The office space market in Louisville’s central business district (CBD) continues to limp along with double-digit vacancy rates.
According to the most recent quarterly report from Commercial Kentucky (and parent company Cushman & Wakefield), the vacancy rate was stuck at about 18 percent at the end of the fourth quarter of 2013.
That doesn’t mean there hasn’t been activity. Most significantly, the Nucleus project at East Market and South Floyd streets has been completed and has announced its first tenant.
Atria Senior Living is going to gobble up 85,000 square feet of the 202,000-square-foot building, with an option for 30,000 more.
That’s the good news. The bad news is that Atria will vacate its 73,000 square feet of office space in the Brown & Williamson Tower.
None of this has yet moved the statistical needle. Well not entirely, anyway. When the Nucleus project was completed, it suddenly added a great deal of square footage to the market, spiking the vacancy rate.
Atria won’t move in until August, when the numbers will move the needle again.
The new B&W Tower vacancy will exacerbate a continuing problem, says Commercial Kentucky president Phil Scherer. There are simply not enough local employers looking for large blocks of space in downtown Louisville. As they move to the suburbs, or move from one suburban location to another, downtown doesn’t gain.
“The good news is, we’ve retained a growing company’s headquarters location,” Scherer says. “There were reportedly a lot of options on the table, including some that were outside of Louisville. I think that, ultimately, Atria couldn’t find any suburban buildings with enough square footage for its needs.”
And that seems to be the story for the CBD to cling to: It has lots of large office spaces and, by the way, at very affordable rates.
“The asking price for downtown landlords is about $18 a square foot,” says Scherer. “The 600 North building [on the ShelbyHurst campus] is getting rents, I believe, in the low to mid $20s.”
Still, that suburban building filled up quickly – Churchill Downs, NTS Development, Semonin Realtors, Stifel Nicolaus and BKD (the accounting firm) – which drove the optimism to build an adjoining building, 700 North, that will be completed in the second quarter. And, says Scherer, it already has its first tenant – unannounced so far, but “probably someone from within the community,” Scherer says.
“There aren’t a lot of out-of-town employers getting off the bus here and looking for office space.”
Another recent Cushman & Wakefield statistical survey, “The Southeast Office Market: 2013 Wrap-Up and 2014 Outlook,” might help explain why.
The Southeast is doing fine, and cities like Charlotte, Tampa and Nashville are thriving. There are big, new leasing transactions going on in Raleigh, Atlanta and Miami. When employers from around the country come looking for office space in what we used to call the Sun Belt, there are apparently a lot more attractive locations than Louisville.
But the report also shows why Louisville’s time might come.
Our occupancy rate of 84.9 percent is above the national average (84.7 percent) and fifth-highest in the region. Only Nashville, Charlotte, Birmingham and Raleigh-Durham are higher.
And our overall asking rents ($17.08 a square foot) are the lowest among the 12 urban markets surveyed. By comparison, in south Florida they’re asking on average almost $30 a square foot.
“It’s a great time to be a tenant here in Louisville,” says Scherer. “It’s a buyer’s market with a lot of available space.
“Our cost of living is low, our cost of occupancy is low, and our economy is improving. The mayor recently reported that Louisville has recovered all the jobs lost during the trough of the recession. That’s a good number!”
Cushman & Wakefield has concluded that, in the larger picture, businesses are becoming more concerned about sales than costs and will begin to hire more aggressively – 2014-2015 could be the best years in a decade.
More hiring might mean more bullishness about moving to larger office space. And Louisville will be waiting, with significant space, low rents and aggressive landlords willing to make all kinds of concessions.
If new projects like the recently completed Catamaran facility in Southern Indiana bring white collar jobs to the market, Louisville could become one of the target cities for out-of-town companies looking for office space.