Lexington, KY - Each year, NAI Isaac, the Lexington representative of the global real estate services network NAI, produces an assessment of the local commercial real estate market. The report, highlighting activities for the second half of 2011, provides an in-depth review of the commercial real estate market, Lexington's market trends and how those trends may impact future performance.
Data on approximately 456 commercial properties, representing more than 30 million square feet of office, retail and industrial premises, was compiled and analyzed to produce the report.
With the company's permission, we offer a reprint of its year-end 2011 report:
Generally, all vacancy levels and leasing activity for each Lexington commercial market segment-office, retail and industrial-improved in 2011.
Single-tenant, high-quality investment real estate continues to be in demand. With savings earnings at an all-time low, the unpredictability of the stock market and the availability of low-interest-rate financing, investors are seeking security and returns in the relative safety of single-tenant, corporately guaranteed, leased properties.
There are some projects that were built based on the availability of financing rather than demand. Those projects continue to struggle and create misleading or skewed market vacancy levels. The available space in the more desirable corridors reflects lower vacancy than the overall market and is a better indicator of the demand for space.
There is also a demand for distressed properties that are priced below replacement cost and for owner-occupied commercial real estate in all categories. Lexington's commercial real estate market should continue to stabilize in 2012.
Market Vacancy Rates Six-Month Change
Suburban office: 1 percent decrease
Central Business District office: 1.16 percent decrease
Retail: 6.65 percent decrease
Industrial: 15.06 percent decrease
The Lexington market is attractive to a variety of industries with its broad-based economy, interstate system access and quality of life. Lexington received the No. 1 ranking by FORBES magazine in "The Best Cities for Finding a Job." Absorption increased in most market segments and speculative construction halted, which led Lexington office and retail markets to achieve stabilization in 2011.
Office
Leasing activity in both the CBD and suburban market has increased. The activity level has been partially camouflaged by some larger blocks of space hitting the sublease market. Continued economic improvement has helped reduce the vacancy rate and stabilize rents. Suburban and CBD office space is being absorbed and the amount of space being released onto the market by tenants downsizing has slowed dramatically. Suburban office rents have begun to increase, and the CBD rents have stabilized.
Investment
The Lexington-area commercial real estate investment market is segmented. The high-quality, highly occupied, well-located properties are achieving pre-recession cap rates. Well-priced distressed properties are also selling. The liquid investor with a good track record has a variety of financing options available from Lexington's banks. Larger, mid-quality, multi-tenant invest-ments that are not priced as aggressively as distressed assets are not seeing significant interest. The market's message to commercial property sellers is clear: If you want to sell your commercial property, either upgrade the property and tenants or reprice it to compete with distressed asset pricing.
Retail
Retail lease rates have seen a modest increase in well-positioned centers as well as stabilization of occupancy in unanchored and B- and C-class centers. Retail vacancies in prime areas are below 8 percent, and rents have begun to increase again. Lexington has not seen any substantial development over the past year, although there are a few projects in early planning phases. Value-oriented retailers and restaurants are the most active in the market, with continued cautious expansion from local and national retailers.
Land
City officials announced in 2011 that they will not seek expansion of the urban services boundary in the near future. City officials report the existence of 6,700-plus acres available for development inside the urban services boundary and an additional 6,000-plus acres suitable for rede-velopment. Under current law, land outside the urban services boundary can be developed for residential use only in minimum tracts of 40 acres, which effectively encourages adaptive re-use of existing sites and preserves the rural Bluegrass landscape. Thirteen of the 17 commercial-land sales over the past year were less than two acres. The largest tract that transferred during this time was 5.11 acres. Demand for land has been soft, with the most recent activity being in student housing, medical/assisted living centers and small retail sites.
Industrial
Leasing and sales activity in Lexington's industrial market gradually increased over the course of 2011. Smaller facilities, flex and R&D lead the activity. Properties near Lexington's core present attractive redevelopment opportunities with flex space in short supply. Stability is anticipated for the industrial market in 2012 with absorption increasing.
Multi-family housing
Student housing continues to be the most active area of the multifamily market, with several projects completed in 2010 and several more submitted for planning review, keeping a positive outlook for 2012. Market-rate housing has little activity outside of the projects started in pre-recession years.
Hospitality experienced an uptick in activity from previous years, with several new projects completed in 2010.