right now, the products that have been announced are 560 new downtown units, and we’re all seeing a lot of retail space go on the first few floors. We have some buildings that are going in with office on the first few floors and some residential above it, but they’re trying to take the biggest advantage they can of the small space that we do have to develop in downtown.
Frazier: In Nashville, a native Nashvillian is probably one out of every five people that you meet. We’re realizing growth far beyond what our own population is generating. We’ve got corporate relocations—the Nashville Chamber has done a terrific job in attracting companies to the Midstate area—and many of these are coming from tier-one cities with much more of an urban lifestyle. People are looking for a different lifestyle, but one with access to the arts, entertainment venues and retail. This is what drives these mixed-use developments, where you can live and work and play all in the same city block.
Larry Jensen: What is the residential population base in those downtowns today, in Chattanooga and Nashville?
Frazier: If you look at the core-frame area in Nashville, there’s probably about 800 units that are completed construction, with probably another 500 or 600 slated to deliver in the next 12 months.
White: We’re nowhere close to that. We’re probably talking an additional 560 units that are being built right now. We’re not seeing an influx of new people to Chattanooga. We’re hoping that all the excitement that is going on downtown will bring in new jobs. Jensen: In Memphis, we’ve been in this sort of residential renaissance in downtown for about 15 years. We’re seeing all ranges of housing prices, from the folks that are building $1.5 million to $2 million up on the river to the studio loft apartments. The residential downtown population today is about 25,000, and it’s growing at about a 9% clip on an annual basis.

BTN: Larry, what kind of effect has that growth had on office, mixed-use and commercial?
Jensen: The Central Business District (CBD) has become an entertainment center. Take last Friday night. It was pouring down rain, but we had the Music Fest, the Grizzlies playoff game, the Redbirds were scheduled to play but got rained out, and a convention was in town. I have teenage kids, and that’s where they go. Ten years ago, nobody thought about going downtown for anything. There’s pretty much something going on six or seven nights a week. We have 10,000 graduate students at the University of Memphis, U.T. Medical School, St. Jude and the Southern College of Optometry, and most of them live in either Midtown or downtown. Something like 75% of all the people living in downtown have a bachelor’s degree or greater. St. Jude has been a real driver for us. They alone are in a billion-dollar expansion of their campus on 69 acres they put together in downtown. It’s a pretty amazing facility around which many things happen—residential, retail, entertainment, etc.

BTN: Joe, what’s the status of residential redevelopment in Knoxville?
Joe Petre: Private developers started about five to seven years ago in residential redevelopment. We’ve had good absorption there—the developers get so many calls that there are waiting lists. We’ve added about 300 units in the last couple of years, but there’s a surge now where almost any vacant building downtown that’s not a commercial office building is in play from a residential standpoint. Class-A commercial has done very well. But as far as the skyline question, we’ve got a lot of space to absorb because of the vacancy issue with TVA’s East Tower, which is on the market. In the rest of the Class-A market, we’re doing very well at about 90-95% occupancy, but our rates aren’t quite high enough yet to look at doing anything new.

BTN: How important is the availability of public financing for big projects, and can you get deals done with only private financing at this point?
Petre: I’m chairman this year of the Central Business Improvement District (CBID). We’ve helped make one retail deal—a 20,000-square-foot Mast General Store, a kind of catalyst that will stimulate other retail downtown. And the CBID has just announced we’ll have a new 12-screen Regal Cinema in downtown Knoxville. It took a while to work out all the financing, which is part TIFs and part private, but it is happening now. So I would say that on the front end, the public investment has been very important. Hopefully, that becomes less important as development continues.

BTN: Let’s shift focus: some see the construction of tall buildings as visible expressions of economic confidence. What’s to be made of the lack of such projects in Tennessee in recent years.
Jensen: Space is hard to find. To get such construction, the rents would have to be significantly higher than they are right now. There’s the structured parking issue, which adds additional costs. Corporations are not looking necessarily to be in a central business district given the costs associated with being there. To put up a high-rise, CBD-type building with 27-32 stories—I’m not sure that corporate America is ready for that. It may be different elsewhere, but you’re not seeing much construction of that type anywhere.
Petre: In Knoxville, we’ve got quite a ways to go on our absorption, but at a rate that is maybe two-thirds the cost of new construction. We’ve also seen a move toward more campus, rather than high-rise, development.

BTN: How big an issue is building very tall buildings in urban areas in the post-9/11 era, when people still might be a little jumpy about being in prominent buildings?
White: People are concerned about security, but height of buildings—that’s not an issue here.
Frazier: The corporate tenants that would occupy these buildings are looking for floor plate designs in excess of 25,000 feet. That doesn’t lend itself to structures above 25 stories. Being able to put down a 25,000- to 30,000-foot floor plate and raise the building 50-60 stories in the air—it’s just not feasible in these markets.
Petre: The floor size for tenants has changed. Most of the buildings in our downtown were built in the ’70s and ’80s, and are all 13,000 to 17,000 square feet. Today, tenants are driving the 25,000- to 30,000-foot floor plates for efficiency in an open space plan. To do a 30-story building would be 750,000 square feet, and I’m not sure anybody has that kind of appetite.

