CITY HIGHLIGHT, SEPTEMBER 2011

LOUISVILLE CITY HIGHLIGHTS
Aaron Johnson, Craig Collins, Powell Spears, Kevin Schreiber, Doug Owen, Phil Scherer, III.

Louisville Multifamily Market

The Louisville multifamily market has remained healthy during the first half of this year. Vacancy rates continue to fall and Class A properties are filling up, which will hopefully lead to more new construction in the coming months.

“Louisville is benefitting from healthy employment growth, bucking the nationwide trend,” says Aaron Johnson, vice president investments for Marcus & Millichap’s Louisville office. “As job seekers migrate to the area to take advantage of expanding payrolls, apartment fundamentals will continue to improve.”

Overall, Louisville will add 15,000 jobs this year, a 2.5 percent increase from last year according to Marcus & Millichap’s 2011 Apartment Research Market Outlook. Nationally, new jobs are only expected to be a 1.3 percent increase.

Craig Collins of Commercial Kentucky, Inc./Cushman & Wakefield Alliance Member says slow single-family home sales have also benefitted the multifamily market in occupancy and rents.

“Most multifamily owners have enjoyed a 3 to 7 percent price increase during the last 12 months on base rents,” Collins says.

During the second quarter of this year, vacancy fell 40 basis points to 4.9 percent, and Johnson expects it to continue to drop to 4.7 percent by the end of the year, down 60 basis points from the end of last year. The strongest submarket, Northeast Jefferson County, had vacancy of 3.6 percent during the second quarter of this year, down 40 points from the beginning of the year.

“The Northeast quadrant, which has the most Class A product, has been very active,” Collins says. “Tenants have high demand for complexes with good amenities and interiors in quality locations.”

A lack of new delivery of Class A units has made for a tight Class A rental market, Johnson says. However, during the next 6 to 12 months, he anticipates Class A developers entering Louisville, looking to take advantage of the excess demand.

For lower class product, location is key. “In all cases, location is the final arbiter. Good neighborhoods close to economic drivers, such as the downtown area or the University of Louisville, or in the path of growth, continue to command strong rental rates and high occupancies,” Johnson says.

Although there are some developments that are planned or under construction, the new units won’t come on line for a while. The next complex slated to open is the 150-unit River Breeze, which will be completed in the first quarter of 2013, but Collins says 500 to 800 more units will be announced or completed in 2012.

Johnson says across the metro approximately 2,000 units are planned, including the 400-unit Chestnut Ridge in Northeast Jefferson County. Developers are seeking land, but the best parcels are still priced at a premium.

During the next 6 to 12 months, Johnson believes more developers, investors and banks will understand that the current economic situation is the new normal, which will lead to more development.

“The multifamily market is experiencing the highest occupancy levels in the last 5 years,” says Collins. “We anticipate continued occupancy above 95 percent and growing base rents throughout the market.”

— Savannah Duncan

Louisville Industrial Market

The Louisville industrial market continued to show signs of uptick in activity as is evidenced by the continuation of the falling vacancy rate and positive absorption.

“During the past 3 years, everyone has felt the brunt of the national economy and uncertainty that persists,” says Powell Spears, managing member of Cassidy Turley’s Louisville office. “However, our industrial market has had positive net absorption for the last seven quarters. It’s not that we haven’t had some fall back, but the general story is pretty positive.”

According to Cassidy Turley’s Year End 2010 Louisville Industrial Market Report, in the Class A market, the vacancy rate at the end of last year was 12.18 percent, compared to 10.87 percent at the end of the second quarter of this year. The strongest submarkets are Bullitt County with 9.7 percent vacancy at the end of the second quarter and South/Airport with 8.5 percent vacancy.

“Bullitt County has been the golden child for the last 3 or 4 years,” Spears says. “That’s where the most of the Class A industrial product has been built.”

At the end of last year, the total Class A absorption was 1.75 million square feet. Spears says that year-to-date, absorption is right around 1 million square feet.

