CITY HIGHLIGHT, SEPTEMBER 2007

LOUISVILLE CITY HIGHLIGHTS
Aaron Johnson, Steve Gray and Phil Scherer

Louisville Multifamily Market

The Louisville apartment market will remain healthy this year, with demand underpinned by tightening lending standards and steady regional economic expansion. While the metro has experienced a moderate shift in hiring in recent years towards the higher-paying business and health services industries, near-term regional economic expansion will likely center on the trade, transportation and utilities sector. United Parcel Services is expected to add 5,000 positions to its local workforce over the next five years as the result of its Worldport expansion, with much of the growth centered near the airport and the Interstate 65 corridor south to Elizabethtown. In the long-term, most sectors of the economy are expected to contribute to the steady growth of the Louisville economy, although there are some concerns about the ongoing restructuring efforts affecting the auto industry.

Similar to many mid-markets, the single-family housing market in Louisville is placing pressure on renter demand as the median home price is relatively affordable for local residents. Despite high affordability, recent pricing trends in the market suggest that the national housing slump has impacted apartment demand in Louisville as well. The median price of a single-family home is off its peak of $139,000 in the third quarter of 2006 by 2 percent. Furthermore, recent and ongoing changes in the capital markets are certain to have lasting effects on the single-family housing market. The fallout of the subprime mortgage industry will continue to cause lenders to tighten standards. As a result, more people will be squeezed in to the rental market, further supporting supplemental demand for Louisville apartments.

As short and long-term indicators point to rising renter demand, estimates point to a decline in new supply. Construction is expected to slow in 2007 after nearly 600 units were built last year. By year end, developers are expected to complete approximately 400 units, below the five-year metro average of 520 units. Approximately 90 percent of the deliveries are expected in the second half of the year with construction concentrated in the Northeast Jefferson County submarket.

Despite a significant amount of rental stock delivered over the past year, vacancy has declined 110 basis points to 7.4 percent. Class A properties have improved the most over this time as vacancy has dropped over 130 basis points to 8 percent. The Southwest Jefferson County submarket had the biggest decline as vacancy fell 440 basis points to 3.2 percent, the lowest in the metro. With the bulk of this year’s construction expected in the second half of the year, we expect vacancy to rise 70 basis points by year end to 8.1 percent.

Over the past year, effective rents rose 3.4 percent, the highest increase over the past 10 years, to $582 per month. Over this time the Northeast Jefferson County submarket had the highest rent growth at 4 percent. Despite an expected slowdown by year-end, rent growth is still expected to remain near the highest levels in recent history at 2.8 percent.

Out-of-state investors have been increasing activity in the metro in recent years, attracted by cap rates that are nearly 200 basis points above the national average. As a result, the median price per unit of $55,600 is up 38 percent over the past 12 months. This sharp increase can be attributed to the high-number of Class A properties selling over this time period. Looking forward, while long term market fundamentals remain stable and prices in Louisville are relatively affordable, the recent uncertainty in the credit markets and higher borrowing costs may cause a slowdown in the investment market in the near term.

— Aaron Johnson is a senior associate in the Louisville office of Marcus & Millichap.

Louisville Industrial Market

Despite developer enthusiasm, the Louisville industrial market has taken a breather from the torrid pace experienced during the fourth quarter of 2006. Although industrial sales and leasing activity of 1.2 million square feet (msf) during the second quarter boosted the mid-year total to 2.3 msf, activity remains well behind last year’s total sales and leasing activity of 7.7 msf.  Likewise, overall industrial absorption year-to-date stands at only 498,434 square feet (sf), barely 25% of the mid-year 2006 total.  Strong sales and leasing activity in 2006 resulted in net absorption of 3.8 million square feet, well above absorption in recent years which has averaged 2 million square feet.  Consequently, 2007 began with a relatively low vacancy rate of 6.9 percent. 

Significant recent transactions include Capstone Development’s lease of 500,000 square feet to Solectron in the South submarket, and their lease at River Ridge to computer repair company, ASUS.  ProLogis leased its 483,000 square foot Park 65 building in the Bullitt County submarket to Konica Minolta and UPS Supply Chain Solutions.  In the South submarket recent transactions include Globalport’s 240,000 square foot lease to Brightpoint and 120,000 square foot lease to HD Smith, a wholesale pharmaceutical distributor.  In the Shelby County submarket, Neff Packaging leased 122,000 square feet.

