What local experts have to say on the current office market in Louisville

What local experts have to say on the current office market in Louisville

Trends in the Louisville office market have been the minds of commercial real estate professionals, business owners and CEOs since the pandemic changed the way some workplaces operate.

And it was the topic of discussion for one of the panels at this year’s Kentucky Commercial Real Estate Conference hosted by the Kentucky Chapter of CCIM.

This year’s virtual panel was moderated by Rick Ashton, vice president of brokerage, at JLL and featured three panelists:

  • Brent Dolen, director at Cushman & Wakefield | Commercial Kentucky
  • David Hardy, managing director at CBRE
  • Tony Fluhr, senior vice president of leasing at NTS Development Co.

Here are three takeaways from the discussion.

It wasn’t one thing that hurt the Downtown office market, and there’s not one thing that will fix it.

As many of us remember, there was a combination of factors that halted the progress of Downtown Louisville.

One was the Covid-19 pandemic, which sent workers home in every market and city around the U.S. The other was the civil unrest Downtown last summer. Most protests were peaceful, but some property damage did occur, much in the form of broken windows.

Dolen said these two issues combined brought negative attention to the area, creating problems that the market still hasn’t bounced back from.

“There’s no other way around that,” Dolen said. “The combination of that one-two punch really impacted that street-level service ecosystem.”

Hardy said anecdotally he’s never seen this kind of vacancy in the Downtown market before. One thing that exacerbates the issue is big market drivers like Humana Inc. pushing back its return-to-office date. He said many smaller companies look to Humana and have followed its lead to not yet fully return to the office.

“We need more workers on the sidewalks and in the restaurants and utilizing all the service retail that’s Downtown,” Hardy said. “So, I think as Humana goes, so goes this Downtown market.”

And getting more people Downtown could one of the ways to help the area. Hardy said summer tourist brought more life to the streets of Downtown, and fringe areas like NuLu and Butchertown can leak into the Central Business District.

Dolen mirrored that sentiment saying more people visiting Downtown businesses and staying in nearby hotels will help boost momentum of the overall market.

“It’s going to be a cumulative effect of positive events, positive investments and we are really starting to see that there’s been a real nice positive accumulation of activity that’s happened over the past few months,” Dolen said.

Some examples he mentioned were the sale of the Kentucky Home Life Building in an off-market transaction for a new hospitality and multifamily development and the sale of the ArtSpace building to be turned into apartments.

The delta variant did not hit the suburban market as bad as the CBD.

After the initial stalling of the market from Covid-19, the office market began to see some momentum. Much of that progress was hindered again with the rise of the delta variant.

Fluhr said although the delta variant has affected the suburban office market, it did not face as many challenges as the CBD. One of the reasons for this is the smaller office spaces outside of Downtown.

“We do not have the issues that some of the Downtown high-rise or mid-rise towers face with getting people packed into elevators and to their various floors,” Fluhr said. “So just by the way of smaller buildings, I think the suburban market was much on pace to see a lot more workforce re-enter the workspace by Sept. 1.”

In general, Fluhr said he’s seen a push toward smaller offices in the suburban market. Deals in office spaces around a 2,000 to 4,000-square-foot range have continued to increase, while transactions in the 10,000 to 20,000-square-foot have been significantly limited.

What’s hampering the market is large users that haven’t returned to the office, something that’s more prominent Downtown. The suburban Class A vacancy rate is roughly 14% while the CBD Class A vacancy rate is nearly 22%, according to JLL’s quarter three Office Insight report.

NTS Development Co. manages or leases approximately three-and-a-half million square feet of office space. Fluhr said about 90% of that is in the suburban market and about 75% of that workforce has re-entered the office in some capacity. Out of the 100 tenants the company manages, he said every one has at least one employee working in the office.

This could be because amenities employees are looking for are typically present in suburbs. Dolen said employees like working in locations where they can interact with their coworkers, have places to eat, take care of services and more. Those types of services have yet to make a major return to the CBD, adding to the slow comeback in Downtown office space.

Although companies are reconsidering how much square footage they need, office space will never be obsolete.

It could be a while until we see the full effect of the pandemic on office space because many occupiers are re-evaluating what they need.

Ashton said JLL has seen a trend of downsizing in Downtown, and Fluhr said the suburban market likely won’t see large footprints being absorbed anytime soon.

The last year and a half has made companies reconsider how much office space they need, Hardy said. Because there’s still uncertainty surrounding returning to the office, it’s likely we haven’t seen the total negative absorption rate yet.

“My concern is that we don’t know how much negative absorption we’re going to have to deal with until we figure out who’s coming back and who’s not coming back,” Hardy said.

While it’s likely office users will adapt a more flexible hybrid schedule, there are employees that enjoy going back to the office.

“I think people are ready to get back to the office,” Fluhr said. “So many organizations have done a phenomenal job at creating a culture where people want to rub shoulders with other colleagues, grab coffee in the office and work on projects together from across the table.”