CITY HIGHLIGHT, SEPTEMBER 2005

LEASING ACTIVITY LEADS TO POSITIVE TRENDS IN LOUISVILLE
Commercial Kentucky, Inc.

Across the Louisville, Kentucky, commercial real estate market, absorption is rising and rates are trending positively. In every sector, beneficial leasing activity has led to increases in market trends, and in the future, real estate development will continue to feed off the dynamic activity.

Office

Positive net absorption and solid leasing activity at mid-year reflect the improving vitality of downtown Louisville and suggest further improvement throughout the balance of the year. Tenants continued to move about within the central business district, resulting in a slight increase in the Class B vacancy rate as select tenants relocated from Class B space to Class A space. The Class A market could change significantly should the Hilliard Lyons operation relocate from the Hilliard Lyons Center to PNC Plaza. Such a move would reduce the Class A vacancy rate to below 9 percent, causing some upward pressure on Class A rental rates and focusing further attention on other Class A options, such as the American Life Building and the Brown & Williamson Tower, where sizeable blocks of very desirable space currently are available either on a direct or on a sublease basis.

With respect to the suburban market, large blocks of contiguous Class A space are becoming scarce, rekindling interest in the speculative construction and build-to-suit options. Of the 344,500 square feet of space currently under construction in the suburbs, only the 240,000-square-foot Anthem build-to-suit at Eastpoint Business Center is expected to be completed during 2005. Anthem will occupy the entire facility upon completion, reducing speculative construction starts for the year to 104,500 square feet including the 72,000-square-foot Plaza III building at Hurstbourne Green.

While the Class A suburban market should continue to improve during the balance of the year, the Class B vacancy rate is expected to remain elevated as two major facilities at Blankenbaker Crossings, totaling almost 160,000 square feet, come back to the market. Both facilities, perhaps best suited for back office use, will be marketed aggressively by NTS. The elevated Class B suburban vacancy rate will be exacerbated further by 135,000 square feet of sublease space coming back to the market later this year when Anthem vacates its space in the Plainview submarket.

— Phil Scherer, president and office services advisor, Commercial Kentucky, Inc.

Retail

Louisville is enjoying dynamic activity levels in retail development, leasing and property transfers. Currently under construction in the northeast quadrant is Old Brownsboro Crossing, which has announced Lowe’s Home Improvement Warehouse and currently is trying to rezone to allow for Louisville’s first Costco. The Old Brownsboro development is located on Highway 22, which also is home to Louisville’s only lifestyle center — The Summit — that was built in 2003. The inline space leasing market also has seen tremendous activity with some rents in newer developments pushing over $30 per square foot. These spaces generally have been smaller retail buildings with excellent exposure and are being leased to national tenants such as Panera Bread and Starbucks Coffee.

Real estate investment trusts have invested significantly in the Louisville market in 2005. In early 2005, General Growth bought the Rouse holdings of Mall of St. Matthews and Oxmoor Mall, which are less than a mile apart; Weingarten has made its first acquisition in Louisville with Jefferson Marketplace on Outer Loop; and New Plan Excel Realty Trust has announced plans to acquire the Springhurst Towne Center from CBL & Associates Properties in late 2005. Small investors also have been extremely active in Louisville, paying for retail property at pricing levels not previously seen in the Louisville marketplace. The Shoppes at Forest Green is being sold for $198 per square foot, similar to other small, unanchored retail centers that are trading above $200 per square foot.

Southern Indiana, which is also in the Louisville retail marketplace, has seen a dynamic shift of retailers from Highway 131 to Veterans Parkway. Veterans Parkway has seen the large national players such as Wal-Mart, Sam’s Club, Lowe’s Home Improvement Warehouse and Target open or soon to open new store prototypes for the southern Indiana marketplace. The 131 corridor is home to two malls and will house the market’s only Bass Pro Shops, which is expected to create a great deal of activity and attention.

