Recently I asked several Louisville Real Estate professionals about what trends they're seeing locally and issues specific to landlords and tenants. While Louisville seems to be experiencing similar trends as others in our region, we did receive interesting feedback from a few interviewees regarding the development of downtown Louisville and its impact on the entire city.
Top Issues for Landlords
The top 3 issues for landlords continue to be 1.) financing, 2.) depreciation of property value, and 3.) tenant retention. Depreciation of property value and tenant retention can be counterproductive to one another. Depreciation of property value, due to the fact there is so much vacant space, leads landlords to be fearful of over-investing in building improvements while tenant retention can often be increased with such improvements. Therefore, it’s critical during these times for landlords to be efficient in the choices they make that relate to any physical improvements they may be considering.
In addition, landlords are facing an increasing number of concerns related to building code and ADA compliance improvements. Many times these are items that are non-negotiable and must be improved before receiving a permit for construction. This can be a hard pill to swallow since these types of improvements are not necessarily on the “wish list” for the landlord or tenant, but are a necessary part of the project to protect everyone involved.
And what about sustainability? We have noticed this is rarely in anyone’s top 5 – EXCEPT – if it is financially worth their while. Green building continues to be considered only if it can offer a cost savings to the landlord or maintain retention of desirable tenants.
Top Issues for Tenants
The two top issues for tenants are 1.) decreasing current footprints, in an effort to maximize the efficiency of a smaller lease space, and 2.) sustainable initiatives that will decrease their utilities. By decreasing footprints tenants and landlords are experiencing an unintended consequence, which is a lack of parking. While footprints decrease, the amount of people do not. Therefore, the design industry is faced with getting more people into less space. But parking lots present a challenge with this new trend, increasing the demand for parking like never before. This issue is compounded in suburban office areas because it’s less convenient for tenants to use alternative transit such as biking or mass transit.
What's Hot in Louisville
The trend of targeting urban areas will be feed by Gen Yer’s and Millennial’s, who are currently entering the workforce, and whose preferences are typically urban “walkable” neighborhoods vs. suburbs. This will create an increasing demand for urban areas to develop mixed-use spaces, more housing, and basic amenities. Retailers will soon follow. But many urban areas, such as Louisville, are faced with ‘the chicken and the egg’ scenario – retailers don’t want to settle until residents do and vis versa. Even greater, potential residents as well as retailers are expecting more involvement and incentives from state and local governments to support this movement. It is clear, an effort must be made by all parties simultaneously to fully capitalize on this opportunity. Luckily for Louisville, it appears that this is beginning to happen with some of the recent developments taking place.
Renovations remain the greatest opportunity for growth in most markets due to the amount of vacant space; therefore new construction is projected to stay slow for some time. Those that are investing in new construction are primarily focusing on large urban areas but there is an increasing trend for these investors to target smaller urban cities with smaller price tags (such as Louisville). In these areas, mixed-use space is rapidly growing due to its flexibility in the future.
Tyler Smith, with Faulkner Real Estate, noted that the area surrounding the airport will be a target for development. Its proximity to downtown and UPS will work in favor of this area’s future development, which could be a great opportunity for investors that are first to the table.
With all market trends, our interviewees were quick to point out that delivery is key, specifically the timing and location of said delivery. One interviewee noted, the mass development of multi-family housing will soon cap, and those late to join the effort will suffer. The critical piece is delivering early, while there is still a healthy level of demand.
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