CITY HIGHLIGHT, SEPTEMBER 2009

LOUISVILLE CITY HIGHLIGHTS
Brian Leonard, Kevin Schreiber

Louisville Industrial Market

Louisville’s economy developed through the shipping and cargo industries. The shipping tradition continues today with the UPS Worldport global air hub located at Louisville International Airport. With one of the world’s largest package delivery companies driving the economy and dominating the industrial landscape, Louisville is one of the nation’s most significant industrial real estate markets.

While the ailing economy has shaken the manufacturing industry to the core both nationally and locally, Louisville is seeing a resurgence in industrial activity thanks to emerging tech-driven firms. This is evidenced in the increasing space demand from players such as online apparel and footwear distributor Zappos.com, which has 1 million square feet of space in the market. Another major player is Electronic Arts, the global interactive entertainment software company, which has a 250,000-square-foot warehouse facility in Commerce Crossing Business Park.  Both companies are benefiting from their proximity to the UPS Worldport facility by increasing product-client delivery times.

Even though demand for warehousing and distribution facilities continues, the market has been besieged by negative absorption in the last 3 years. Development in Jefferson County surged until 2006, and then the economic landslide reversed the trend causing supply to outpace demand. The 611,000-square-foot Linen n’ Things warehouse in Bullitt County is a case in point to the effects of a lagging economy; the property has been vacant since late 2008. The same goes for Lauth’s 936,000-square-foot Building II at the Salt River Business Park in Bullitt County. Speculative development has all but dried up as a result. However, as more and more companies downsize or consolidate their operations, subleasing activity has increased and tempered vacancy rates. It is estimated that there is approximately 2 million square feet of sublease space on the market currently.

Vacancy rates are up from 8.5 percent at year-end 2008 to 10 percent and remain far from the heady days of 6.5 percent in 2006. We expect the rates to remain stable and begin to improve toward the end of 2010. 

Capital is tight and exit strategy options are sparse, so developers are remaining cautious, but we expect to see firms like Main Street Partners, who are well capitalized and less dependent on exit strategies, to remain active. In fact, Best Buy has recently signed a 600,000–square-foot build-to-suit in Cedar Grove Business Center with Main Street Partners. Other developers, such as ProLogis, have re-focused their energies on maximizing their current assets by lease renewals or attracting new tenants. With average rents at $2.92 per square foot — down from $3.05 at year-end 2008 — it is certainly a tenant’s market.

While Kentucky offers aggressive incentive packages to attract new business to the region, across the Ohio River in Clark County, Indiana, Jeffersonville is fast becoming a popular submarket. It boasts easily accessible, cheap, flat and ready-to-develop land as well as its own attractive incentives. Bullitt County — located in the opposite direction, 12 miles south of the Ohio River and easily accessed by Interstate 65 — is another popular and growing submarket. Its proximity to the expressway, accessibility and state incentives make it an attractive prospect to industrial tenants, investors and developers.

With new submarkets on the rise, plans to expand the UPS Worldport and the anticipated growth of supply chain and logistics sector, the Louisville industrial market has a positive future. It has managed to keep its head above water, and we expect it to emerge triumphant as the economy steps into recovery.

— Brian Leonard is a Vice President with Jones Lang LaSalle.

Louisville Retail Market

During the past 12 months, the Louisville retail real estate market has proven itself to be full of opportunities as well as challenges. An almost equal amount of developments were completed since the beginning of last year as were put on hold. Likewise, as many stores have opened as have closed, and as many submarkets have thrived as have struggled.  In spite of these inconsistencies, the Louisville market finds itself uniquely well-positioned for resumed retail growth as the national economy rebounds.

The northeast and east retail submarkets remain extremely stable. Within these markets there are more than 2 million square feet of retail space including some of the city’s premier shopping destinations. Managed by Bayer Properties, The Summit, the city’s only lifestyle center, is more than 98 percent leased with a tenancy that boasts the most recognizable names in lifestyle retail and fast casual dining. The landscape will continue to evolve with the completions of Phase I of Chamberlain Pointe, a mixed-use center, and North Commons, a town center development.

St. Matthews continues to be widely considered the primary retail hub of Louisville. General Growth Properties’ Mall St. Mathews and Oxmoor Center anchor this retail corridor with a combined occupancy rate of 94 percent. Liquor Barn is expanding with its fifth store under construction.

Retail has lost a great deal of its momentum in the southern and southeastern sectors of the Louisville market. Of the 800,000 square feet of new development proposed at Bardstown Road east of Interstate 265 in 2008, only one Kohl’s-anchored development appears to be moving forward in the near term. The three retail developments originally proposed for the area south of the Outer Loop are stalled. Nevertheless, Jefferson Mall and Festival at Jefferson Court remain stable properties with marginal vacancy.

One of the most significant challenges for retailers expanding in Louisville is the limited amount of new retail development. Target, Kohl’s, Liquor Barn, Walgreens and Staples have committed to new stores, while mid-size retailers move forward with their expansion plans. Kroger is actively seeking new sites and expansion opportunities throughout the market. The value-oriented restaurant segment also continues to grow.

Overall, Louisville is weathering the economic storm in a reasonable fashion. The  city’s wide and diverse employment base has insulated the market from sharp declines in consumer spending and the consequential repercussions of dramatic economic fluctuations. The result is a retail market that is positioned to capitalize on retail opportunities as economic conditions continue to improve.

— Kevin Schreiber is an associate in The Shopping Center Group’s Louisville office.

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