Louisville’s multifamily market has long benefited from the city’s highly diversified employment base. With strongholds in distribution (boosted by the recent surge of e-commerce sales), manufacturing, healthcare and professional services, Louisville has rebounded from the pandemic-induced recession more quickly than much of the rest of the country.
As of July 2021, the local unemployment rate was 4.5 percent, while the national rate was 5.4 percent. In addition to increased job growth, local employers are raising wages to attract top talent needed for expansion requirements. This wage growth, coupled with employment demand, has created a considerable advantage for multifamily property owners that have been able to push rental rates on an annual basis.
Integra Realty Resources (IRR) reports that overall market vacancy is hovering at a low 4 percent. The combination of low vacancy rates and wage growth has allowed multifamily owners to increase rent structures. Landlords have seen high single-digit annual rent increases for the last four years in the Louisville MSA. Class A properties have been achieving rents approaching $2 per square foot for some unit types in luxury developments.
IRR also reports that there are currently over 4,000 multifamily units planned or under construction in the Louisville MSA. With the previous four years showing significant rent growth, multifamily development is expected to continue to be expanded in the Louisville MSA to meet demand.
Large-scale multifamily development was previously dominated by out-of-state developers such as Bristol Development, Cityscape Residential and LIV Development. However, large Class A developments in Louisville have also been proposed and delivered by locally based firms such as Poe Cos., Denton Floyd, LDG Development, NTS Development, Jefferson Development and Hagan Properties.
With the most obvious urban infill sites taken, new development continues to push east, south and even north into Southern Indiana to find viable sites to deliver new multifamily product. In Eastern Jefferson County there are a number of new Class A properties, including developments from LDG, Bristol Development, Hagan and Cincinnati-based Hills Properties. Historically, the eastern submarket of Louisville has attracted the highest rents and most amenity-rich apartment development in the state of Kentucky. We forecast that trend to be continued for the foreseeable future.
Louisville’s manufacturing and distribution employment base also drives new construction and high absorption in Southern Indiana, as well as the southern and southwestern quadrants of Louisville. The high employment demand from employers such as UPS, Ford and General Electric, as well as numerous large employers in the 6,000-acre River Ridge development in Jeffersonville, Indiana, should continue to add employment and residential demand in these submarkets.
Acquisition demand for existing 1970s to 1990s apartment communities throughout the Louisville MSA continues to be strong from out-of-state investors looking to do community renovation and add additional amenities to these properties. Louisville has seen a number of these investment groups acquire older apartment communities and add significant interior capital improvements and amenity packages to drive up base rents and overall revenues for these renovated communities.
We expect the demand for well-located, older properties to continue for the foreseeable future and provide investors excellent returns, with capital improvements spent in interior unit renovations and additional amenities such as dog parks, playgrounds, grill stations and fitness centers. In the past five years, Louisville has seen a number of investment groups experience high returns with this investment strategy.
Downtown Louisville near the CBD has experienced the most pain during the recession due to downtown office workers working from home, as well as the significant civil unrest that downtown Louisville experienced in 2020. The combination of remote work policies and continued civil unrest in the CBD provided a very challenging environment for multifamily properties. Owners of these properties have rebounded somewhat in 2021, but have not achieved the occupancy and rent growth that they were experiencing in 2019.
Properties located in the NuLu neighborhood have experienced some rebound and, along with Shelby Park and Germantown, these urban neighborhoods feel like a safe distance from any of the civil unrest. The City of Louisville is encouraging downtown employers to bring office workers back to the office and have provided more security measures to keep civil unrest under control so that residents in the CBD feel safer and can experience the great amenity package that downtown offers.
Overall, we expect Louisville to experience continued job growth, low vacancy factors, low concession rates and increasing rent growth for the foreseeable future. When reviewing comparable cities throughout the Southeast and Midwest, Louisville still offers much opportunity for additional unit growth and rent growth. Therefore, we expect local and out-of-state firms to continue to develop new and exciting product here.
— By Craig Collins, Senior Director of Cushman & Wakefield | Commercial Kentucky. This article originally appeared in the September 2021 issue of Southeast Real Estate Business.