"While residential sales have realized an impending "bubble" bursting, evidence suggests that does not hold true in the commercial segment of the real estate market. One of the most important dynamics happening in commercial real estate today is the record level of capital flowing into commercial markets. Large institutional investors, pension funds and foreign investors are acquiring commercial real estate.
According to the National Association of Realtors (NAR), over $236 billion in commercial real estate transaction volume was recorded during the first 10 months of 2006. The majority of this represents commercial properties valued at $5 million or more, and was the result of portfolio trades, particularly in the office sector.
Nationally, the office sector is one of the best performing segments of commercial real estate. NAR forecasts that national office vacancy (including suburban and central business districts) will be approaching 12 percent by the end of 2007, but the organization is optimistic that demand in the health care sector will cause the vacancy rate to drop even further. Transaction volume for office buildings is up 31 percent from last year due in fact to job growth. However, because of rising costs of steel, cement and other building materials, there has been a slowdown in speculative construction. The national average lease price is $25.75 per square foot, incorporating central business and suburban markets.
In the industrial market, trade with foreign markets, in particular China, is still having a major impact on both coasts of the United States, especially in south Florida. NAR forecasts the demand for industrial space will continue around ports and distribution hubs. It forecasts that the vacancy rate will approach 9 to 9.5 percent and may be even lower when factoring in obsolete industrial buildings that have been retrofitted for other uses. The most expensive industrial market space is located in southern California, where rent markets range from $8 to $10 per square foot.
As far as the retail market, NAR projects that this sector is expected to be flat or slow in 2007. Nationally, vacancy rates in regional malls are up, and retail sales are down. Also, the merger of Federated Department Stores and May Company has led to product duplication. No one needs two Macy's in the same shopping center. The International Council of Shopping Centers (ICSC) recently published that national sales were only up by 3.7 percent last year. This is one segment that depends heavily on consumer confidence. Overbuilding is also leaving older retail strip centers that have not had a face-lift looking for new tenants. NAR forecasts the vacancy rate to remain in the 8 to 8.2 percent range for the next several quarters. They predict that retail and investor demand will focus on grocery-anchored strip centers.
So how does Lexington fare in comparison with the national market? Without question, Lexington's economy remains strong as it continues to be the major retail, health care and cultural center for Central and eastern Kentucky.
NAI Isaac provides an annual review of the office, retail and industrial market in Lexington and forecasts trends.
In the office sector, Lexington compares favorably with the national vacancy rate average. According to NAI Isaac, the suburban office market has a total of 4,673,416 square feet distributed over 131 Class A and Class B properties, resulting in a 15.53 percent vacancy rate. The amount of new construction in Hamburg, Beaumont and Wellington, along with the increase of office condominium products, has put pressure on existing available office space, causing a saturation point. Landlords must give more market concessions to compete for potential tenants. Unless new users absorb new construction, this vacancy rate will remain the same or increase. The total average lease rate for a suburban office building (including Class A and Class B buildings) is approximately $15.87 per square foot.
The central business district, or downtown office area, reflects a vacancy rate of 8.76 percent. This, coupled with the surge of mixed use and residential units under construction, will only benefit existing office space. There are a total of 2,525,271 square feet of downtown office space, encompassing 32 buildings (Class A and Class B office buildings) and averaging $15.33 per square foot.
Hamburg and Nicholasville Road corridors remain the dominant retail corridors and continue to grow. War Admiral Place adjacent to the Hamburg development is now the home of a Super Wal-Mart, Lowe's and Sportsman's Warehouse. Fayette Place, that runs contiguous to Fayette Mall, has expanded its retail to include Cinemark Cinemas, Old Navy, Gordmans and a variety of upscale franchised restaurants. Wal-Mart Neighborhood Market stores are entering the Lexington market, locating at the Saron Drive and Palomar strip shopping centers. According to NAI Isaac, there is a total of 10,141,565 square feet in the retail market. For example, Fayette Mall is designated as a regional mall and is comprised of 1,224,602 square feet, has zero-percent vacancy and leases at an average of $50 per square foot. In addition, there are 61 neighborhood retail centers and 14 community power centers, totaling 8,916,963 square feet. In this case, the average vacancy rate equates to 7.45 percent, below the national average, and leases for an average of $30.33 per square foot.
Although Lexington has a good central geographic location, sits on two major interstates and has a regional airport, it does not have the advantage of being a seaport, thus causing its industrial vacancy to be much higher than the national average. Lexington is not a manufacturing community and has always been service oriented. The focus on courting research and development companies has been at the forefront for the city and the University of Kentucky for sometime. The University of Kentucky's Coldstream Research Park has 400,000 square feet of new high tech office and research facilities under development and available for occupancy in 2007. Much of the smaller industrial units that are owner occupied, such as those located in the Blue Sky Industrial Park, have much higher demand than larger manufacturing/distribution facilities. According to NAI Isaac, there are a total of 7,981,983 total square feet of industrial space made up of 82 buildings. More than half of those buildings are distribution facilities. The remaining are manufacturing, high tech/R & D and bulk warehouse. Total average lease rate is $5.68 per square foot and total average vacancy rate is 22.94 percent, almost two times the national average vacancy rate.
So, how does Lexington measure up to the national scene? Diversification of employment has been our greatest asset. We don't rely heavily on one employment sector for our economy to thrive. In terms of investment, the more diverse the portfolio, the stronger the investment; I believe Lexington is a safe investment.
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