“We are on pace to maintain what we did last year,” Spears says. “However, last year we had some bigger spaces to fill and most of that product has been absorbed, so we’re not going to be knocking down the 300,000-square-foot chunks we had [last year].”

Cassidy Turley’s report says last year’s activity consumed all Class A vacancies in excess of 350,000 square feet, except Lauth’s 624,000-square-foot Salt River II, which was completed in 2009.

Although leasing and absorption are active, construction remains slow. In the second quarter of this year, 140,000 square feet of construction was completed compared to 797,000 square feet total last year.

“There are a couple of pad sites that are ready to go but developers still want some consistency to the market,” Spears says. “There’s still a ‘waiting for the other shoe to drop’ mentality and it would be very difficult, even in today’s pricing, to compete with existing product.”

Spears says there are a few barriers to entry that are also stalling new construction. The first is the availability of space to develop on since a river borders the northern part of Louisville. The second is there still isn’t much funding for land acquisition, so unless a developer has a build-to-suit project, it’s difficult to acquire land.

Looking ahead, Spears believes the next 6 to 12 months the Class A industrial market should continue at the same pace.

“Right now, we’re tracking a pretty steady pipeline of users,” Spears says. “It’s nothing that’s going to completely make the market healthy during the next 12 months, but we are encouraged by the activity. Hopefully at some point we’ll see some speculative construction because we’ll backfill the remaining product we have.”

—  Savannah Duncan

Louisville Retail Market

In similar fashion to the rest of the country, the Louisville retail market is rebounding from the economic slowdown of the past 2 years. Existing space is being filled with retailers from within our marketplace as well as several new retailers. The most significant short-term challenge remains the lack of new development that is stifling the growth plans of some retailers seeking to enter the market.

Several new retailers are set to open stores this year or early next year. Kentucky’s first Trader Joe’s will open in October at Shelbyville Road Plaza. Guitar Center opened in January this year in a portion of the former Linens ‘N Things with the balance leased to Nike Factory Store. Ollie’s Bargain Outlet also plans to open its first Kentucky store at Park Place Shopping Center on Dixie Highway and is looking for two additional locations in the metro trade area. Additionally, Ross Dress for Less signed a lease at Jefferson Mall and is actively seeking additional sites.

The city’s core retail trade area, St. Matthews, remains strong with only three significant boxes available, including one of the four Borders that shuttered in Louisville. Forever 21 opened a large-format store in Mall St. Matthews. Oxmoor Mall, anchored by Macy’s, Sears and Von Maur, is also stable and well occupied. Meanwhile, the St. Matthews trade area has very limited small shop space, especially with frontage to Shelbyville Road.

The Northeast market is also very strong with no anchor vacancy and little shop space available. Springhurst Town Center will add HomeGoods and Old Navy next year, filling its only box vacancies. The Prudential-owned Summit, Louisville’s only lifestyle center, will welcome the state’s first Earth Fare and Versona Accessories along with Drake’s fourth location, which will replace the former Max & Irma’s. Owned locally by the McMahon Group, Brownsboro Crossing, just east of the Summit, has more than 20 acres available for retail development.

Louisville’s Southern trade area will be home to one of the market’s only new retail developments. A 27-acre site contiguous to Jefferson Mall is slated to deliver 200,000 square feet in the fall of next year. Ross Dress for Less also signed a lease for the former Linens ‘N Things space at the Jefferson Mall entrance. The Weingarten-owned Festival at Jefferson Court replaced AJWright with T.J. Maxx and remains the dominant strip center in the trade area. Several anchor spaces remain available including a former T.J. Maxx box, a former 113,000-square foot Wal-Mart and a 28,000-square foot space adjacent to Hobby Lobby. In addition, there is a tract of approximately 20 acres available adjacent to Target.

