Louisville’s office landscape can be described as a tale of two distinct submarkets woven together by a common thread of consistency. In the central business district (CBD), Class A vacancy rate stands at approximately 13 percent while the suburban Class A vacancy rate hovers around 8.5 percent. As can be noted, there is a substantial gap in occupancy between the two submarkets — 450 basis points. The thread of consistency in the Louisville office market lies in the fact that both are within 100 basis points of those vacancy rates for the same quarter of last year.
The suburban office market continues to see healthy rental rate increases driven by the low rate of delivery for new product, coupled with consistently lower vacancy rates. Newer projects are advertising rates in the range of $24 to $28 per square foot, while second-generation, Class A product has quoted rates in the high teens and low 20s.
Many companies such as Thornton Oil, BrightSpring Health Services (formerly ResCare) and V-Soft have chosen to grow their headquarters presence in Louisville, which is helping maintain stability in the suburban market.
Mark Wardlaw, NAI Fortis Group
As in most markets, Class B and C product continues to struggle as functional obsolescence, lower parking ratios and inferior locations present challenges for newer or more image-conscious tenants.
The CBD market rates have remained relatively flat due to the higher vacancy rate and the subsequent increase in competition. Last year’s announcement by PNC Financial Services Group to vacate approximately 220,000 square feet of space in the former PNC Plaza (now known as 500 West Jefferson) was a setback for the downtown market.
However, there are several interesting trends in the CBD market that have helped stabilize the market and fueled the absorption for some of the vacancies.
Supporting Businesses
Back-office operations, call-centers and other support operations are finding the downtown Louisville market to be a vibrant location for their businesses to call home. It is a trend to which owners and other occupiers of CBD space are having to grow accustom. Companies such as Ernst & Young, Med Synergies, Cotiviti and Mercer Consulting have located in Class A buildings over the past several years.
As way of an example, Computershare initially occupied approximately 40,000 square feet in Meidinger Tower in 2015. In a recent third expansion of its customer support center, the company now occupies over 120,000 square feet, housing close to 1,000 employees.
With these less traditional CBD office uses, owners are needing to find creative ways to attract and retain these types of tenants. Most Class A buildings now offer collaboration areas, fitness centers and large meeting facilities that are all designed for greater collaboration, team building and workplace satisfaction. These are amenities that generally did not exist in the Louisville market several years ago.
The growth of these types of companies and the entrepreneurial class of employees they attract is adding a vibrancy to the marketplace. That vibrancy is accompanied by other positive happenings in Louisville’s CBD.
Omni, Convention Center
The long-awaited Omni Hotel and Residences officially opened in April, just in time for the influx of visitors for the Kentucky Derby. With 612 suites and 225 rental residences, the Omni offers residential density and amenities that were previously absent from the CBD market. The Omni’s interior and finishes are inspired by Louisville’s renown for bourbon, horses and baseball bats.
The opening of the Omni was followed by the reopening of the Kentucky International Convention Center. The center received a $207 million renovation and expansion. The nearly 1 million square feet of exhibit and meeting space will open doors to conventions and meetings not previously available to Louisville. These two major projects and the addition of several new residential projects are adding an excitement not felt in Louisville for many years.
The synergy of these activities, along with the stability of both the CBD and suburban office markets, creates an optimism for the Louisville office market. While much work lies ahead for business attraction, including new platforms for growth and local and state initiatives, the real story to tell is that Louisville will maintain its position as a regional center for economic prominence. It is and will continue to be a great place to live, work and play.
— By Mark Wardlaw, SIOR, CCIM, Senior Vice President, NAI Fortis Group. This article originally appeared in the September 2018 issue of Southeast Real Estate Business.