There isn’t a single major commercial real estate market in the United States that hasn’t been impacted by the COVID-19 pandemic and the economic uncertainty it has caused. Louisville is no exception. But here’s a bit of good news: The CRE professionals working the Louisville market say that commercial sales, leases and new construction are all still happening.
Why? Demand is still high for commercial real estate in Louisville. Even during the pandemic, this Kentucky city remains a solid market, one that hasn’t been overbuilt and one that still boasts a top location in the middle of the country, a busy UPS hub and multifamily and industrial markets that continue to thrive.
That was the good news from the 5th annual Louisville Commercial Real Estate Summit held earlier this month by REjournals.com and Midwest Real Estate News. And though this was a Louisville summit like no other – the event was held virtually because of the pandemic – the message remained a positive one: Yes, Louisville faces a challenge because of COVID-19. But the city and its surrounding communities are poised to come out the other side of the pandemic as an even stronger market.
Doug Owen, senior vice president with the Louisville office of JLL, said that before the pandemic hit, the Louisville office market saw vacancy rates fall in both its downtown and suburban markets for the last five years straight.
Vacancy rates in the office sector did creep up slightly at the end of last year, Owen said, mostly because of corporate resizings.
“We did not see a downturn at the end of last year. We actually saw an increase in headcount in the downtown office market at the end of last year,” Owen said. “What we did see was a reduction in the amount of space companies were using per person. That is a sign of the times as corporations choose to use space differently.”
Owen said that the pandemic has slowed the office sector in Louisville, both downtown and suburban. But this is just a slowdown, not a crash, Owen said.
“There is still demand out there,” Owen said. “We’ve seen deals put on hold, but we are not seeing deals that are going away. People are taking a pause to reevaluate their market needs and office needs. We fully the office market to pick back up.”
Seth Edens, vice president for healthcare real estate with TRIO Commercial Property Group, said that the healthcare market in Louisville remains strong, even during the pandemic.
“Medical in general is always going to be busy,” Edens said. “There is always a need for healthcare. Some of these doctors groups are starting to fill up a lot of space. Institutional groups are coming in and buying some of the larger independent practices.”
Edens said that the larger corporate medical providers are also in growth mode. These systems, already large, are looking to get even bigger, he said.
“The healthcare market was a little slow from March through June because the focus was on COVID activities,” Edens said. “But since July, the market has been as busy as ever. Healthcare providers still need space, even today.”
Taylor Thompson, vice president with Louisville’s PRG Commercial Advisors, said that retail, of course, suffered the biggest hit from shutdowns and shelter-in-place orders. These same retailers are now struggling with restricted capacity requirements.
Retailers, though, have gotten creative, Thompson said. Restaurants, for example, focused on boosting their curbside pick-up and delivery businesses.
And it’s not like retailers weren’t facing, and meeting, challenges before the pandemic hit. The rise of ecommerce has been a boon for industrial, but a struggle for brick-and-mortar retailers. Those retailers who are thriving today have adapted to the changing shopping habits of consumers, offering them ways to shop both online and in person. Others have focused on providing experiences that consumers can’t get online.
“The growth of ecommerce has exposed retailers to different customers,” Thompson said. “They have been forced to adapt to a new way of shopping and a new way of interacting with their customers. Some retail deals have fallen through since the pandemic started. But at the same time, many retailers and restaurants are opening back up and seeing strong business.”
Robert Walker, senior director with Cushman & Wakefield Commercial Kentucky, said that one commercial sector that continues to thrive even during the pandemic is industrial. Walker said that the industrial market in Louisville did slow briefly when the pandemic first hit. But activity began to climb quickly, within two weeks, Walker said.
Walker said that the Louisville market had 5.2 million square feet of bulk industrial under construction at the end of 2019. Most of that new construction was speculative. The bulk industrial market had a vacancy rate of 6.9 percent in the second quarter.
“Considering that industrial had seen so much growth, so much new spec construction, that vacancy rate remains relatively low,” Walker said.
Walker said that he expects ecommerce activity, which has provided an impressive boost to the industrial market already, to only continue to grow. The pandemic has only accelerated the country’s move toward online shopping, he said, with many consumers preferring the safety of buying items online instead of shopping in physical stores.
“I think COVID-19 is only going to accelerate people’s habits,” Walker said. “You are going to see ecommerce activity accelerated. You are already seeing how active Amazon is. Everyone, it seems, is pushing toward ecommerce.”
But what big changes will hit the Louisville market as a result of the COVID-19 pandemic? What will 2021 and beyond look like?
The office sector faces plenty of unknowns as companies determine how much space they’ll need for their employees, how many workers will remain at home and whether they want to set up shop in urban areas or head to the wider open spaces of the suburbs.
Owen said that it is still too early to say what changes are coming to the office sector.
“In the surveys we’ve done of companies, it seems that remote working is at its peak,” Owen said. “Working from home is working fine. But now companies are ready to move forward. Employees want to get back into the office. They feel that the seasoned employees have lost the ability to collaborate. New employees are simply losing the knowledge they would gain from other employees. Remote working from home worked fine in March and peaked in June. Now companies are ready to get back to normal from the COVID side.”
Edens said that the presidential election is a key one, too, for the future of commercial real estate.
“Both candidates have wildly different views on the future of corporations, taxes and real estate,” Edens said. “They have different views on what you should be able to write off and what you can’t. This will be a very impactful election as far as real estate goes. That is something to keep our eye on.”
Taylor said that COVID is already causing restaurant operators to rethink some of their business plans. Restaurants are looking to take more advantage of their outdoor space as more diners consider outdoor eating to be a safer experience. Others are focusing on the quick-service side and looking to downsize their interior spaces.
“The quick-service restaurants are realizing that they don’t need as much in-store seating,” Taylor said. “That was a trend prior to COVID, but it is one that has been accelerated by recent events.”
Walker predicted that 2021 will be another big year for Louisville’s industrial market. He pointed to the large spec industrial buildings that have opened in the Louisville market recently. Tenants are filling those spaces at a steady pace, he said.
“The question was whether we could absorb those spaces,” Walker said. “I think we’ve answered that question. With the big spec buildings that have come online, they have attracted attention. There is a lot of activity with these new buildings.”