Derby City Office Market Now Entering Full-On Recovery Mode

by John Nelson

Louisville’s office market is certainly a representative example of a typical office market in a mid-sized city. As expected, Louisville experienced the impact of COVID-19 and the remote work trend. Downtown had to endure the social unrest during summer 2020 that created a perception of a lack of safety. Our community has work to do to get things back to “normal,” but things are slowly starting to move in the right direction.

As has always been the case, the downtown and suburban markets face different trends. Typically, the suburban market has outperformed the central business district (CBD) with higher average rents and lower vacancy. Presently, the downtown Class A market has average rents in the $19.11 per square foot range and vacancy around 22 percent. The suburbs are seeing $22.16 per square foot in rent and 14.6 percent vacancy.

Robert Scholtz, PRG | Commercial Property Advisors

Recently, the CBD posted 480 square feet of negative net absorption for the second quarter. After taking large hits throughout most of the pandemic, this looks to be a sign that downtown may finally be turning the corner. The suburban market took a big hit this past quarter due to vacancies and downsizing of two large companies.

Even so, suburban markets continue to have the most leasing activity. In fact, approximately 75 percent of leasing activity for Louisville’s metro area has occurred in suburban markets.

Development of new office space in suburban markets has continued during the pandemic. L&N Federal Credit Union, Louisville’s largest locally based credit union, just completed its new 70,000-square-foot headquarters in south Louisville. Another notable project that is currently under construction is the new 37,000-square-foot headquarters for QSR Automations, a local tech company. This project is located on River Road, just a couple of miles from downtown Louisville. We believe that while speculative office projects should remain on hold, we’ll continue to see owner-users construct new buildings for their own use.

Downtown has seen renovations to office buildings, but even more, conversion projects have been at the forefront. Currently, three historic office buildings are being repurposed into mixed-use properties. The Starks Building was one of Louisville’s most well-known office buildings and is now undergoing renovations to be repurposed into 264 apartments, commercial space and art studios. Although projects like this cut down on available office space downtown, they are extremely beneficial to the surrounding office buildings and downtown as a whole.

Office towers may not be able to get back to full capacity if they can only provide office space, so we anticipate seeing many more conversion projects in the future. Those adaptive reuse projects should be tied to the older, Class B office buildings that are more suitable for such conversions.

Louisville needs to continue to invest in downtown in an effort to create a true live-work-play environment. This will lead to companies wanting to locate to this submarket and can attract even out-of-state users.

One of the ways companies and office building owners can do this is by investing in their office space. Amenities are going to become a key component in attracting employees to work in the office.

With so many companies shifting toward a hybrid model going forward, amenities are going to be crucial. If someone has the choice to either work at home or go to the office, there needs to be something compelling that makes the commute worthwhile.

One example of a company making a very sizable investment in an existing downtown footprint is the financial advisory firm Baird’s $20 million renovation in its space at 500 W. Jefferson St.

Finally, downtown should continue to experience a rebirth as tourism (or “Bourbonism” as it’s called here) and our thriving convention market returns to normal. This all enhances the strength of the office market.

Another major factor in the Louisville office market’s revival, especially downtown, will be when certain companies return to the office. One of Louisville’s largest employers, Humana, which employs almost 13,000 people, has continued to delay their back-to-work date due to a rise in COVID-19 cases and the surge of the Delta variant. Currently, it is set for Oct. 18, though it could be delayed further. Regardless, it will be a big boost for downtown and local surrounding businesses when Humana and other employees are able to return to the office.

Not all has been challenging in the office market throughout the pandemic. We have seen an uptick in some businesses outgrowing their current offices. In Louisville, there are many smaller users that actually grew during the pandemic, and they have a new need for more space. Small, boutique space has seen a lot of positive activity, especially in the East End and other suburban areas of Louisville.

It has not only been the source of considerable leasing activity, but also sales. Many businesses, especially smaller ones with basic office needs, are interested in being an owner-occupant and are taking advantage of our city’s competitive lending market.

It’s hard to imagine a world where offices don’t exist at all, and fortunately that’s not where we’re trending. However, like many things, the situation is dynamic and we are still waiting to see what the new normal will be. Remote work will be an option for people and more companies will likely begin to adopt a hybrid model where employees only work in the office on certain days.

No doubt the challenges of the past 18 months have brought difficulty and hardship to the office market, but also opportunities for innovation and growth that make for a positive outlook for Louisville. A return to a positive trajectory downtown and a true shake-out of the needs of suburban users through the rest of this year should create stability as we enter 2022.

— By Robert Scholtz, Associate of PRG | Commercial Property Advisors. This article originally appeared in the September 2021 issue of Southeast Real Estate Business.

You may also like