Tight Occupancy in Louisville Industrial Market Warrants New Construction

by John Nelson

Kevin Grove

Kevin Grove, CBRE | Industrial Services

The trends in Louisville are typical of a market rebounding. According to CBRE Research, the Louisville market is experiencing rent growth, vacancy declines, construction increases and more speculative product hitting the city. Leasing volume is increasing steadily, and investment sales are peaking as well.

The Louisville industrial market remains tight even with several recent construction completions. With more than 100 million square feet of industrial space in the area, Louisville is a major player in the Eastern United States distribution market. Despite several lease and sale transactions consummating in the second quarter of 2014, market vacancy increased slightly to 4 percent, which reflects the fact that several large speculative buildings came on line during the period offsetting otherwise net positive absorption.

As expected, with existing industrial inventory levels at an all-time low and new building deliveries coming on line and more on the horizon, market vacancies rose to 3.9 percent in the first quarter of 2014, ending a streak of 13 consecutive quarters of declining vacancy. Louisville remains an extremely tight market, even considering the increase in the vacancy rate. In addition, compared to the percentage of total market size in neighboring cities like Columbus, Cincinnati, Indianapolis, Nashville and Memphis, Louisville marks the lowest vacancy with the highest square footage under construction.

The Bluegrass and Northeast submarkets on the east side of metro Louisville are now below 1 percent vacancy. The most recent noteworthy changes have occurred in the Bluegrass submarket, which has seen a decrease of 770 basis points from 8.1 percent to 0.4 percent. The Bullitt County and Southside/Airport submarkets both saw increases of 190 basis points, and the Southern Indiana submarket decreased by 170 basis points (to report 1.5 percent) and will likely remain low as some of the current construction projects are build-to-suits.

The sole reason for the increase was the addition of new speculative product being completed. Some of the speculative space has already been leased and that trend will continue through the next couple of quarters. UPS’ Worldport, Louisville being a day’s drive from the majority of the US population, the I-65 artery, and the automotive sector have driven demand and pushed rents upward in metro Louisville and will continue to do so.

The last few months have brought the completion of several speculative projects in metro Louisville. Two of the largest were in the Bullitt County submarket: a 631,336-square-foot project “LogistiCenter I-65” by Dermody Properties and a 500,918-square-foot project “Park 480” by VanTrust Real Estate. In the Southside/Airport submarket, Clarion Partners completed construction on a 230,000-square-foot building and a 406,640-square-foot building, both of which were mostly leased prior to construction completion.

At the start of the second quarter this year, a 315,147-square-foot speculative project by Dermody Properties was on the books for the Southside/Airport submarket and construction on a 468,731-square-foot building by Pinchal and Crossdock Development in the Southern Indiana submarket is well underway.

Rental rates already jumped in the second quarter of 2014, from $3.10 to $3.19 per square foot. The largest increase was in the Bluegrass submarket, which saw an increase of $0.28, increasing the rate from $2.22 to $2.50 per square foot.

Market-changing deals include a 219,000-square-foot lease by Tower Automotive in the Bullitt County submarket; a 150,000-square-foot lease for Tenneco in the Southern Indiana submarket; a 119,000-square-foot lease for an undisclosed company in the Bluegrass submarket; a 100,000-square-foot lease to Gilt Groupe in the Southside/Airport submarket; a 59,000-square-foot lease to DCL in the Riverport submarket; a 54,000-square-foot lease to Graphtec in the Bluegrass submarket; a 45,000-square-foot lease to Heels.com in the Southside/Airport submarket; and 109,000-square-foot facility sale in the Southern Indiana submarket.

Investment opportunities continue to garner strong interest when assets are brought to market. Becknell acquired two assets totaling more than 400,000 square feet from KTR Capital Partners in the Riverport submarket. Similarly, Exeter Property Group acquired a property of more than 450,000 square feet from Pinchal & Co. in the Southern Indiana submarket.

These acquisitions are indicative of a healthy investment trend around Louisville. As the market continues to improve, aspects such as convenient interstates; two new interstate bridges; the Port of Indiana-Jeffersonville, one of the fastest-growing ports on the Inland Waterway System; and multiple rail lines; as well as affordability and quality of life draw interest from investors.

With the Louisville International Airport being the seventh-busiest air cargo hub in the world and acting as home to UPS’ Worldport, a major influence on the Louisville distribution market, and Interstates 64, 65, and 71 connecting and placing Louisville within 500 miles of half of the population in the United States, the metro Louisville market reaps the benefits of quick and easy transport.

With solid activity, plentiful construction and demand on the rise, we are well positioned for a booming industrial market. We expect the current market activity, if sustainable, to result in positive net absorption into the near future.

— By Kevin Grove, Senior Vice President, CBRE | Industrial Services. This article originally appeared in the September issue of Southeast Real Estate Business.

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