As one project finishes, another one is soon to begin. The $2.3 billion Ohio River Bridges Project its nearing its December 2016 completion, and Louisville commuters are yearning for a return to normalcy and enhanced transportation options. The East End Crossing will link Louisville’s fast-growing suburban markets to Southern Indiana’s burgeoning distribution hub at River Ridge. The new Abraham Lincoln Bridge parallels the John F. Kennedy Bridge downtown and carries I-65 across the Ohio River. After three years of disrupting traffic in metro Louisville, both projects are entering their final phase of construction.
Just as the Bridges Project nears completion, two major projects in Louisville’s central business district (CBD) may have an impact on the office market. The Kentucky International Convention Center closed in August for a two-year, $200 million renovation project. Sections of 3rd and 4th streets will close during the construction, which could have a drag on downtown commuter traffic. In addition, Louisville will welcome a 600-room, $289 million Omni Hotel in 2018, but not before the major project squeezes Liberty Street and Muhammad Ali Street traffic. Both significant projects will bring dividends to Louisville’s CBD when completed, but the market will have to endure some disruption in the interim.
All this activity comes as the CBD office market has enjoyed a resurgence in the past two years. The overall CBD vacancy rate fell to 12.5 percent at mid-year 2016, fueled by 86,300 square feet of absorption. This represents the CBD’s lowest vacancy rate since the fourth quarter of 2011, when vacancy stood at 11.5 percent. CBD vacancy peaked at 17.9 percent as recently as 2013, but three straight years of positive absorption greater than 100,000 square feet has put the CBD back on solid footing.
Richard Ashton, Cushman & Wakefield | Commercial Kentucky
This trend is unlikely to continue, however, as PNC announced in April its intention to consolidate its operations at National City Tower in October 2016. This will leave a vacancy of over 150,000 square feet at PNC Plaza. Together with 161,000 square feet available at 400 West Market and 84,000 square feet available at Brown & Williamson Tower, the project will provide significant tenant opportunities in early 2017.
Vacancy rates in the CBD are projected to rise to the mid-teens in 2017, and this submarket may struggle to return to its current vacancy status until the early portion of 2018.
Expect downward pressure on rental rates in the CBD, as the average Class A asking rate of $20.76 per square foot will move closer to $20.00 per square foot over the next 12 months. It has been three years since new office construction has been delivered in the CBD market, and it is unlikely that we will see new activity before 2019.
Louisville’s suburban market continued its solid performance in the first half of 2016, as over 92,000 square feet of space was absorbed driven by nearly 478,000 square feet of leasing activity. The overall vacancy rose to 12.8 percent from 10.6 percent at year-end 2015. This increase is fueled primarily by two recently completed office buildings: Woodlawn Center II (45,000 square feet) and 500 North Hurstbourne (120,000 square feet). Woodlawn Center II was completed in July 2016 and is already 92 percent leased. 500 North has strong early leasing activity while quoting market-leading rents of $27.00 per square foot. Expect the suburban vacancy rate to move downward in the second half of 2016 as these properties and other Class A offerings benefit from positive absorption.
Suburban Class A asking rates stand at $21.00 per square foot at mid-year, led by the $21.70 per square foot rates in the Hurstbourne/Eastpoint market. Much of the new construction in the suburbs is having a positive impact for other Class A owners that have experienced marginal rent growth over the last two years. Over 500,000 square feet of new office buildings have been built in the East End since 2012, and developments are planned at the Old Henry / Gene Snyder interchange and the North Hurstbourne corridor.
Much like its CBD counterpart, there are some clouds hanging over the suburban market in the near future. In June, Humana announced plans to move its 1,200 employees from 12501 Lakefront Place back to its downtown campus. This will free up 170,000 square feet of call center space in mid-2017. In addition, Thorntons’ 92,000-square-foot headquarters off Old Henry Road is scheduled for completion in June 2017. Thorntons will vacate 46,000 square feet of Class B space on Linn Station Road. These vacancies, combined with other large blocks at 9100 Linn Station Road and 5200 Commerce Crossings Drive, will offer sizable space users opportunities that were difficult to find in the suburban market over the last three years.
Louisville office tenants and landlords may endure a few quarters of shaky performance as we close 2016 and look forward to 2017. However, significant public and private investments totaling over $3 billion will fuel Louisville’s growth over the next decade.
— By Richard Ashton, CCIM, Senior Real Estate Advisor, Cushman & Wakefield | Commercial Kentucky. This article originally appeared in the September issue of Southeast Real Estate Business.