Monday Business Briefing: Here’s what to expect in four key areas in 2018

Welcome to the Jan. 1 Monday Business Briefing, your business intelligence digest from Insider Louisville. Here is what to expect in 2018 in real estate, government, health care and bourbon.

Real Estate

Experts weigh in on the real estate market outlook for 2018. | Courtesy of iStock

Experts agree that 2018 generally will be a good year for the real estate industry in Louisville.

“The commercial real estate business in Louisville is strong,” said Craig Collins, senior director of Commercial Kentucky.

The industrial real estate market (read: warehouses, distribution centers and factories) will continue to shine in 2018. “Speculation is doing well,” Collins said.

Craig Collins

A third-quarter report by CBRE echoed that. About 5.9 million square feet of industrial space was under construction at the end of the quarter, showing builders’ confidence in the market. The average asking rental rate rose to $3.57 per square feet, up from $3.44 per square feet in the first quarter of 2017, the report states.

New construction also is expected to continue in the suburban office market.

“With three Class A buildings under construction as of the end of the year, that will bring an additional 250,000 square feet of Class A space on line” in 2018, David Hardy, managing director of CBRE in Louisville, said in an email. And “rental rates for all Class A suburban buildings will continue to climb given that new buildings are priced between $25 and $27 per square foot.”

Collins said the suburban office market would continue in a positive trajectory.

“In Louisville, a suburban office market has been strong for the last couple years, I don’t really see that changing,” he said.

Downtown, Collins said, he anticipates better absorption rates of vacant office space in 2018 as new apartments come online and some employers seek to locate near where their employees live. There are several large luxury downtown apartment projects in the works or under construction, and the Louisville Downtown Partnership projects that 1,033 new units will become available for rent in 2018 and 2019, an increase of 39 percent in the number of apartments downtown.

David Hardy

Although Hardy predicted that the downtown office market would continue to have large vacant spaces because of corporate downsizing, he said “these large blocks will be attractive to certain tenants that have traditionally been located in the suburbs due to the energy and momentum in the downtown area and the competitive pricing.”

The average asking rent downtown in mid-2017 was $19.58 per square foot, according to a report from Commercial Kentucky. The average asking rate has traditionally been several dollars cheaper per square foot than suburban office rates.

Looking at the housing market, Insider recently reported that 2018 could best home 2017 sales, which is slated to beat 2016 numbers by a couple of percentage points. Dave Parks, president of the Greater Louisville Association of Realtors, said people, particularly millennials, are buying houses even though available inventory remains tight.

“It’s not like there are no homes to sell,” Parks said previously. “They are [just] selling quickly.”

As more homes are built, it could loosen up the market, making it easier for buyers to enter. The number of permits issued for new-home construction was up 19 percent January through November 2017 compared to the same period in 2016.

The Hikes Point Kmart closed in 2016. | Courtesy of Jefferson County PVA

While the real estate industry projections are mostly positive, there is one area that is still expected to struggle in 2018: retail.

“On the retail side, unfortunately, we will still see more stores closing in ’18, but the well-located stores will be reabsorb,” Collins said. That can be seen in the repurposing of two Kmarts that closed in the past couple of years as sales fell short.

The McMahan Group plans to chop up the 72,000-square-foot former Kmart in Hikes Point into small spaces and add four out lots — a 18,560-square-foot automobile service center and shop; 9,656-square-foot pharmacy; a 1,277-square-foot restaurant and a 2,382-square-foot restaurant, Insider reported. A 90,000 square-foot former Kmart in New Albany is slated to become an temperature-controlled indoor storage facility, News and Tribune reported.

Collins added: “Some small retailers will be caught up in the pressure on the retail environment.” However, stores with strong footholds in the community and those who offer an omnichannel shopping experience are more likely to survive. —Caitlin Bowling

Government

The Kentucky General Assembly begins its 2018 session on Tuesday, in which legislators will tackle two issues with far-reaching impact around the state: the public pension crisis and a two-year budget that is expected to have major cuts to state services.

Gov. Matt Bevin had guaranteed that he would call a special session last year to take up his pension legislation, which moves most government workers away from a defined benefit plan and toward a 401(k)-style plan. However, Republican consensus around his bill never formed, with Bevin and other leaders of the GOP controlled legislature now say this will be taken up and passed in the early weeks of the regular session.

The dire state of public pensions – with unfunded liabilities of at least $43 billion – will factor into the next crisis, as their increased costs are projected to create a $1 billion hole in the two-year budget legislators have to pass. Bevin has stated that this budget will “be a doozy,” as some agencies and services that have been exempt from steep cuts in recent years – such as SEEK funding for K-12 education – may have to be included on the chopping block.

The Kentucky Department of Education has already been ordered to cut $20.5 million for the rest of the current fiscal year, as the General Fund is projected to fall $156 million short of revenue projections.

The burden of increased pension costs are also expected to trickle down to local governments, as Louisville Metro Government’s pension costs are projected to rise by $38 million.

While legislators in the Republican-dominated House and Senate seek consensus on a pension bill and what services will face deep cuts in the next budget, they have indicated that there will likely not be enough time to tackle tax reform. —Joe Sonka

Health Care

Courtesy of Flickr.

The health care industry in 2018 will continue to be shaken up by mergers and acquisitions, a health care expert told Insider.

Last year began with courts rejecting mega-mergers in the insurance industry, including a proposed deal between Aetna and Humana. The year ended with the former partners announcing other ways to expand.