Despite a slow start to the year developer interest remains strong.  Recent speculative bulk space completions include Riverport Commerce Center’s 240,000 square foot facility in the West/Southwest submarket and ING Clarion’s completion of 415,400 square foot building in the South submarket.  Buildings under construction include Global Port Business Park’s 401,600 square foot facility in the South submarket, Cross Dock Development’s 404,039 square foot facility in the Bullitt County submarket and ProLogis’ Park Cedar Grove building of 484,000 square feet.

Interstate 65 continues to attract developer interest.  In the past, the focus along the Interstate 65 corridor has been in Bullitt County, just south of Louisville International Airport and the UPS Worldport.  Recently, however, speculative development has crossed the Ohio River into Southern Indiana where River Ridge Commerce Center has offered an alternative to bustling Bullitt County.  Two planned Ohio River bridges, one near downtown Louisville and the other connecting the “outer belts” (Interstate 265) of both communities have focused a great deal of attention on southern Indiana development.  To date, locally owned Capstone Realty is the only developer to actually construct speculative bulk space in the area although a number of other developers are contemplating land acquisition and speculative construction.  

Available inventory at competitive prices is critical to Louisville Metro’s continued success as a distribution hub.  As available land for development becomes more difficult to locate and develop, all four points of the map should see increased activity.  Not only should southern Indiana and areas south of Louisville Metro benefit, but also areas just east and west as well.  Interstates 71 and 64 also pass through the community enabling quick access to and from UPS Worldport and Louisville International Airport.

— Steve Gray is an industrial broker with Louisville, Kentucky-based Commercial Kentucky, Inc.

Louisville Office Market

The excitement is building as construction is set to begin on Louisville’s new $252 million, 22,000-seat multi-use downtown sports arena, which is planned at Second and Main Streets. A talented project team, assembled by the Louisville Arena Authority includes lead architect HOK Sport, working in conjunction with PC Sports LLC, the program manager for the facility, and M.A. Mortenson Co. who will be acting as Construction Manager. The new arena is scheduled to open in fall 2010, adding measurably to the energy and vitality of Louisville’s central business district. Concurrently, plans continue to percolate for Museum Plaza, the 62-story mixed-use skyscraper planned for Louisville’s ever-changing waterfront. The $465 million project will feature 270,000 square feet of class A office space, a 250-room Westin Hotel, 98 luxury residential condominiums, 78 studio loft condominiums and a three story “island” starting at the 24th floor that will house a new contemporary arts museum as well as 20,000 square feet of premier retail space. In addition, the University of Louisville’s Master of Fine Arts program studios will be housed on three floors which will include a glass shop and fine arts gallery. The project is scheduled for completion in 2011.

With more than $700 million in new downtown development soon to be underway, the stage has been set for accelerated activity in the downtown office market. At mid-year, CBD leasing activity stands at an impressive 406,312 square feet, with overall positive net absorption of 188,170 square feet. Larger blocks of class A space have become scarce as the overall class A vacancy declined to 9 percent while the direct class A vacancy rate fell to 7 percent at mid-year. Both leasing activity and net absorption are expected to continue throughout the balance of the year with the relocation of Humana, Inc. from the 108,511-square -oot Riverview Square to Waterfront Plaza in the fall. The anticipated conversion of the Hilliard Lyons Center, located at 4th and Muhammad Ali, into a 250-room Embassy Suites Hotel will further reduce the Class B vacancy rate in the CBD resulting in some upward pressure on both Class A and Class B rental rates.

The Louisville suburban office market experienced 476,820 square feet of leasing activity at mid-year and 272,576 square feet of positive net absorption. The balance of this year will likely see increased leasing activity and absorption as the result of several recently announced transactions including a new headquarters location for PharMerica Corp., a new $2 billion Fortune 1,000 pharmacy business, which will occupy a 93,000-square-foot facility at 1901 Campus Place in Jeffersontown, formerly occupied by Anthem Blue Cross and Blue Shield of Kentucky, Inc. Trover Solutions has also announced plans to expand into an 80,000-square-foot facility at 9390 Bunsen Parkway, the site of a former Sears call center. The overall suburban vacancy rate stands at 16.2 percent, the lowest level since the third quarter of 2005, while the class A vacancy rate stands at 15.4 percent. With limited new construction underway, suburban vacancy rates are expected to decline throughout the balance of 2007.

— Phil Scherer is the president of the Louisville, Kentucky-based Commercial Kentucky.


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