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Commercial real estate improving

By Mark Green

Commercial real estate brokers who sell and lease multifamily and industrial properties in Kentucky report sharply improving activity in this sector, with the retail and office space sectors lagging behind  industry but improving as well.

In 2013, there was “a noticeable rise in most markets across the United States, including secondary and tertiary markets that had slower rebounds,” according to the Commercial Real Estate Outlook report from the National Association of Realtors (NAR) in February 2014.

Kentucky commercial real estate is “pretty buoyant at the moment,” said Tim Brown of Hoagland Commercial in Louisville. “It has definitely picked up.” And the current year has gotten off to a “strong start.”

Workers with Paul Hemmer Construction erect new office space for St. Elizabeth Healthcare in Northern Kentucky in August 2013. After improving in 2013, commercial real estate activity is forecast to increase significantly in 2014 and 2015. (Paul Hemmer Construction photo)
Workers with Paul Hemmer Construction erect new office space for St. Elizabeth Healthcare in Northern Kentucky in August 2013. After improving in 2013, commercial real estate activity is forecast to increase significantly in 2014 and 2015. (Paul Hemmer Construction photo)

Improving U.S. employment and housing markets are producing better consumer confidence levels, as measured by The Conference Board and by the University of Michigan. Consumer confidence rose from an average 67 level in 2012 to 73 in 2013, but NAR forecasts a significant consumer confidence level jump to 82 this year and on to 87 in 2015.

Consumer spending propels more than two-thirds of the U.S. economy, and Americans spent more on durable goods (up 7.2 percent), automobiles (up 5.1 percent), RVs and related goods (up 10.3 percent) and household furnishings (up 6.3 percent), said the NAR report.

Increased consumer spending more than offset a collective 2.2 percent drop in government spending at all levels in 2013. Business investment improved a moderate 2.6 percent, the NAR noted, continuing to underperform corporate profits because of government budget fights and uncertainty among managers about impending regulation and fiscal policy.

International trade provided strong uplift to GDP the second half of 2013. U.S. exports were up 11.4 percent and imports 1 percent, boosting traffic for transport and warehouses while shrinking the trade deficit. Kentucky exports grew 14 percent in 2013, a third consecutive record-setting year for the commonwealth.

This stimulates commercial real estate’s industrial sector of warehouses, distribution centers and manufacturing sites but also can result in nonintuitive changes in metrics. For example, in Greater Louisville the industrial vacancy rate increased in the fourth quarter of 2013 from 4.5 percent to 5.6 percent – because nearly 1.6 million s.f. of new construction was completed and came onto the market, according to the Cushman & Wakefield Marketbeat snapshot for the market.

“2014 has the potential to become a banner year for industrial real estate activity in the Louisville Metro,” according to Cushman & Wakefield, the 97-year-old New York-based global real estate specialist. Developers see fundamentals improving and are increasing construction.

“U.S. online sales are expected to reach $370 billion by 2017, up from $231 billion in 2013,” C&W’s Louisville Marketbeat says. That 60 percent increase in sales “translate into greater demand for logistics facilities tailored to the needs of e-commerce.”

That’s good news for the UPS Worldport global shipment hub at Louisville International Airport and those serving Kentucky’s growing logistics sector, which includes the DHL global freight shipment hub at Cincinnati/Northern Kentucky International Airport as well.

“Developments in logistics and technology have driven the demand for newer and bigger warehouses and distributions centers,” C&W reports.

The Cincinnati region Marketbeat reported that speculative construction is underway and noted two large buildings totaling over 1 million s.f. in the airport area that came available in the third quarter of 2013 were leased by year’s end without dividing either space. Landlords are gaining strength in lease negotiations.

In Lexington, available industrial space has steadily declined for a decade, according to a fourth quarter 2013 Industrial Warehouse/Flex Market Study by Coleman Group. Among the properties Coleman Group Brokerage Services monitors, available space for lease has fallen from 26.1 percent in 2004 to 8.4 percent of the 5.8 million s.f. available in late 2013.

In 2013, consumer confidence improved 9.2 percent and payrolls gained 2.2 million net jobs. NAR’s forecast for consumer confidence levels in 2014 represents a 12.3 percent improvement and 2.5 percent GDP growth with the addition of another 2 to 2.5 million jobs.

Major commercial property sales (transactions of $2.5 million and up) increased 19 percent in 2013, according to the NAR. Prices increased an estimated 15 percent nationally, as investors pursued the higher yields being created by improving economic conditions.

CommercialRealEstateNAR forecasts rent growth in all categories of commercial real estate for 2014 and 2015. Multifamily housing looks the strongest with an estimated 2014 rent growth of 4.3 percent and another 3.5 percent in 2015.

The forecast is for 2.4 percent rent growth in 2014 for U.S. industrial space and 2.6 percent in 2015.

Office space rent growth for 2014 is predicted to be 2.3 percent nationally, stepping up to 3.2 percent growth in 2015.

Even in retail, where ecommerce’s expanding numbers of shopping channels allow consumers to make transactions at home, rent growth of 2 percent is forecast for 2014, increasing to 2.3 percent rent growth in 2015.

The vacancy rate for Class A space is much higher than for more affordable Class B in Lexington’s central business district, the Coleman Group Office Market Study reported. The combined vacancy rate is 14.8 percent, or a seventh of all space.

There was a 40,000 s.f. increase in Lexington CBD office space from 2012 to 2013, but since 2004 the trend line has been steadily downward, decreasing just more than 300,000 s.f. during the decade.

The CentrePointe project to redevelop a square block of downtown Lexington went into site preparation early this year after four years and should add space perhaps next year.

The C&W Office Snapshot for Louisville is very encouraging, in line with a forecast that U.S. business in 2014 will shift from a focus on controlling costs to concern about sales growth and begin to hire aggressively. Greater Louisville employment is benefiting from the Ohio River Bridges Project, hiring by Ford and GE, and growth in distribution and fulfillment in response to the tremendous growth of Internet sales across the country, C&W said.

“The (Louisville) CBD office market should improve during 2014 as more employees will be drawn downtown to capture the energy and vitality of the area and to attract a younger generation of employees who value the live, work, play environment only found in the urban landscape,” C&W forecasts.

Brown at Hoagland Commercial is not quite that ebullient, but he does say “there’s a general greater optimism about the economy.”

The downtown office towers have been struggling to find tenants lately, he said, while suburban space is faring better. Downtown space is more expensive and often has to be reconfigured for a new tenant.

“Some people just want to be in the suburbs,” Brown said. They can work closer to home, and there are lower or no parking costs. Suburban space typically is newer and does not require the infrastructure updating of older office buildings.

Mark Green is editorial director of The Lane Report. He can be reached at [email protected].