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Downtown office market outpaces suburbs in fourth quarter
John R. Karman III
Business First Staff Writer

For owners of commercial office space, whether it was a happy new year might have depended on where their property is located — downtown or in the suburbs.

The central business district enjoyed a significant increase in both leasing activity and absorption of office space as the overall vacancy rate fell to 20.1 percent from 21.3 percent during the fourth quarter, according to a market overview compiled by Commercial Kentucky Inc., a Louisville real estate brokerage.

The same could not be said for the suburbs, where the overall vacancy rate for office properties rose to 16.6 percent from 15.1 percent.

In the Class A suburban market, a string of eight consecutive quarters of declining vacancy rates was snapped. The mark stood at 14.9 percent at year’s end, up from 14.4 percent at the end of the third quarter.

Still, the suburban Class A rate was much improved from 16.9 percent, where it stood at the end of 2004.

Rick Ashton, a broker with Commercial Kentucky, remains bullish on the suburbs, which absorbed 118,633 square feet of space during 2005.

“It would be really hard to characterize the suburban (market) as bad,” he said. “It just looks less positive than downtown.”
Downtown Class A vacancy lowest since ‘02

The “real story” of 2005 for the local office market, according to Ashton, was the central business district, which had its best year of leasing activity and absorption since 1994.

The vacancy rate for Class A properties in the city’s downtown core fell from 11.1 percent at the beginning of the period to 10 percent — its lowest level since the second quarter of 2002.

The long-struggling Class B market also saw improvement during the fourth quarter, as the vacancy rate declined to 26 percent from 27.7 percent. The improvement was prompted primarily by Humana Inc., which leased large blocks of space at Waterfront Plaza at Third and Main streets, and at the Clocktower Building, located at 123 E. Main St.

The availability of quality space downtown and — to a lesser degree — new investments and amenities such as Fourth Street Live have made the city’s central core more attractive to potential tenants and created momentum, Ashton said.

“I think it will continue,” he added. “It will potentially spark increased activity and interest in new office projects downtown.”

Doug Owen, a broker and partner with the Louisville commercial real estate brokerage Harry K. Moore Co., agreed that the downtown market has remained active.

He cited coming at­­tractions, including the upscale steakhouse Cin­cinnati restaurateur Jeff Ruby is bringing to Waterfront Plaza and the 21c hotel and art museum planned for West Main Street, as “great elements” that give companies a reason to be downtown.
Spec building will test suburban market

The fourth-quarter picture for the suburban market wasn’t quite so rosy, as vacancy rates increased without any new construction completions.

In addition to the increase in the Class A market, the Class B vacancy rate jumped to 18.3 percent from 15.5 percent.

Absorption also wasn’t as strong last year as in 2004. The total year-end absorption for 2005 in the suburban market — at just over 118,000 square feet — was only about 30 percent of the 391,214 square feet absorbed in 2004.

Still, the suburban Class A vacancy rate stood at nearly 24 percent at the end of 2003, making the current mark of below 15 percent look quite impressive.

“It’s a very good trend over a two-year period,” Ashton said.

The suburban vacancy rate will get a test later in 2006, when several large speculative construction projects are slated for completion, but Ashton believes that the impact won’t be overwhelming.

“It may have slowed a little bit toward the end of 2005, but the Class A market continues to tighten,” he said.

Owen, of Harry K. Moore, also believes the coming speculative projects, such as the 150,000-square-foot Ormsby Three building planned for Forest Green, “should be well-received. Right now, it’s difficult to find a large block of space.”