Humana has said its planned acquisition of an initial 40-percent stake of Kindred Healthcare’s home health division would be completed this summer, while Aetna and CVS expect their merger to be completed in the second half of the year.

The deals may face scrutiny from regulators and shareholders. A large Kindred shareholder already said he would vote against the Humana deal as currently proposed, saying the purchase price of $9 per Kindred share is “grossly inadequate.” Kindred shares closed the year at $9.57.

Meanwhile, on Jan. 1, a new “change in control” policy will take effect at Humana, which would pay executives millions of dollars if the company changed ownership in a merger or takeover. The update, which the company executed in late November, had fueled merger speculation.

This year also is expected to see the completion of KentuckyOne Health shedding most of its Louisville assets. The system, part of Denver-based Catholic Health Initiatives (which also is planning to merge), said in May that “significant challenges” in the health care industry were prompting it to sell Jewish Hospital and other Louisville facilities, which had been losing money. CHI has said that it expected to finalize the sales by summer, but it said in mid-December that it is nearing a deal to sell Jewish and other Louisville assets to New York-based hedge fund BlueMountain Capital.

David Cyganowski

The industry dynamics that are pushing both insurance companies and medical providers to increase their capabilities and/or size will remain dominant in 2018, said David Cyganowski, managing director of Skokie, Ill.-based consulting firm Kaufman Hall. Cyganowski runs the firm’s New York office and advises health care organizations nationwide, including in Louisville.

Insurers have been and are going to continue to acquire health care providers but not hospitals to try to provide patients with care that is less expensive than the care they get in hospitals, he said. Insurers will try to lower costs in part by focusing more on employing their data analytics capabilities to figure out which patients can benefit most from intervention outside of the hospital.

And that, Cyganowski said, means fewer patients will come to hospitals, which will intensify the need for hospitals and hospital systems to pool their resources.

Companies from the insurance and other sectors will continue to encroach upon the delivery of medical care, and traditional care providers are going to react to find ways to compete, he said.

These are “the new realities of health care,” Cyganowski said. “It’s really quite transformative.” Boris Ladwig

Bourbon

With six distilleries currently making bourbon, whiskey, brandy, gin, and other spirits, in Louisville and another three scheduled to open in 2018, it’s going to be a big year in “bourbonism” for the city.

While towns like Bardstown, Frankfort and Versailles still are popular spots to hit along the Kentucky Bourbon Trail, Louisville now boasts the most bourbon distilleries per city in the state.

A rising tide lifts all boats, they say, and thanks to Louisville’s rich history in bourbon and distillers who have decided to set up shop, 2018 will welcome Old Forester, Rabbit Hole and Michter’s to the cavalry that includes Stitzel-Weller (Bulleit), Copper & Kings, Evan Williams, Angel’s Envy, Kentucky Peerless and the Jim Beam Urban Stillhouse.

Let’s take a look at the three newcomers.

A rendering of the Old Forester Distillery | Courtesy of Old Forester

While Old Forester always has been distilled here in Louisville in the Shively neighborhood, parent company Brown-Forman saw the need for a state-of-the-art, one-of-a-kind visitor’s experience, and in 2014, the company announced plans for a $30 million distillery to be built along the historic Whiskey Row on Main Street.

Construction began on July 22, 2015, and the cost rose to $45 million once crews realized that much more was needed to stabilize the old buildings that sit at 117 and 119 W. Main St. Renderings of what the immaculate 60,000-square-foot facility would entail were released in 2016, and the opening date was moved from 2017 to 2018.

From what we’ve heard, 2018 will for sure be the year the Old Forester Distillery opens its doors to the public, and we are among the many who are excited to see it firsthand.

A rendering of the Rabbit Hole Distillery | Courtesy of Rabbit Hole Distilling

Just last month, Insider went on a hard-hat tour of the new Rabbit Hole Distillery in NuLu, a $15 million, 55,000-square-foot project let by founder Kaveh Zamanian and his team.

Zamanian plans to bring a little Napa Valley to Louisville with his beautiful, state-of-the-art distillery that will connect East Market and East Jefferson streets and offer a restaurant as well.

The innovative distillery will consist mostly of glass and winding steel, and on our tour, we were taken up to the top floor, 65 feet off the ground, which revealed magnificent views of the Louisville skyline and beyond. Everything will be done at this distillery from grain to glass, except the aging of barrels, which will take place in other locations throughout the state.

The Rabbit Hole team hopes to be open and distilling by Derby, with the restaurant opening later in the summer.

The Fort Nelson building sits at 801 W. Main St. | File Photo

Michter’s, which is made here in Louisville also in the Shively neighborhood, has been eyeing the historic Fort Nelson building on Main Street since 2011, and progress on the abandoned, unstable, 125-year-old building has been slow and steady.

Michter’s president Joe Magliocco practically saved the structure that was leaning about 22 degrees into Eighth Street, and now crews have been working all year to construct the more than $8 million micro-distillery/visitor’s center.

Michter’s will keep its 67,000-square-foot distillery in Shively to produce most of its bourbons and whiskeys, but the new facility also will produce a unique product, much like the one-barrel-a-day program at the Evan Williams Bourbon Experience.

In 2016, Master Distiller Pam Heilmann told Insider she hopes Michter’s will have a presence on Main Street in 2018, and by all indications, that should be on schedule.