Louisville, Kentucky, has consistently been recognized as one of the best places to live in the United States. The cost of living in Louisville is approximately 6 percent below the national average. While maintaining a low cost of living, Louisville's economy has outperformed the U.S. economy in many areas, including job growth of 16.9 percent and income growth of 45.6 percent. In addition to a strong economy and low cost of living, Louisville has many other competitive advantages, such as logistics/distribution, healthcare/biomedicine, information technology and financial services, as well as traditional manufacturing.

The Greater Louisville region has added more than 50,000 net jobs, $3 billion in payroll growth and well over $1.5 billion in business investment over the last 5 years. MSA population recently exceeded 1 million, and with city and county governments merging in 2003, Louisville expects this growth to continue.

Office

The Louisville office market consists of more than 17.5 million square feet in nearly 300 buildings measuring 5,000 square feet or larger. Louisville's office market slipped quietly into a mini-recession mid-year 2000 as evidenced by a significant decline in leasing activity and net absorption during the third and fourth quarters. The sluggishness continued into the first quarter of 2001, but the market began to show some signs of recovery during the second and third quarters. Unfortunately the recovery was not sustainable as leasing activity and net absorption declined in the fourth quarter. With positive net absorption in the first half of 2002 as larger tenants took advantage of favorable market conditions, vacancy rates are expected to decline somewhat throughout the balance of the year.

The central business district (CBD) represents 51 percent of the entire market with 8.9 million square feet in more than 90 buildings. The overall CBD has been stagnant in recent years with slowed leasing activity and four consecutive quarters of negative net absorption in 2001. Despite disappointing performance in the overall CBD, the Class A market has performed well throughout this recession with the Class A vacancy rate never exceeding 7 percent and falling to 6.4 percent in the first quarter of 2002. This compares to the overall CBD vacancy rate of 15.9 percent in the first quarter of 2002. With excitement building in the CBD over a retail project called 4th Street Live planned by The Cordish Company of Baltimore, expect vacancy rates to decrease as leasing activity increases.

The Louisville CBD experienced its first significant new construction in more than a decade during the second quarter of 2002, and more projects are under construction. With 61,562 square feet of leasing activity and net absorption of 52,227 square feet, the Louisville CBD is showing signs that it may be recovering.

The suburban office market in Louisville has experienced a plethora of new construction completions in recent years averaging approximately 570,000 square feet of construction completions per year over the last 3 years. With more than 800,000 square feet coming on line in 2001, new construction caused an increase in suburban Class A vacancy rates from 9.8 percent in the first quarter of 1999 to 26 percent in the first quarter of 2002. New construction increased the Class A inventory from 2.5 million in the first quarter of 1999 to 4.25 million in the first quarter of 2002, increasing the overall suburban vacancy rate to 19.3 percent and the suburban inventory to 8.69 million square feet, nearly surpassing the inventory of the CBD. Although the suburban market vacancy rate has increased, suburban leasing activity has been very strong considering the Louisville market has been in a real estate recession since the third quarter of 2000. The suburban market has also shown signs of a recovery during the first half of 2002. As the construction pipeline continues to empty, increased leasing activity and positive net absorption should begin to reduce the unusually high Class A vacancy rate as well as the overall suburban vacancy rate.

Industrial

The Louisville industrial market consists of nearly 1,500 buildings, 10,000 square feet or larger, and totals more than 94.5 million square feet. After a record-setting year in 1999 and a very strong first half of 2000, the industrial market activity has been anemic at best.

In comparison to the office market, the industrial market has been affected more negatively by the current real estate recession. Sales and leasing declined significantly from 5.9 million square feet in 1999 to 4.5 million in 2000, 3.2 million of which came in the first 6 months of the year. Sales and leasing activity declined even further to 4.1 million in 2001. Net absorption also decreased from nearly 2.8 million square feet absorbed in 1999 to 1.5 million in 2000 after absorbing more than 1.6 million square feet in the first two quarters of 2000. Net absorption decreased dramatically in 2001 to 246,452 square feet, less than 9 percent of the 1999 level.

Despite the decline in activity and net absorption, the Louisville industrial market has experienced a plethora of new construction completions totaling more than 7.2 million square feet from 1999 through 2001. This new construction has left the Louisville industrial market poised with over 5 million square feet of high-quality distribution facilities waiting for the economy to recover. Fortunately, both leasing activity and net absorption are expected to improve throughout the calendar year; consequently, vacancy rates are expected to decline as construction activity subsides.

