Consistent. Steady. Resilient. Those are three key words that Craig Collins, senior director with Cushman & Wakefield Commercial Kentucky, uses to describe the Louisville commercial real estate market.
As Collins says, Louisville doesn’t experience sudden highs when it comes to real estate values. The market doesn’t get hit with surges developments. Occupancy levels tend to remain steady. At the same time, Louisville’s commercial real estate market doesn’t see big dips in demand or value when the country’s economy struggles.
That steady nature is a positive today, when the U.S. economy is struggling with persistent inflation and investors are pulling back as the Fed continues to raise its benchmark interest rate.
As Collins says, Louisville’s commercial real estate market, especially the multifamily and industrial sectors, have so far proven resilient during the post-pandemic hangover and the country’s current economic uncertainty.
And Collins doesn’t expect this to change: As he says, Louisville has consistently weathered rough markets before.
“Louisville has always been known as a steady Eddie market,” Collins said. “We don’t have big spikes up or big sikes down. We just have steady occupancy and steady construction volume. Period.”
The Louisville advantage
What factors have led to the resilient nature of Louisville’s real estate market? Collins pointed to the region’s diversified employment base.
Louisville is home to the headquarters of Humana and a massive UPS distribution center. Ford operates a major manufacturing plant here, too.
The city also boasts several national and regional headquarters of companies specializing in everything from finance to life sciences.
“The diversity of industry allows our Louisville market to be much more predictable,” Collins said. “You don’t have as much speculation as you do in a market like, say, Nashville, where you have explosive growth. You historically have not seen that much speculative building in Louisville. Louisville tends to have more programmatic development.”
As in most markets, certain sectors are performing better in Louisville than are others. One of the stars? The multifamily sector. Collins said that multifamily throughout the Louisville market continues to see high occupancy rates.
This is partly because Louisville doesn’t have much speculative multifamily development. Because of this, when new apartment developments are built, they tend to fill up quickly at solid monthly rents.
As with many other large cities, Louisville doesn’t have enough multifamily product to meet the demand for it. That, too, is keeping vacancies low and rents at solid levels.
“There is, generally, a housing shortage in Louisville,” Collins said. “And that allows multifamily developers to build new product and product absorbed in an orderly fashion. Because we have lower supply than other markets, that generates rising rents.”
How strong have apartment rents been? Collins said that in the late summer and early fall of this year, the local multifamily sector saw an average year-over-year monthly rent growth of 9%.
That rent growth has slowed recently, Collins said. Some of that is because of seasonality. As Collins says, many people don’t want to move late in the year or during the winter months. But while rent growth has slowed, absorption and occupancy levels are still strong in the Louisville market, Collins said.
Certain submarkets are seeing an especially strong multifamily market today, Collins said. He pointed to suburban Louisville and the Southern Indiana market as examples where occupancy levels are especially high.
The impact of the new Ford plant located just south of Louisville is a positive for the apartment market, too. As Collins says, those new jobs are bringing new residents, and they need a place to live.
“We anticipate that the housing market will be very strong in Louisville for the next several years because of housing demand and the new job growth we have in the community,” Collins said.
The multifamily market, and other commercial sectors, aren’t performing quite as well in downtown Louisville, though. This isn’t unusual: The downtowns of many big cities across the Midwest are struggling today thanks to the hangover of the COVID-19 pandemic, the rising number of workers who are no longer commuting to downtown offices and the fears associated with rising rates of crime.
Collins said that downtown Louisville’s office market is seeing some of its highest vacancy rates in the last 35 years. Collins, though, hopes that the arrival of a new mayor in 2023 – Louisville held its mayoral election on Nov. 8 this year – will lead to more efforts to reduce crime in downtown Louisville and ease the fears of both tourists and residents. The mayoral candidates had stressed the importance of safety during their campaigns.
“You are seeing that across the country,” Collins said. “Downtowns are struggling to come back. In Louisville, it is unusually unsafe today.
Louisville has always been a very safe community. But the current social unrest has made office tenants hesitant to return to the downtown market. We are hopeful that the new mayor will take steps to improve safety, allowing office tenants to return. Once they return, that will also benefit the apartment communities that are in the downtown market.”
Back to the office?
Are employers in Louisville bringing their workers back to the office? That’s a complicated question.
Many major employers, such as Humana, are still finalizing their back-to-the-office plans. And until the city’s biggest employers do that, downtown will seem quieter during the workday.
Collins, though, said that convention traffic has largely returned to downtown as has traffic from the city’s bourbon tourism. That is bringing energy back to downtown, he said.
“It is quieter downtown than it was pre-COVID. That is true,” Collins said. “But some activity has returned. We are not at full capacity, but we are hopeful that a new mayor will be the cheerleader to bring businesses back to downtown and provide a safe, stable living and working
Like other urban markets, Louisville is seeing a flight to quality in the office sector. Companies often need less office space today as many of their employees continue to work from home. Because they don’t need as much space, these companies are often renting higher-class office space: They can get this space without spending more money because they don’t need as much square footage.
Demand, then, for Class-A office properties is higher than it is for lower-class space, Collins said.
He points to Two Olympia, a Class-A, top-of-the-market office building in the Summit Ridge neighborhood of Louisville. Cushman & Wakefield Commercial Kentucky sold the property in 2022 for $38.7 million.
“We are seeing tenants moving toward the top of the market,” Collins said. “In Louisville, there isn’t that much of a stretch between the rent for a Class-B office building and the rent for a Class-A property. For that little bit of premium, tenants will move to the Class-A buildings.”
The suburban Louisville office market also remains stronger than the downtown market, Collins said. Rents in the suburban office market are rising, standing almost a dollar higher now than where they rested a year earlier.
Solid Retail Performance
The retail sector in Louisville is holding its own, too, Collins said, with demand especially high for grocery-anchored retail. Both investors and tenants are seeking out these retail properties, he said. And in good news, supermarket chain Publix has announced that it is opening two stores in the Louisville market.
“Commercial real estate is still an attractive investment to people, even with rising interest rates,” Collins said. “Real estate is a great investment in an inflationary environment. It’s a good place to be when you have a high rate of inflation. If the cost of reproduction is going up, the purchase today will generally be below the replacement costs tomorrow. For a long-term hold, inflationary periods are beneficial to the buyers of real estate.”
This doesn’t mean that rising interest rats aren’t having an impact on Louisville’s commercial real estate market. Some deals have been scuttled as interest rates rise. Rising rates are also putting pressure on the pricing of commercial real estate assets. This isn’t surprising: As interest absorbs more of the cash flow of investors, the less they can spend on acquiring an asset.
The next several months will probably feature even more uncertainty as the Fed continues to raise its benchmark rate. Collins, though, said that he expects investors to continue to sink their dollars into Louisville’s commercial real estate assets. After all, real estate remains one of the safest investments today.
“I do think investment sales will continue,” Collins said. “There are still quality assets that will need to be refinanced or sold, and over the next year or two years there will still be activity. But what will change is that the casual seller will most likely not sell in this environment.”