— Craig Collins, retail and investment services advisor, Commercial Kentucky, Inc.

Industrial

Louisville has posted substantial positive absorption since July 2004, after languishing during the first half of 2004 with negative absorption totaling almost 173,000 square feet. The turnaround has been tremendous as the metro area boasts absorption of more than 2.8 million square feet over the last four quarters.

Both local and national developers have benefited from the recent leasing activity. Bulk tenants such as Cafepress.com, MBT International, Zappos.com, Dixie Warehouse Services, Amerisource Bergen, Sonopress and Genentech either have expanded or newly located in the area. In addition, the area has benefited from an influx of companies developing their own space for manufacturing and distribution activities.

Highlights of owner-occupied space include the completion of Dri-View Distribution’s 120,000-square-foot facility in the South submarket along Interstate 65, Gordon Food Services’ 350,000-square-foot facility under construction in the Bullitt submarket, and Maverick Tube’s 400,000-square-foot facility under construction in the West/Southwest submarket.

Realizing the speculative market from 250,000 square feet and greater had no existing options, ProLogis recently broke ground on 756,000 square feet along I-65 just south of Louisville International Airport at Standiford Field. Not to be outdone, Main Street Realty has begun construction on its second facility at Louisville Metro Commerce Center, also just south of the airport, which encompasses 822,500 square feet. Capstone has joined in with a 100,000-square-foot speculative facility at Commerce Crossings, just east of I-65, and Lauth Property Group of Indianapolis now is under construction on a build-to-suit expansion of 624,000 square feet for Zappos.com at Salt River Business Park.

Developers anxious to increase rental rates to offset increasing construction costs may find it difficult due to the onslaught of projects currently under construction and those yet to be announced for completion in 2006. The outlook for future rental rates of transactions below 50,000 square feet is increasing slightly given decreasing supply.

Overall, the Louisville market is rebounding nicely and continued solid demand is expected for the balance of the year into 2006. Should existing demand hold throughout property types, continued construction is inevitable, but vacancy should be fairly stable to slightly increasing from its current overall rate of 8.3 percent.

— Stephan Gray, industrial advisor, Commercial Kentucky, Inc.

Louisville’s Apartment Market Improves According to the Integra Realty Resources Kentucky-Southern Indiana’s Louisville MSA Apartment Survey, the apartment market is healthy and improving with increased rents, as is evidenced by the consistent occupancies of 93 percent to 94 percent for the past 2 years, and rents rising at 2 percent and 3 percent for one- and two-bedroom apartments, respectively, over the prior 6 months. The average apartment rents in Jefferson County are $509 for one-bedrooms and $620 for two-bedrooms. The Paddocks, a new upscale community in Louisville, has a waiting list and cannot complete units to meet the demand. New products are commanding a 20 percent to 50 percent rent premium and meeting with success. Rent concessions have declined with less than one-third of the communities offering free rent. Concessions range from one-half month to one month free in a ratio of 30 percent to 70 percent, respectively. The areas with the highest rent increases are those with no new product available. Those with weak to declining rents are Eastern Jefferson County’s affluent areas where significant new products are being introduced. The abundance of older communities in the survey inventory tends to suppress rents. However, according to interviews with management of The Paddocks, the newest upscale community to be brought to the market, the community has a waiting list and cannot complete units to meet the demand; the monthly absorption is in the upper teens. The communities on the outerbelt, Gene Snyder Freeway, all have met with success. The Paddocks has a commanding and appealing view from Gene Snyder, which is a huge marketing advantage, as observed in many MSA’s in the region. The Paddocks’ current rents are one-bedrooms starting at $640 and two-bedrooms starting at $855. Additionally, there are 400 units under construction throughout Jefferson County. Four projects currently are in the planning stages and are predicted to bring a total of around 250 units to the market. — George Chapman, MAI, SRA, CRE, Integra Realty Resources Kentucky-Southern Indiana

©2005 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.