The Dixie Highway corridor in Western Louisville is a trade area mixed with challenges and opportunity. On the northernmost end at Southland Terrace, AJWright converted to T.J. Maxx, but two anchor boxes remain available. To the south, a former Circuit City box was sold and converted to medical use. Dixie Manor, the dominant strip in the middle of the corridor, remains stable. Yet further south, under new ownership, Dixie Valley Shopping Center is undergoing renovation in an effort to reposition the center and replace the former Kroger anchor space.

New, national restaurant concepts are entering the Louisville market at about the same pace as retailers. This includes Genghis Grill, Smashburger, Panda Express and Mellow Mushroom. Likewise, several existing restaurateurs continue to expand, including Jimmy John’s, Qdoba, Cheddar’s, Dunkin’ Donuts and Chuy’s.

Overall, the Louisville retail market remains healthy but the short-term prospect for expansion will be limited due to the lack of new development. The optimistic expectation for next year is that the few remaining anchor boxes will be leased and the demand for quality small shop space will be strong.

—  Kevin Schreiber is with The Shopping Center Group’s Louisville office.

Louisville Office Market

In the Louisville Office market, the first half of this year has shown some signs of positive change compared to the end of last year. Absorption significantly increased, causing the vacancy rate to decrease more than 1 percent. However, there is still one large office building sitting empty and another new project slated for completion that will come on line in 2012, which will have a large impact on the market until they are filled.

According to Cassidy Turley’s Mid-Year Louisville Office Market Snapshot, the vacancy rate in the second quarter of this year was 15.1 percent, compared to 16.7 percent in the fourth quarter of last year. 

The Louisville office market contains two major markets, CBD and Suburban, both of which had decreasing vacancy rates from the first quarter of this year to the second quarter. According to Cushman & Wakefield’s Second Quarter Louisville Office Report, 44,782 square feet of positive absorption lead to the overall vacancy rate in the CBD for the second quarter of 12.3 percent compared to 12.8 percent in the first quarter. In the Suburban market, absorption was positive 16,458 square feet, and the overall vacancy rate dropped from 17.3 percent in the first quarter to 17.1 percent in the second quarter.

Although this shows signs of improvement, Doug Owen, co-manager of Cassidy Turley’s Louisville office, says a lot of tenants are still sitting on the sidelines.

“We’ve had some political unrest and financial distress [in the United States],” says Phil Scherer, III, president of Louisville-based Cushman & Wakefield/Commercial Kentucky. “These things tend to dampen the outlook of business that might otherwise have led to some commitments on the part of some tenants within the local market to major blocks of space to take advantage of what’s available in a relatively soft market with fairly aggressive terms being offered by landlords.”

There are several empty office spaces that continue to have a negative affect on absorption and vacancy rate. The first is the 93,000-square-foot The Sanctuary, a Class A office building located in the Eastpoint submarket that has been vacant since its completion in 2008.

“The Sancutary was built on a spec basis and none of it was leased,” Scherer says. “That is pretty reflective on the lack of activity in the marketplace during the past 2 to 3 years.”

Another large empty space is the approximately 200,000 square feet Aegon vacated in the CBD at the beginning of this year. Additionally, NRT and the University of Louisville is construction the 125,000-square-foot The 600, a Class A building in the Surburban market which is slated for completion in early 2012.

“The 600 will be a very well-located building that will be full or 90 percent leased in the next 18 months,” Owen says.

A lot of the activity in the market has been tenants moving from Class B office space to Class A space as landlords have dropped their rents, says Owen. Class B office owners have been renovating their buildings to try to entice tenants to stay. As vacancy begins to stabilize, he anticipates the end of Louisville being a tenant’s market and landlords having to compete less for tenants.

“Space continues to be affordable with new product being slightly more expensive,” Scherer says.

During the next 6 to 12 months, with Aegon’s recent departure and The 600 opening, vacancy and rental rates are expected to remain about the same.

“We will see rental rates stabilize, they won’t travel down anymore but it will be at least 18 months before they start to go back up,” Owen says. “Looking ahead, we hope to see tenants capitalize on expansions. Due to new and upgraded space, we’ll continue to see some move outs from older space.”

— Savannah Duncan

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