BTN: Rick, how much in lease commitments must you have in order to find financing for signature projects? And has this changed much in the past five years?
Frazier: It has not changed much. It’s going to really vary from developer to developer and lender to lender, and it really has more to do with how much debt you’re going to put on a building. There aren’t many developers out there who do not develop without some amount of debt. We tend to be a little more conservative on the pre-leasing side—a prudent amount would be somewhere in the 30-40% range. Anything below that is going to be more speculative.
Jensen: I think you’ve got to have a significant piece of it pre-leased because of the financing market. Also, parking in the central business district can add $2 to $2.50 a square foot to the rate. So you’ve got a high-end rate already, and then you’ve got to add parking on top of that. That’s a pretty big hill to climb, especially with tenants looking at the significantly lower costs of buildings in the suburbs or other lower-rise opportunities in downtown.

BTN: Kim, we’ve just talked about parking a little bit. I understand that’s also an issue in Chattanooga?
White: It is. We’re fortunate that all but one of our downtown buildings does have parking attached. The Electric Power Board, as I mentioned earlier, is in the process of finishing its new headquarters, which will add a 500-car parking garage downtown. That will help ease some of the issues we have now with parking, but it’s at a premium right now.
Jensen: What kind of monthly parking rates are you seeing downtown?
White: We’re seeing $80 to $90 a month.
Frazier: In Nashville, reserved parking can run $80 to $175.
Petre: Knoxville is $85 to $95 in the Class-A garages. We just added a new 630-space garage that the city is funding, so that is going to alleviate some problems.

BTN: What’s the current level of subleasing say about the supply of downtown space?
White: We don’t have a big sublease market in Chattanooga. I only know of about 15,000 square feet downtown that is on the market as sublease.
Frazier: In Nashville, it’s a tough number to track. It takes a lot of research, and any numbers that you quote will probably be pretty speculative. Currently, from a pure vacancy standpoint, our downtown is probably higher than any of our other markets. Most of our midtown and suburban markets are below double-digit vacancy right now, and the downtown market consistently stays in the double-digit vacancy. As for how much of that is in the sublease space? A significant percentage of that vacancy, probably.
Petre: In Knoxville, we also have almost no sublease market. TVA almost works like a tenant with a sublease in our case, though. They have extra space that is kind of flooding the market right now.
Jensen: Our sublease in downtown is not high. The thing that we struggle with is getting the C-buildings that are functionally obsolete off of the big vacancy.

BTN: What are office rates saying about demand for space? Office rental rates?
White: Our office rates are on the rise. The rates in downtown Chattanooga are anywhere from $14-$19. With Class-A space, it’s $17 and above. Rental rates over the last six months have been on the rise.
Petre: The same is true for Knoxville. We’re between $16 and $17 on Class-A. It drops down significantly—there’s almost no B space. In the C-space, like Larry said, we have a lot of functional obsolescence. It’s probably in the $12 range.
Frazier: In Nashville, we’re consistent with the other markets. For A-space, you’re looking at $19 to $24. For the B-space market, it’s going to in-fill from that $14 to $18.
Jensen: It’s similar for us, depending on which building and how much improvement has to occur. I don’t know if your numbers are net or include parking, but when you represent somebody and they’re looking at the suburbs or downtown, that’s a $2 swing just for parking. Our rates might be late teens or early twenties in terms of what is quoted on the street, but when they make a deal, they’ve got to decide if they’re going to pay for their employees’ parking on top of it. It can be a couple of bucks higher.
White: Our rates do not include parking, so that’s true, when you add parking to it, it does increase that rate.
Petre: Yes, same for Knoxville. Larry’s right—you add about $2 to $2.50 for parking.

BTN: What topics have we not yet addressed that we should?
Jensen: I’d be interested in hearing what everyone thinks the driver for the respective CBD will be over the next couple of years. Is there a business driver in particular?
Petre: In Knoxville, the law firms seem to be expanding. We’ve got Baker Donelson in one of our buildings, Bass Berry & Sims in Nashville, Memphis same thing. All those firms seem to be expanding again, where they had been contracting for awhile. That’s probably due to our location in the market—we’re next to the Courthouse and the City-County building—but we’ve seen an expansion in the law firm space across the board in Knoxville.
White: In Chattanooga, our four largest tenants—who had been sitting on a fence for quite sometime—have expanded and signed long-term leases. Miller & Martin, Decosimo, Chamblis Bohner & Stephel, and one that we’ve not announced—a large tenant that is getting ready to expand in one of our buildings. We’ve not seen much new business coming into town, but we are seeing a lot of expansion. We’re hoping that with everything going on in Chattanooga, we will reap some rewards from all of that in the form of new businesses.
Jensen: Our real driver is the bio-medical. We have our first of the implosions on Sunday morning—the old Baptist buildings. There’s a $42 million U.T. School of Pharmacy going up, and when you look at all that St. Jude is doing, it’s just amazing. It’s at the edge of the CBD, but it’s becoming more and more a part of the CBD. St. Jude has invested more than a billion dollars, and they are building something over there all the time. They’ve done a great job of incorporating themselves into downtown. Methodist-LeBonheur is getting ready to start a $200 million hospital project on Poplar Avenue. They will take down a couple buildings and then go back up with a new hospital. We have completed a master plan that, hopefully, will be adopted by the City Council here in the next 90-120 days. It’s a land-use plan that takes all of the CBD and then incorporates this whole medical area. And there are two Hope-6 grants underway in what is called Uptown, the area immediately north of downtown. It’s about a $100 million project. Then there’s another one called University Park that is over south of the hospital area that begins to tie all of this together.

BTN: Very interesting. Thank you.

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