The explosive growth of the distribution market in Louisville, fueled in large part by the growing presence of United Parcel Service, has forced industrial development beyond the confines of Jefferson County. The shortage of available land for new industrial developments in Jefferson County has sparked the development of two new industrial parks outside the county at Cedar Grove in Bullitt County and Kingbrook in Shelby County. These two industrial parks have been successful due to convenient access to the interstate highway system and the UPS hub at Louisville International Airport. Industrial parks outside Jefferson County will continue to develop throughout 2002 and beyond because of Louisville's central location, interstate highway access, UPS and the fact that 50 percent of the nation's population is within a day's drive of Louisville.

Retail

The Louisville retail area encompasses a metropolitan statistical area of just over 1 million people. Recent retail activity has paralleled that of most cities throughout the region, with its share of big-box vacancy as well as absorption of the well-located spaces by retailers wanting to expand in the Louisville marketplace.

"Preston Highway/Outer Loop-CBL owns the 1.1 million-square-foot Jefferson Mall, which has been the benchmark retail piece of this area," says Doug Butcher of CB Richard Ellis/Nicklies in Louisville. Adjacent to the Jefferson Mall, Jacobs is developing a Target-anchored power center. Wal-Mart, which is across the street from Jefferson Mall, is in the planning and rezoning stage to develop a Wal-Mart Supercenter.

Further south on Preston Highway in the I-265 area are new Kohl's, Wal-Mart Supercenter, Lowe's Home Improvement Warehouse and Home Depot locations, Butcher continues. "Preston Highway runs into Bullitt County, which is considered part of metro Louisville. There have been numerous residential developments in this area. The town of Shepherdsville has plans for a new Kroger center development. Currently a Winn-Dixie-anchored center dominates the market."

The overall retail market in 2002 is softer than the previous 2 years because of national retail tenants closing Louisville locations and lackluster retail activity in the metropolitan area. Recently, positive job growth has been encouraging and retailers that are surviving in Louisville are also looking to expand in Louisville.

There are very distinct retail locations that provide regional, community and neighborhood draws that will continue to be successful for the long term. Many national, regional and local tenants recognize these distinct retail locations and continue to expand into these locations when availability comes up. Currently, the best large neighborhood locations available are from the closure of a several Winn-Dixie stores throughout the marketplace. Although Winn-Dixie continues to operate successfully in Louisville, the retailer has closed a number of stores above 30,000 square feet that provide opportunity for retailers to market to the neighborhoods. Additional community locations have been created by the closure of Service Merchandise, Franks Nursery, Drug Emporium, Furrow's and Kmart. This list is parallel to other cities that are comparable to Louisville's size and allows expanding tenants to backfill these locations in other cities as well as look at Louisville for expansion opportunities.

Fortunately for Louisville, there is a long list of retailers wanting to backfill the coming vacancies, as well as expand their presence in Louisville. These retailers include Barnes & Noble, Borders Books & Music, PetsMart, Staples, Marshalls, Dick's Clothing and Sporting Goods, Kohl's, Lowe's Home Improvement Warehouse and Target. These tenants are either looking in Louisville or have expanded their presence in the Louisville marketplace into better locations or locations they were not serving in the past.

Louisville and Jefferson County governments will merge into one metro government beginning in 2003. The new government, touting the CBD as a destination location, has entered into an agreement with The Cordish Company to redevelop the Galleria downtown. The Cordish Company plans to develop a themed retail center, which will have a high-energy entertainment base of retailers, creating greater activity in downtown Louisville. The Cordish Company plans to begin construction in late 2002 and finish construction sometime in late 2003, with an entertainment-style retail center known as 4th Street Live in the heart of downtown Louisville.

Louisville has recently attracted retail developers interested in redeveloping in-fill sites by bringing national tenants to these sites and doing cosmetic overhaul to create a more exiting shopping environment for the neighborhood and community shopping areas. BC Wood Companies recently acquired approximately 500,000 square feet in Louisville. The company plans to reposition the Dixie Manor and Iroquois Manor shopping centers by bringing Marshalls and Staples to these centers as new tenants.

Robert Walker is director of research services with Grubb & Ellis| Commercial Kentucky, Inc.


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