Louisville’s CBD Rebound Complements Suburban Office Market

The economic recovery has flipped Louisville’s office market. Historically, the central business district (CBD) has lower vacancy and higher leasing rates than the suburban office market, while new development and low barriers to entry generally kept vacancy higher in the suburbs. Now, suburban vacancy rates rest below the CBD’s, especially for Class A product. Even as speculative development returns to the suburbs, the submarket’s hot streak shows no signs of abating, and the downtown submarket has plenty of positive momentum as well.

Suburban Class A vacancy was 8.4 percent at mid-year, with average asking rates in the $20 to $22 per square foot range, or higher in top-tier new office developments. The suburban office market has been quite active, but Class A and B vacancies haven’t materially changed this year due to a spate of renewals and net moves from one building to another. Still, we expect a noteworthy fourth quarter as demand is perhaps as strong as it’s ever been, and owners remain aggressive, in many cases offering three months free rent and turnkey tenant improvements with long-term deals.

Lack of available large blocks of space could lead to build-to-suit activity, too. There are virtually no available blocks of contiguous Class A space larger than 40,000 square feet in the suburbs. On the other hand, we expect suburban Class B space to hold steady at approximately 13 percent vacancy as prospects slowly backfill available blocks, especially in the Jeffersontown area.

In the suburbs, the University of Louisville and NTS Development’s ShelbyHurst Research and Office Park has achieved remarkable success. The partnership’s first Class A building, which totals approximately 125,000 square feet and delivered in 2012, was 50 percent pre-leased before construction started and leased up within a year of completion. Its second office development is nearly 50 percent pre-leased as well and achieving close to its asking rate of $26 per square foot. If the market remains strong, we anticipate groundbreaking for ShelbyHurst’s third building within a year after completion of the second, which also will be 125,000 square feet.

Downtown’s value and revitalized amenity base resonates with office tenants as well. Prospects’ interest in large blocks of CBD space continues to escalate. Owners of select Class A towers — the Meidinger Tower and Brown & Williamson Tower, in particular — are aggressive deal makers, offering compressed rates at entry points unseen in decades.

With lease rates of $15 to $16 per square foot and parking between $80 and $85 per month, it is economically feasible to lease Class A CBD space for less than its suburban counterparts, with employee parking included in the transaction. Competition between the Brown & Williamson and Meidinger towers, which are 39 percent and 44 percent leased, respectively, has lured tenants that are new to the market such as MedSynergies, XPO Logistics and TQL Logistics to downtown. Conversely — and only a few blocks away — downtown Class A stalwarts such as National City Tower, PNC Plaza and LG&E Center are all at least 92 percent leased.

Like many cities across the United States, Louisville’s CBD also benefits from revitalization and tenants’ desire for the types of cool, urban settings that appeal to Millennials. Cordish Co.’s 4th Street Live!, a retail, restaurant and entertainment district connecting the Meidinger and Brown & Williamson towers, provides an amenity base that serves both daytime office tenants and nigh-time revelers. The KFC Yum! Center, home of University of Louisville Cardinals’ basketball games and big-name concerts and events, is a big driver for the area, too. What’s more, the city of Louisville’s focus on downtown revitalization has yielded more hotel and restaurant development.

Louisville’s first big office trades since 2008 are imminent and will indicate demand for the city’s office properties and set the market. The sale of Faulkner Real Estate’s 500,000-square-foot Ormsby portfolio of suburban office assets should close by the end of the year. Downtown, we anticipate that the 288,000-square-foot LG&E Tower will hit the market before the end of the year.

Given the healthy appetite for well leased and located commercial real estate across the United States, interest in these properties should be strong. Occupancy and assets are stable, as Louisville is a strong secondary market that historically does not experience the wild highs and lows of other Sunbelt cities. Though pockets of vacancy do remain in the Meidinger and Brown & Williamson towers and in a few other isolated instances, that’s a bit of an anomaly and was not unexpected. In other words, Louisville is a solid office market, and the recession’s lingering impact, such as it is, is being addressed with a great deal of success by aggressive owners.

Ultimately, Louisville has returned to its status as one of the steadiest secondary markets in the United States, and we’re fortunate to be in a market where both suburbs and CBD are thriving and have a great deal of potential. With the strength of Louisville’s suburban markets and revitalized CBD, we expect that momentum to carry over into 2015 and for the foreseeable future.

— Doug Owen, Co-Managing Member and Office Group Leader, Cassidy Turley. The article originally appeared in the September 2014 issue of Southeast Real Estate Business.

Content Partners
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