It’s the commercial real estate buzzword that Phil Scherer thinks might likely be the future of downtown Louisville.
“If someone came in over the weekend and tore down a bunch of office buildings that were only only 50 or 60 percent occupied, that would be great for our statistics,” said the president of Commercial Kentucky, a Louisville-based brokerage, management and real estate market research firm, referring to the quarterly reports on commercial real estate tenancy and vacancy his company shares with us.
“But of course nobody suggests that would be a good thing for the city.”
What would be a good thing for the city is what’s happening or about to be happening or rumored to be happening:
• Repurposing existing facilities, such as Al J. Schneider Co. CEO Mary Moseley turning the historic Stewart’s Dry Goods building/Hilliard Lyons Center at Fourth Street and Muhammad Ali into an Embassy Suites hotel, with 100,000 square feet of office space remaining, plus restaurant and retail space;
• Baltimore-based developer The Cordish Cos.’ tentative plan to build a 600-room, four-star hotel and retail development on the old Louisville Water Co. headquarters site on Third Street.
• Hints about turning a couple of old downtown buildings such as the Republic Bank Building on Fifth and Broadway and the Fincastle Building at Third Street and Broadway into residential spaces.
“There’s also interest in the Starks Building as a mixed-use facility,” Scherer said, “where you retain some of the office space, convert some to residential and the balance would be the retail mix up through the Starks core.”
Is that in fact happening? I’ve heard things, he said.
“Look, when residential rents were 75 or 80 cents per square foot per month, you couldn’t make the numbers work for a major overhaul and transformation that size,” Scherer said. “But if you redo a building and offer a new product in a historic shell at $1.40 a square foot, now you can really make it work.”
And a number of developers recently have looked at the burgeoning demand for rental properties downtown – especially the 500-to-800-square-foot units that would be pretty easy to do in the Starks Building.
And, after all, doesn’t it make less sense to build something from the ground up than to take over a terrific building with great bones – especially in a fantastic location? Where are you going to find vacant land, downtown or anywhere, that’s as central as Fourth and Muhammad Ali?
“These buildings still have remaining useful life,” Scherer says. “Not just remaining useful life as office buildings.”
Even the announced move of Atria Senior Living from the Brown & Williamson Tower a few blocks east to the new Nucleus building at Market and Floyd has a silver lining, says Scherer. Though, as with a lot of these relocations, it’s a good news/bad news story.
“You’d like to see growth within the marketplace without every transaction having a winner and a loser,” he says. “So now you have 300,000 square feet of space that has to be re-tenanted, and you just don’t re-tenant that amount of space 5,000 square feet at a time. We need large users at a time when there just aren’t a lot of large users in the market.”
Despite some naysayers (I’m thinking he was talking about Insider Louisville), “We have retained and expanded a major corporate presence in this community and, all things remaining equal, that’s a major victory for the city and a reason to celebrate,” Scherer says. “Sometimes, you just have to focus on the good news. Don’t always look under the sheets.”
The new Hilton Garden Inn project adjacent to The Henry Clay Building on a vacant lot on Fourth and Chestnut streets is good news, though it neither fills any office space vacancy nor adaptively reuses existing space.
But it adds to the downtown dynamics and, as we said a week or so ago, it adds to the city’s sleeping room inventory, which helps bring convention business to the city, which raises all boats.
Adaptive reuse! “It doesn’t add to the occupancy numbers, but it does reduce inventory which reduces the vacancy percentages,” says Scherer, whose company measures the ebbs and flows of Louisville’s commercial office space every quarter.
“It also makes downtown commercial space more productive, which brings more people into downtown, which helps other business and is good for the city’s tax base.”
Also, less supply has driven more demand at least since John Locke wrote, in 1691, “Some Considerations on the Consequences of the Lowering of Interest and the Raising of the Value of Money.” (Thanks, Wikipedia.)
And you thought all Locke did was invent democracy.