CITY HIGHLIGHT, DECEMBER 2007

LEXINGTON CITY HIGHLIGHTS
Steve Pulliam and Todd Harrett

Lexington Industrial Market

Lexington’s industrial market continues to spin a tale of two cities. In the city of owner/users, life is exceptional. Demand for small to mid-size space—located largely in the south and southwest submarkets—has skyrocketed and inventory is almost fully occupied. Conversely, the city of large users—located primarily to the north and northwest—is struggling. Here, empty warehouses serve as holes in the market and skew the sector’s overall vacancy rate to as high as 22 percent.

This disparity reflects in pricing as well. Whereas developments of up to 25,000 square feet are renting for between $4 and $6 per square foot and selling for $60 to $80 per square foot, larger vacant space can be rented for $3 to $4 per square foot and purchased for $25 to $30 per square foot. On the development front, land for smaller light industrial product also is at a premium, selling for up to $150,000 per acre. Yet with local development restrictions tight for any plot totaling more than 20 acres, this endeavor also is an uphill battle.

On a positive note, industrial space continues to rebound by about a percent a year since its spike to 28 percent after 9-11. Furthermore, there are definitely areas of the large industrial market that remain very active. This activity, however, is delivered almost exclusively through build-to-suit projects in master plans like the City of Lexington’s Bluegrass Business Park near Georgetown Road or within the University of Kentucky’s Coldstream Research Park.

Buoyed by the Toyota plant in Georgetown—a northern submarket whose access to the interstates makes it a local industrial leader—some large, previously empty industrial space has seen genuine absorption. A portion of this space has been picked up by the carmaker, while other space is now occupied by spin-off support businesses. In the northwest, across from Lexington’s new Fed Ex facility, a local investor also has purchased a 10.5-acre plot and will break off 6.5 acres for small speculative space. Planned for the 10,000- to 20,000-square-foot range, the project will list for $60 to $70 per square foot.

The anticipated 2010 World Equestrian Games, which will be held  for the first time in the U.S. in Lexington, represents added potential. Bringing more than 400,000 visitors over three weeks, the event will attract high net worth individuals spanning from the Middle East to Europe, and will shine a light of opportunity across all lines of the local real estate market.

In the interim, Lexington must continue to  mitigate the gap between its two industrial cities. It must continue to build off of a location within the triangle of I-71, I-64 and I-75, and its ability to get product to most points of the nation within one day’s freight. And it may need to finally evaluate and act on opportunities to break down its larger space for smaller users. If nothing else, these steps will take Lexington that much closer to reconciling and maximizing the potential of this bluegrass industrial market.  

— Steve Pulliam is a managing director in the Lexington, Kentucky, office of Sperry Van Ness.

Lexington Multifamily Market

Although it is still recovering from the construction upswing that introduced more than 1,000 new apartment units in 2005 and 2006, Lexington’s multifamily market is finding renewed footing and equilibrium between supply and demand.

The lion’s share of new apartments can be found in the southeastern suburbs in three large developments: the 184-unit Glen Eagles tax credit property by LDG Development, the 325-unit Summit at Brighton Place by locally based RML Construction, and the 472-unit Hamburg Villages apartment and town home community by Ohio-based newcomer to the market, Lifestyle Communities.

While suburban owners have not yet been able to shrug off concessions, their average vacancy rates have improved to 7.5 percent and rents remain steady at $620 per month. With only one major apartment project underway—the 216-unit Phase I of Townley Park Apartments on the north side of town just inside New Circle Road—Lexington’s suburbs are proceeding under an optimistic forecast.

Downtown may be in even better shape, with new urban multifamily development booming for the first time in decades. In this submarket, for-sale condominiums, lofts and student housing run the show. These are represented by new undertakings like the 96-unit mixed-use Main + Rose, where Lexington Real Estate Company offers units of 750 to 2,200 square feet starting in the $160s, and reports most units pre-sold as the project completes this quarter.

Also downtown is Schneider Designs’ The 500’s on Main, where 69 units with 12’ ceilings and open floor plans are selling at $300 per foot and up, and the mixed-use CenterCourt mid-rise, targeting students, professors, young professionals and baby boomers with for-sale residences ranging from $130,000 to $300,000. Additionally in the student housing sector is the 332-unit Newtown Crossings. Developed by market newcomer Edwards Companies of Ohio, this property recently became the largest multifamily deal of the year, selling for more than $57 million, or $172,000 per unit, to Austin, Texas-based American Campus Communities.

According to Sperry Van Ness research, Lexington’s total multifamily sales in 2007 closely track last year at $125.587 million and a median price of $35,994 per unit with a 7.49 percent cap. Notably, of 15 significant properties purchased this year, 12 were bought by out of state capital. This may be particularly true for Class A complexes, which are experiencing high demand as compared to some B and C properties that still remain on the market after a year or more.

The draw of Class A lies, in part, with its ability to cash flow, offsetting high land costs stemming from Lexington’s stringent zoning requirements. Meant to protect area horse farms, these regulations require city approval to subdivide land tracts of 20 acres or more and have created a veritable land shortage for developers. Though some new projects—like the regional commercial and retail taking place in Hamburg to the southeast—have managed to navigate this hurdle, many remain joined to a municipality that increasingly promotes infill, mixed-use and repositioning opportunities that they expect will help keep Lexington balanced on its new-and-improved multifamily footing.

— Todd Harrett is an advisor in the Louisville, Kentucky, office of Sperry Van Ness.

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