Even though the vacancy rate in downtown Louisville will go up in the first quarter of 2017, the picture drawn of the commercial real estate market by JLL/Louisville is rosy – and looking rosier.
(For clarification, since Louisville may not yet find the name JLL/Louisville to be familiar, it’s actually the 70-year-old local real estate institution Harry K. Moore, which was acquired in May by the Chicago-based Fortune 500 commercial real estate and investment management firm JLL – originally Jones Lang LaSalle.)
The office space vacancy rate in Louisville’s Central Business District (CBD) will jump in 2017 when PNC bank will vacate PNC Plaza (500 W. Jefferson St.) and move entirely into the National City Tower (101 S. Fifth St.), where it already occupies space. This will complete the consolidation of operations that began when National City Corp. of Cleveland acquired Pittsburgh-based PNC Financial Services Group in 2009. And that will leave a hole of 150,000 square feet in the downtown office space PNC left behind.
But don’t despair, says JLL/Louisville senior vice president Doug Owen. The picture is much brighter than that looming glitch in downtown’s growth. There’s just too much going on that’s positive.
For one thing, says Owen, PNC’s relocation keeps about 300 workers in downtown Louisville. “PNC could just as easily have moved to the suburbs or, worse, to another city,” he says. “Instead, it chose to maintain and strengthen its regional headquarters commitment here.”
As Charles Denny, PNC’s regional president for Greater Louisville and Tennessee, said in June when the move was announced: “PNC is making a major investment and commitment to our customers and Louisville by bringing our downtown employees together into one tower.”
No doubt, Owen suggests, PNC saw what others are seeing: a downtown that is growing and thriving, and getting even better as highway and bridge construction is completed; as investors continue to flow into downtown with hotel and residential construction; and as landlords continue to spend money to improve tenant amenities for existing downtown office space.
“If these investors didn’t believe in Louisville’s future, you wouldn’t see them making these kinds of investments. They’d be selling these buildings and getting out of town,” he says. “This is not an industry that makes investments because someone ‘thinks something.’ It’s all well-researched and well-thought-out before significant dollars are spent.”
In June, of course, Humana reinforced the downtown trend by announcing it would move about 1,200 employees back downtown from the Blankenbaker Parkway call-center location it moved to around five years ago.
The lease there had expired, and the workers will be moved to the Humana Waterside Building (101 E. Main St.) and the Clocktower Building (123 E. Main), where Humana has 550,000 square feet and 125,000 square feet, respectively. Humana seemed to be downplaying any CBD-vs.-suburbs factors in the decision, calling it “part of the company’s routine review of all its properties.”
Owen points out that Humana’s original decision to move to Blankenbaker might have been because there wasn’t sufficient downtown space available at the time. Besides, he says, “the Blankenbaker building was a sublease and included furniture, so I could see multiple business reasons for selecting the space when they did.”
Nonetheless, the decision made another strong statement for the downtown market by Louisville’s largest employer. “Any major shift of employees from the suburbs to downtown will only serve to increase the viability of downtown,” says Owen.
But back to the PNC move: It will escalate the downtown commercial vacancy rate, which according to JLL’s figures had dropped to 11.6 percent (11.8 percent for Class A buildings) in the third quarter. At the end of 2015, it had been about 12 percent. It had been as high as 18 percent just a couple of years ago.
However, the jump should be temporary if Owen is correct that all the other downtown trends – investments in residential developments, new hotels and restaurants, large renovation and reuse projects, and growing interest among both employers and employees to be a part of a thriving urban scene – results in increased activity and maybe even some new commercial construction. Louisville hasn’t had a major commercial facility built downtown since the 35-story Aegon Building went up on West Market Street in 1993.
According to the JLL report: “While PNC’s consolidation will raise CBD vacancy, downtown momentum continues with retail, office, residential, and hospitality projects currently under construction totaling $1.2 billion in investment. Upcoming vacancy within the market should provide attractive opportunities for employers looking to bolster their downtown presence.”
One lure to looking at downtown office space is a friendly rent level. Owen surmises that in the suburbs, where the vacancy rate is still tighter – 9.6 percent in the always burgeoning Hurstbourne/Lyndon Class A market – rents naturally trend upwards.
He believes that in the new NTS/University of Louisville building just finished at Shelbyhurst, rents are in the $26-$28-per-square-foot range. Whereas downtown, rents are low enough that “even if a tenant has to pay for employees’ parking, it’s still cheaper to be downtown.”
JLL represents three downtown buildings as the leasing agent: National City Tower, 400 W. Market (the former Aegon Building) and Brown & Williamson Tower (401 S. Fourth St.). The National City Tower, roughly 96 percent occupied (Humana and the law firms Bingham Greenebaum Doll and Dinsmore & Shohl are its largest tenants), has rents in the mid-$20s per square foot. At 400 W. Market, rents are in the low-$20s for the lower floors, mid-$20s for the higher floors. Brown & Williamson rents are below $19 a square foot.
Besides the lower rents, Owen mentions increasing investment in tenant-centric amenities by some of the buildings’ owners. In the three buildings JLL represents, Owen mentions such upgrades as tenant lounges, access to fitness facilities and state-of-the-art conference centers, plus some important if less dazzling upgrades to restrooms and elevators.
“The owners of National City Tower modernized the elevators, a much more efficient system that cuts way down on wait time,” Owen points out. “It’s a huge dollar investment for something you may not necessarily be able to see, but it certainly improves the lives of the building’s tenants.”