Commercial Kentucky and parent, Cushman & Wakefield, just released their quarterly report on the Louisville business office market.
And despite all the commissions and talk and plans devoted to building up downtown, it was hard to avoid some pessimism from the fourth quarter numbers.
The overall vacancy rate in the Central Business District (CBD) increased to 13.8 percent, up from 12.3 percent in the third quarter (which was up from 10.4 percent in the second quarter of 2012).
But what is really depressing is the 15.3 percent vacancy rate in downtown’s Class A buildings, more than doubling in only six months from 6.2 percent.
If we are really going to see a revival in downtown activity, occupancy will have to grow in those showy, high-profile, high-end, skyscraper office buildings.
Not that we didn’t see this coming three months ago. The other shoe just hadn’t dropped then.
Mercer Inc. hadn’t technically left Meidinger Tower, and its lease hadn’t yet expired, but we knew it was vacating for the Aegon Center. That got reported in the fourth quarter. And the Aegon lease in its own building didn’t burn off until December, so that would affect fourth quarter vacancy rates, as well.
E. Phillip Scherer III, president of Commercial Kentucky Inc., doesn’t anticipate improvement.
“I expect the Class A vacancy rate to get even higher,” Scherer says, “barring some substantial out-of-town tenant parachuting into Louisville.”
Muddying up the downtown office space prospects is the yet-to-be-determined status of the 160,000-square-foot Nucleus Innovation Center on Market Street between Floyd and Preston streets, due to be completed in May. Originally conceived as a major medical and health research center with the University of Louisville as a partner, it hasn’t been included in Commercial Kentucky’s statistics, which only measure commercial office space.
But Scherer feels it’s being marketed differently lately as all-purpose office space. “There was some speculation a local law firm is considering the building,” he said. “That tells me, if you’re a rent-paying tenant, you’re going to be welcome there.”
On the other hand, the suburban market – by which Commercial Kentucky means everything outside the central business district – is doing pretty well. While fourth quarter leasing activity of 189,945 square feet was less than in the third quarter, leasing activity for 2012 surpassed the 2011 level by nearly 30 percent. And more than two-thirds of the suburban leasing activity for the year occurred in the Class A market.
That, says Scherer, could drive suburban rents up and landlord concessions down, which could lead to downtown becoming a better-looking prospect for tenants. But that requires a change in mentality.
“Businesses won’t move downtown just because the rents are better or the concessions are generous,” he says. “You have to buy into the idea of a thriving, functioning central urban core. We have to promote downtown as an environment unlike any other, a place for excitement, fun, networking – the whole work-live-play mindset. And that’s a job for the city, the GLI and (Louisville Downtown Development Corp.). They have to lead the charge as a way to help landlords re-tenant the space.”
But before all that, he says, we need to see some movement in the economy.
“I’ve seen fourth quarter GDP growth projections of as low as 1.2 percent, and 2013 growth of between 1.6 and 2.2 percent,” he says. “But most of that growth will likely occur in the second half of the year, and we still have some heavy lifting to be done in Washington – the deficit, spending issues, the debt ceiling. And unemployment is stubbornly holding at about 7.9 percent.”
But, the report notes, “the Louisville economy should outperform the U.S. economy as a whole through continued employment growth, particularly in the construction trades, driven by the improving housing market and major construction projects including two Ohio River bridges and the $940 million renovation of the LG&E Mill Creek Generating Station.”
Still, Scherer says, there’s not enough to give the local business community much reason to be optimistic, “and in that environment, businesses don’t expand and they don’t hire, they cut back on capital expenditures.
“Those with money on hand sit tight.”