Kentucky: beneath its rural appearance, the Bluegrass State is a booming real estate market

Commercial real estate activity is vibrant in Kentucky, nearly as much so as the bluegrass that defines this Southeastern state. Between Louisville and Lexington, the office, industrial, retail, multifamily and hospitality markets are drawing attention.

The Louisville metropolitan area was named one of North America's 10 best places to live by the most recent Places Rated Almanac, which conducts a study every five years. The almanac also named greater Louisville one of five "super solid metro areas." "In fact, Louisville was the only city in the entire survey that ranked in the top half in all 10 categories," says Jon T. Seiz, managing director at Trammell Crow Co. in Louisville.

Office construction begins

"Louisville's real estate market can be characterized as healthy from an occupancy standpoint," says Seiz, adding that the CBD office market and the downtown industrial market lag behind a bit. "The lack of new construction of speculative space for the last several years in suburban office turned a soft market in the late-1980s and early-1990s to a relatively tight market today," he says.

The Louisville CBD office market suffered several setbacks during 1995. "First and foremost, the decision of Columbia/HCA to relocate to Nashville left a highly visible 108,511 sq. ft. Class-A building vacant,"Seiz says. In addition, the consolidation and relocation of Fifth Third Bank to the Brown & Williamson Tower and the reclassification of 110,000 sq. ft. of former retail space to office space added significantly to the available inventory. This, despite more than 300,000 sq. ft. of leasing activity, left the downtown market with a vacancy rate above 20%.

The suburban market, in sharp contrast, enjoyed more than 300,000 sq. ft. of new leasing activity, bringing the overall and Class-A vacancy rates to below 10%. Net absorption of more than 114,000 sq. ft. in 1995 was enough to lower the overall suburban vacancy rate to 9.5%.

During the past 18 months, the first new speculative construction in suburban Louisville since 1989 took place in the form of a two-phased, 96,000 sq. ft. office project in the far northeast St. Matthews market.

Absorption for year-end 1996 is looking very good, says Carla Cates, general manager at Heitman Kentucky Management Inc., Louisville.This year, we're looking at 185,000 sq. ft. to date in downtown alone," she says. Much of that absorption is attributable to Vencor's move to Louisville after its recent puchase of Hillhaven. "It's really having a positive effect on our market," she says of Vencor's acquisition.

Heavy leasing heats up industrial

Activity levels for industrial space in the Louisville market have remained strong during 1996. Activity in the third quarter increased significantly over second quarter results, as the area saw over 889,000 sq. ft. of leasing and sales activity compared with approximately 300,000 sq. ft. during the previous quarter. The overall vacancy rate dropped to 10.85 from 12.4% three months ago, says Susan Lennon of Commercial Kentucky Inc. in Louisville.

Lennon says 75% of the activity occurred in the Class-B sector while the balance was recorded in Class-A space, which currently boasts a vacancy rate of only 6%. "Local expansions and relocations continue to be the driving force of the area's absorption of space," she says.

The west/southwest market has become the fastest-growing submarket in recent years. Much of the market's new industry has located in the Jefferson Riverport International industrial park, Lennon says, adding that the vacancy rate there is currently 5.7%

"Recent activity suggests that strong demand will continue throughout the fourth quarter as interest rates are expected to remain stable and the local economy relatively strong," Lennon says.

Multifamily stays strong

The overall health of the multifamily market in Louisville is strong, says George Williamson, principal and broker with Williamson-mulloy Commercial Group in Louisville.The only weakness is in the Class-C properties," he says.

There is a moderate amount of new construction in the growth corridors for multifamily the Hurstbourne Lane area and Brownsboro Road region. "the multifamily market here pretty much mirrors that of the Midwest," Williamson says.

Overall, a very limited amount of new product is keeping other properties full. Additionally, some properties in the Class-B and Class-C categories are being repositioned, providing a new niche category for developers.Properties in good, convenient locations are doing well," Williamson says.

Grocery anchors drive retail

Most recent retail development in Louisville has been concentrated in free-standing operations, with users such as Home Depot, Target, Home Quarters and Kohl's building to suit, says Craig Collins, associate with Commercial Kentucky Inc.

An average of two to three grocery-anchored centers have been developed annually in Louisville, Collins says, mostly anchored by Kroger and Winn-dixie. "This kind of grocery-anchored strip development continues to drive the retail market," he says.

Retail strip center rents vary, depending on submarket, but average $10 to $18 per sq. ft., he says, with vacancy rates in non-regional centers at about 8%. Regional malls have vacancy rates slightly higher at about 11%.

Conventions keep hotel market busy

Louisville's hospitality market continues to be an excellent one as a result of significant convention business, says Collins, adding that "the city currently ranks No. 9 in convention business." The attractions are reasonable room rates and 2 million sq. ft. of air-conditioned convention space.

Louisville, like much of the country, has experienced a significant increase in the number of extended-stay hotel chains in the last year. Candlewood Suites, Extended Stay of America and Suburban Lodge all have recently opened new product in the city, he says.

Time to build in Lexington office market

Lexington and Frankfurt boast a suburban office vacancy of just 8.2%, says Al Isaac, president of Isaac Commercial Properties Inc./new America Network.It's time to start building now. Eight percent is just not enough inventory to service all our space needs," he says.

The healthiest office submarket, according to Isaac, is the southwest corridor. Here, Class-A properties gamer rates in the $12 to $16 per sq. ft. range.There's a lot of activity and interest here, but not much space," he says.

In the Lexington CBD, office space has a 13.1% vacancy rate.There's been some absorption in the CBD, but there's still a lot of uncertainty because of bank consolidations and mergers," Isaac says, adding that despite this uncertainly, relatively good deals can be achieved.The CBD is the only place to come up with a sizable amount of contiguous square footage," he says.

Lexington industrial boasts low vacancies

A 3.3% vacancy rate in Lexington's industrial market proves its tightness.We're working with at least one client to build speculative industrial space on the west side," Isaac says.And they're leasing up as we construct the buildings. There's more demand than space to fill it."

The last major building of any significance to be constructed was a 600,000 sq. ft. project by W.T. Young Co. on the west side. Completed one year ago, it quickly reached 100% occupancy, Isaac says.

"There is much need that's not being met for new space," he says. "l expect we'll have to start seeing some speculative development coming out of the ground very soon.

Lexington retail remains healthy

Lexington's retail market has been healthy for a number Of years, Isaac says. And it's extremely tight, with an overall vacancy of just 7%.

"We have a lot of national tenants interested in the area, but there's just not enough space to accommodate them," he says.That's allowing the landlords to keep the centers full and keep rents at a good rate." Isaac says that the city's restrictive zoning has made zoning changes difficult to accomplish.

Ground has not yet been broken, but leasing is 100% accomplished, on a new development on Richmond Road in southeast Lexington. Lowe's is building its first superstore in the market at a 150,000 sq. ft. center being developed by Bellerive Development Co. of Lexington. The center, which is currently unnamed, will consist of 30 acres of retail space at Beaumont Center. There, Kroger will anchor a 250,000 sq. ft. center which will commence construction in spring 1997.

Lexington struggles with hotel market

Isaac describes the hospitality market asvery stagnant," saying that this is not a particularly vibrant hotel market in terms of new transactions.We have a good supply, though," he says.

Sales of hotel properties have characterized this market, however. Wyndham Hotels recently purchased a former Hilton Hotel that was in bankruptcy and Starwood Lodging bought the French Quarter Suites as part of an insurance company liquidation and converted the property to a Doubletree Suites.

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