The office sector throughout the Midwest is steady these days, with moderate vacancy rates in most markets. But that doesn’t mean that the sector is stronger in certain areas than in others. In many of the Midwest’s biggest markets, the office sector is performing far stronger in the suburbs than in the city, despite the headlines trumpeting the return of jobs and workers to the urban centers of communities.
Just ask Richard Ashton, senior director specializing in office at Cushman & Wakefield Commercial Kentucky in Louisville. Ashton said that there is a split between the CBD and suburbs when it comes to the office market in this key Kentucky city. And that split is fairly dramatic.
The numbers back him up. As Ashton says, in the second quarter of the year, the suburban office market saw positive absorption of about 150,000 square feet. The CBD office market saw negative absorption of about 107,000 square feet.
“Unfortunately for the downtown market, that has been a trend that has been somewhat consistent over the last few quarters,” Ashton said.
And Louisville isn’t an outlier. The same kind of split is seen in markets such as St. Louis and Indianapolis, too.
Why this trend? Ashton pointed first to companies consolidating their office space. PNC Financial Services Group, for instance, consolidated its about 600 downtown Louisville workers into the 39-story National City Tower on 5th Street in downtown Louisville.
That move, though, left a lot of empty office space in the Jefferson Street office tower that PNC vacated in the CBD.
And this isn’t the only example of company consolidations leaving behind empty office space in Louisville’s CBD. Ashton said that not only does the PNC Tower have a higher vacancy rate, so does the Brown & Williamson Tower, where the occupancy rate is at about 81 percent. Ashton said the occupancy rate at another downtown office tower, 400 West Market, is just above 75 percent.
“Those are towers with significant vacancies related to their historical performances,” Ashton said. “That has impacted our downtown market.”
Ashton, though, says there is reason to expect the vacancy rate in the CBD to drop soon. First, in 2017 the Ohio River Bridges Project wrapped up. That project added two new Ohio River bridges, reworked access ramps on Interstate-65 and reconstructed the often-snarled Kennedy Interchange to make it easier for motorists to travel in and around the CBD.
Ashton also pointed to the opening of the Omni Louisville Hotel. That hotel has been a positive addition to downtown Louisville, he said. But the construction of it was disruptive to the CBD office market. That construction is now done.
The downtown market is also seeing the addition of new shops, restaurants and entertainment. Demand for housing in the downtown area is on the rise, too, Ashton said.
“That will ultimately benefit the CBD office market, too,” he said.
The suburban office market continues to thrive, Ashton said. Developers have added new suburban office space to meet the continual strong demand for it. For the second quarter, the suburban office vacancy rate in the Louisville market stood at a solid 11 percent, Ashton said. Class-A suburban office space had an even lower vacancy rate of 8.4 percent, he said.
Of course, the Louisville office market, like markets across the country, is seeing change. Most notably, companies continue to reduce the amount of office space they are providing per employee. Others are encouraging changes in the way their employees work, meaning that they won’t need quite as much office space in the future.
“In the suburbs and in the CBD, companies are encouraging some of their employees to work more often from home,” Ashton said. “They are looking to boost their efficiency when it comes to their floor plans. We see a core group of tenants who still embrace the private offices and more traditional floor plans. But the new buildings under construction are definitely touting more efficient floor plans and use of space.”