Low vacancy rates in the single digits in Kentucky’s retail real estate sector – a national trend – are likely to prompt new construction for the next few years, according to market watchers. Office space remains more plentiful, but there is improvement in that sector, too.
Kentucky bourbon’s ongoing global boom is turning downtown Louisville into a commercial real estate hot spot with distillers continuing to announce projects on Main Street to cater to tourists.
Angel’s Share Brands, Michter’s Distillery, the Evan Williams Bourbon Experience, Maker’s Mark and Brown-Forman all have opened or announced major distillery or tourism tasting room projects. There is even an expectation developing among some commercial real estate brokers that bourbon is going to do for Louisville what country music has done in Nashville 175 miles to the south on I-65.
Bourbon-driven tourism – bourbonism it is termed by Louisville leaders – is, in turn, is creating a flurry of hotel construction, especially in Louisville.
“On the whole, 2014 was a very active in both the suburban and downtown markets,” according to DTZ Harry K. Moore Commercial Real Estate’s Louisville Office Market Report. “The scarcity of large, contiguous blocks of Class A space in the suburbs remains.”
Despite vacancy rates in the low teens for Class A and B office space downtown, the report said shifting national demographic trends are benefiting most urban areas. Young professionals have a distinct preference for urban work environment, and larger companies are responding accordingly.
“Louisville’s Central Business District is in the midst of an explosion of development,” according to the DTZ Office Market Report.
It cites the announced 30-story Omni hotel-multiuse project, which will be the third tallest building downtown, and the $180 million expansion of the Louisville International Convention Center. Increasing numbers of users are looking at large blocks of space in downtown Louisville, the report states.
Meidinger Tower and the Brown and Williamson Tower have significant vacancy with lease rates of $16 to $18.50, which is $5 to $10 below top rents at nearly full National City Tower and premium space at 400 West Market. To better compete, Meidinger and B&W have added free-to-tenant fitness centers, lounges with free wi-fi and enlarged board rooms.
The vacancy rate in CBD Louisville’s 10.6 million s.f. of office space declined from 13.8 percent at the end of 2013 to 13.4 percent at the end of 2014. Vacancy levels in suburban Louisville’s 10.9 million s.f. of office space fell from 11.7 percent to 11.2 percent, with suburban Class A vacancy at 8.1 percent, according to the DTZ Harry K. Moore report.
Lexington office market cooler but ‘stable’
Lexington’s smaller office space market lags Louisville somewhat with a 14.6 percent vacancy rate, according to the Yearend 2014 Commercial Real Estate Report from Lexington-based NAI Isaac. However, Class A office space in Lexington is having more difficulty attracting tenants and has a vacancy rate of 18.2 percent.
“I look at it as stable,” said Al Isaac, president of NAI Isaac. Absorption and release rates for office space have been in rough balance lately, keeping lease rates steady.
“As a landlord you’d like a little increase, but as long as they are not decreasing,” he said.
The 12.2 million s.f. retail space market is another story, though. The year-end vacancy rate was only 4.8 percent. Fayette Mall, the lone regional mall in the Lexington market, had a microscopic 0.8 percent vacancy rate.
The Lexington retail space market has fully recovered from the recession and then some, Isaac said. There is a need for additional retail inventory.
“From the perspective of landlords and of tenants, there has to be some level of vacancies to be able to do business,” Isaac said.
Industrial space is growing tight as well, although occupancy rates are not as high as with retail.
The Market Report for Lexington surveyed 516 properties, nearly all of which are more than 30,000 s.f. The survey does not take in properties smaller than 10,000 s.f., Isaac said, because they do not constitute a significant fraction of the overall market.
“You could survey the 2,000-s.f. spaces, but it doesn’t move the needle,” he said.
While it can be easy to find empty storefronts or note a space that never seems to obtain a tenant, Isaac said, such examples are more anecdotal than reflective of the overall market.
Retail adapts to new technology
Technological innovation is now driving the retail sector through a significant evolutionary phase, said Justin Baker, principal broker and partner with TRIO Commercial Property Group, based in Louisville.
As online businesses took an ever larger piece of the sales pie during the past two decades, the belief grew that there was decreasing need for physical “bricks and mortar” retail stores. Customers could visit stores in person to examine products, then go home and make purchases through the Internet from online providers who offered lower prices because they did not have the costs of maintaining, staffing and stocking store locations. Many major national retail brands reduced their physical marketplace presence significantly, such as Sears, or went out of business, such as Circuit City. Two of Lexington’s three malls closed.
However, many of the retailers who remain as well as new operations that have entered the marketplace in recent years are adapting and finding way to turn Internet technology to their advantage, especially as mobile devices became pervasive in the past five years.
“On the retail side, the buzzword is ‘omnichanneling,’ ” Baker said. “That’s the word that your going to hear more and more. It refers to bringing all of the advantages of brick-and-mortal together with online shopping.”
Companies today are using a multichannel approach to reach customers that relies on combining “smart” technology in mobile devices with their physical presence to both market products more effectively and better satisfy customers.
“Because of this multifaceted approach, you see retailers making sure they are maximizing the use of their square footage,” Baker said. Some find they need less commercial space. “They want to make sure the space they are in is maximized, especially those that have been impacted the most” by Internet shopping.
The Internet is becoming a benefit to bricks and mortar retailers and enabling them to multiple channels of marketing – or omnichanneling. It is derived and built up from data created by individual customer interactions.
Retailers can now generate customer-specific marketing in addition to – or sometimes rather than – general marketing to inform customers that a retail store is having a sale, Baker said.
Instead, for example, a customer’s favorite sporting goods store can notify them that the Under Armour clothing he or she has previously purchased is on sale today, Baker said.
“Or Starbucks will text you as you drive by to say that your favorite drink is a dollar off today,” he said. “Omnichanneling is changing retail in a really fast way in the next few years.”
And this retail activity is likely to create demand for more store space. Baker expects an increase in commercial construction for the next several years. TRIO Commercial Property Group is seeing increasing commercial real estate activity in most of the state.
National retail occupancy rates are 93 percent, according to information presented during a commercial real estate conference Baker attended last month in Washington, D.C.
“Based on the vacancy rates, the absorption and increase in demand, I think you will see more construction than we’ve seen in awhile,” he said. “Now that demand has bounced back, some of those projects that were teed up before the recession – people are pulling out the plans and dusting them off.”
GBT Realty of Brentwood, Tenn., is investing more than $100 million on a pair of shopping centers now under construction in Louisville, the 27-acre Jefferson Commons on the Outer Loop between Preston Highway and Shepherdsville Road and the 31-acres Middletown Commons on Shelbyville Road near I-265 (Gene Snyder Freeway).
GBT also has an 8-acre retail development, Woodland Commons, under construction in north Elizabethtown on Ring Road near U.S. 31W.
Mark Green is editorial director of The Lane Report. He can be reached at [email protected]