As Al Isaac looks across the Midwest, he’s noticing a trend, one that is providing a boost to his home market of Lexington, Kentucky: Investors and developers are more interested in building and sinking their dollars in retail centers, warehouses and office towers in smaller markets.
What’s behind this? Isaac, president of Lexington-based NAI Isaac, says that the cap rates for bigger markets such as Chicago, New York City and Los Angeles, are tough for investors and developers. He says, too, that the competition in primary markets has increased, making it difficult for investors and developers to earn the profits they need.
“This is bringing more people to secondary markets,” Isaac said. “And it seems that this trend has some strength behind it.”
The trend is a good one for Lexington, too. As Isaac says, the commercial real estate market is a healthy one today in the city and its surrounding communities. Amazon has played a part in this. The online retailer has a strong presence in the entire state of Kentucky.
This isn’t surprising. Amazon needs locations in the center of the country. Lexington certainly fits this description, with Isaac saying that Amazon today has millions of square feet of warehousing throughout Kentucky.
Lexington’s prime location, its law unemployment rate, the increased attention its drawing from developers and investors and the presence of Amazon, then, has combined to provide the city with a bustling retail sector. Isaac says that the retail vacancy rate throughout the Lexington market stands at a healthy 4.7 percent today.
The most bustling areas for this sector? The Nicholasville Road corridor and the Hamburg area.
“Both of these areas are extremely busy today,” Isaac said. “There is never enough space to fit in every retailer that wants to be in those corridors.”
Lexington’s brick-and-mortar retailers, of course, are dealing with the competition from online shopping. But Isaac says that the physical retailers who are operating in Lexington successfully have already adapted. They are taking the omnichannel approach, offering both physical stores and a robust online shopping platform.
The retailers who didn’t take this approach, who didn’t adapt? Isaac says that most of them have already shut their doors and been replaced.
“A lot of the struggles we saw were from retailers who didn’t develop a strong Internet strategy,” Isaac said. “The companies that have taken the omnichannel approach, though, are still expanding. They are focusing both on their brick-and-mortar stores and building a strong online presence. These retailers are still seeking out locations in our market.”
As Isaac says, for all the press that online shopping gets, the online portion of the retail world still accounts for only 9 or 10 percent of the total retail business in the United States.
“It has an impact, definitely. But online shopping is really only hurting those companies who haven’t figured out how to do both physical stores and online shopping,” Isaac said.
What, then, makes Lexington, and especially its stronger retail corridors, such a draw to those retailers who have adapted along with the shifting preferences of consumers?
Isaac said that the city’s Nicholasville Road corridor has always been known as a strong retail center. It’s long been home to the top names in retail. The Hamburg area is a bit younger, but it, too, benefits from a large concentration of retailers and restaurants. This area is easily accessible by the interstate and draws plenty of shoppers from southern and eastern Kentucky.
“There is a synergy in those areas,” Isaac said. “There are already so many companies and retailers there already. This generates an attraction from others who want to take advantage of the activity here.”
The Summit at Fritz Farm is a good example of the buzz surrounding Lexington’s retail market. This mixed-use development at the intersection of Nicholasville Road and Man O’War Boulevard totals about 330,000 square feet of retail space and 40,000 square feet of office.
The Summit also features multifamily units above its retail space. It’s the newest and largest mixed-use development in the city, holding its grand-opening last year. And so far, the returns on this development have been strong, with restaurateurs and retailers flocking to the area. Isaac says that the apartments here, too, have attracted a steady stream of tenants.
The development has also attracted the first-ever Lexington locations for several big-name retailers. This includes Shake Shack, Brooks Brothers and men’s apparel company Bonobos.
“Lexington is simply a successful commercial real estate market today,” Isaac said. “We have an educated population. The job base is diverse. Lexington serves as a medical, retail, education and service hub for southern, central and eastern Kentucky. We generate traffic and trade for a larger area than just Lexington itself. We are simply an attractive market for retail and restaurants.”
And if a retailer that is struggling nationally does close its doors? In Lexington, it’s usually not a struggle to find a replacement for whatever vacated space that retailer leaves behind.
“There is always a good list of people who want to get into this market,” Isaac said. “The landlords aren’t always too upset about getting that space back. They know they can always sign a lease with a new retailer.”