The 515 Building, in the lower left hand corner, is in a pivotal position downtown, in the same area as the Humana Building, Providian Center and PNC Tower.
The 515 Building, in the lower left hand corner, is in a pivotal position downtown, in the same area as the Humana Building, Providian Center and PNC Tower.

Maybe it was because of comments made by Ben Bernanke.

Testifying before Congress in May, the chairman of the Federal Reserve Board said the Fed could “take a step down in our pace of purchases” in the “next few meetings” if it sees continued and sustainable improvement in the economy.

Bond prices fell, 10-year Treasury yields jumped and mortgage rates rose as well – as much as 100 basis points, or 1 percent.

Locally, notes E. Phillip Scherer III, president of Commercial Kentucky Inc.,  some 30-year mortgages reportedly went up to 4.51 percent from the relatively comfortable and stable 3.35 percent rate at which they’d been sitting.

And while Bernanke stepped back from his comments a month later, saying the Fed will stick to aggressive stimulus policies and not crank up interest rates, the damage had been done. The surge in interest rates suggests not everyone believes him.

Every three months, Commercial Kentucky and its parent, Cushman & Wakefield, share with Insider Louisville an exclusive peek at their quarterly report on the state of commercial real estate in Louisville.

The most recent report, covering the second quarter of 2013, shows the overall vacancy rates in Louisville at 14.7 percent overall; 16 percent in the Central Business District; and 13.5 percent in the suburban market – especially the desirable, flourishing Hurstbourne/Eastpoint market, which has a vacancy rate of 8.9 percent.

More important are the rates in Class A office space. Those are 11.2 percent overall; 16.1 percent downtown; and 7.8 percent in Hurstbourne/Eastpoint.

If this sounds like a lot of the same old same-old, Scherer suggests the same old could get even worse, thanks to the climb in interest rates – unless Bernanke walk-back begins to gain some believers.

“Interest rates affect affordability, and affordability impacts home ownership,” Scherer notes. “Also, Kentucky’s unemployment was at about 7.9 percent in May, slightly higher than the national average but also higher than the 7.4 percent in April.

“It’s moving in the wrong direction, suggesting a business slowdown – certainly in manufacturing employment – and we know how that trickles through the economy.”

In the downtown market, it means few companies making office space moves – unless you’re Humana, which seems to be playing a game of musical chairs all by itself.

This month, the Louisville-based health insurer/health care provider purchased the eight-story building at 515 W. Market St., which it had moved out of earlier this year after its lease expired.

Statistically, that should show an improvement in Commercial Kentucky’s numbers next quarter, removing 130,000 square feet from the vacancy column.

On the other hand, [a] it’s Class B office space; and [b] it’s owner-occupied space, so it won’t enter into Commercial Kentucky’s calculations as newly absorbed downtown space, anyway.

The other shoe remaining to be dropped is where the Humana employees will come from to fill these 130,000 square feet.

“One hopes,” says Scherer, “that given the state of healthcare today, Humana is feeling more comfortable than it was a couple of years ago and will use that building to create new jobs.”

On the other hand, if Humana keeps playing musical chairs, moving employees out of other Louisville facilities and downsizing in those buildings, the net effect will be negative in Commercial Kentucky’s statistical evaluations.

But that won’t happen until the third quarter.

Haymarket-Rendering-005-600x399Also in the third quarter, the Nucleus building on East Market Street (officially the Nucleus: Kentucky’s Life Sciences and Innovation Center), may finally come into inventory. Remember, the facility – planned for an August completion – halted its plans until it could secure some New Markets Tax Credits, which it must settle before taking its certificate of occupancy.

“If they indeed settle the tax credits issue and open in the fall, those 195,000 square feet of new inventory will more than offset the reduction in inventory caused by Humana’s purchase of the 515 building,” Scherer notes.

On the other hand, if their ongoing negotiations for tenants prove successful – and Nucleus president and CEO Vickie Yates Brown recently said they’re quite promising – that will indeed help the overall picture.

The overall picture is better in the suburbs. Those numbers have long represented a much more hopeful view of Louisville’s commercial office market strength. Once again this quarter, the suburban Class A vacancy rate dropped to 7.8 percent, from 9.4 percent.

Strong leasing activity in the quarter showed 242,900 square feet of newly occupied space, though more than half of that was Humana’s taking 144,000 square feet in the Forum Office Park on North Hurstbourne Parkway.

That’s the good news.

The bad news, says Scherer, is there’s little space left in the suburbs for growth to occur. There’s certainly no 144,000-square-foot property around – until the music starts and maybe Humana vacates some of that office space for the 515 building.

“There’s a lack of large blocks of space in the suburbs – say 50,000 square feet of contiguous space – and that can’t be rectified unless there’s new construction.”

Which there isn’t.

ShelbyHurst
ShelbyHurst

The only new construction right now is the 700 North property at ShelbyHurst, which won’t be completed until 2014. Ground was just broken last month on the University of Louisville/NTS Corp. joint venture at Shelbyville Road and Hurstbourne Parkway, a companion to the 600 North building at what is now called the University of Louisville Foundation’s Office and Research Park (formerly U of L’s Shelby Campus).

But Scherer points out that the 600 North building, while now 95 percent occupied, was mostly filled by companies moving from other leased space, other than Churchill Downs, which relocated from its own facility.

If 700 North is also filled with a bunch of relocations, vacancies will show up elsewhere even as space fills up here.

The only real progress, says Scherer, would be for new tenants from out of town to begin looking at Louisville as potential headquarters space.

“I hope somebody’s having these discussions,” he said, echoing something an impassioned John Lenihan told us a couple of months ago. “I think there are opportunities, for example, to present the case to some of these companies that have opened fulfillment centers here recently.

“The costs of living and doing business here are very attractive, especially compared to California or New York. The lifestyle here compares favorably to those places, too.”

But – and this one always come up! – Scherer says that until we’re more than a connecting flight to the country’s major markets, we’ll never be able to sell ourselves effectively as a big market that company executives would want to move to.

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Steve Kaufman
Steve Kaufman has been writing professionally since the Johnson administration (Lyndon, not Andrew) on all manner of subjects, from sports to city hall to sales and marketing to running a medical practice to designing stores. His journey has taken him from Chicago to Buffalo to New York to Atlanta to Cincinnati, before landing, finally, in Louisville.

One thought on “Louisville office space: A game of musical chairs, and Humana is paying the musicians

  1. This over-roasted chestnut: “But – and this one always come up! – Scherer says that until we’re more
    than a connecting flight to the country’s major markets, we’ll never be
    able to sell ourselves effectively as a big market that company
    executives would want to move to.”

    The reality is LAX, SFO, SEA and BOS are the only major markets that require a thru or connecting flight from SDF; there is regular and multiple nonstop service to the rest of the major markets in the US.

    Whomever gets these objections must never fly…there is plenty of service to ATL and ORD that provide service to everywhere. The truth is someone in Louisville can get anywhere in about the same amount of time someone living in ATL or ORD can because SDF is much easier to get to and maneuver around. If AA/UA would upgrade to larger regional/mainline jets to ORD….then whomever bitches about service will quit bitching because they can fly FC to ORD.

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