With help from low interest rates and a strengthening economy, the Lexington commercial real estate market experienced another robust and steady year in 2017.
Vacancy rates remain low across multiple sectors of the economy, with industrial vacancy at 3.26 percent and retail vacancy at 5.83 percent, according to the most recent Mid-Year 2017 Commercial Real Estate Market Report issued by NAI Isaac Commercial Properties. The suburban office vacancy rate stands at 12.07 percent, while the vacancy rate for office space in the central business district is slightly lower, at 11.32 percent.
“We’ve seen positive absorption in all sectors,” said Al Isaac, president of NAI Isaac Commercial Properties.
Commercial property sales volumes for January through November in 2017 have already exceeded the average yearly volume for the five-year period from 2012 through 2016 in multiple sectors, including office, industrial, hospitality/recreation and multi-family, according to data compiled by the office of David O’Neill, the Fayette County property valuation administrator. While total dollar values for existing sales in most sectors for the first 11 months of 2017 have not yet topped the five-year averages, high-profile new developments such as the Summit at Fritz Farm, which are not reflected in the existing sales numbers, have brought new businesses to the market and reinforced a generally robust commercial year.
“Since 2009 and going forward, we’ve had good, solid growth and overall very good results in all sectors,” said Jamie Schrader, owner of Schrader Commercial Properties and president of the Commercial Property Association of Lexington.
Industrial property, in particular, has been in high demand, Schrader said, and finding available land for new construction that is zoned for industrial uses is becoming increasingly more challenging.
Isaac said demand for existing building space in the industrial sector has also been very strong.
“We have seen price increases in that sector just because of the lack of availability,” he said.
In the retail sector, the opening of the Summit mixed-use development brought new opportunities along the busy commercial corridor of Nicholasville Road as one of the more high-profile commercial projects of the year.
“They’ve done a great job of bringing a lot of new retailers to the market in Lexington,” Isaac said.
While some shakeout throughout the market from the opening of new developments such as the Summit is to be expected, Isaac said he still sees significant pent-up demand in busy retail areas of the city such as Hamburg and the Nicholasville Road corridor. The list of national retailers looking to enter the Lexington market is sizable, Isaac said, and much of the mid-sized and larger spaces get snapped up quickly—sometimes even before it’s publicly available.
Retail in general is being redefined in light of increasing pressure from Amazon and other online competitors, Schrader said, as well as other factors ranging from changing technology to the consolidation of bank branch offices. But popular retail centers in Lexington remain strong, Schrader said, and interest is high, particularly for convenience-oriented retail in high visibility locations.
The office market in Lexington has been relatively stable, Isaac said, despite the moves by many companies in recent years to reduce their square footage per employee. This national trend has created a challenge for many office properties, which have had to add more tenants to fill the same square footage as compared to a decade ago. That trend appears to be leveling off, Isaac said.
“I think we are probably close to equilibrium in terms of people right-sizing their companies, and I look to see more absorption in suburban office space this year,” Isaac said.
Commercial real estate activity slowed in the downtown area in the past, in part because of a lack of new product, Isaac said. That is changing, and as new properties such as CentrePointe fill up quickly, it could spark more interest downtown.
“The lease-up that we are seeing shows that there would be demand for a new product in downtown,” Isaac said.
But the addition of new office space is not limited to just downtown, O’Neill said. He noted growing interest within multiple commercial centers across the city, rather than a direct migration between them.
“We’ve seen new office space built recently in Beaumont, Hamburg, Coldstream and the Summit,” he added.
Businesses are also seeking more modern and creative industrial workspaces in less conventional locations to better suit the new workforce, Schrader said.
“I think the millennials and younger professionals are really beginning to impact the kind of office space that is desired,” Schrader said.
Lexington’s economy isn’t driven as much by large private employers as some other cities, and many of those headquartered in Fayette County have not been increasing their headcounts in recent years. While Lexington has benefited historically from its signature industries, Schrader said he would like to see more creative efforts to develop Lexington as an attractive niche market in the emerging new economy, building up a critical mass of talent in a specialized sector that could become a new signature industry for the market.
“It would be great if we could develop some niche that we would be known for, that would make people want to be in Lexington to interact with other people in that industry and distinguish us from other markets,” Schrader said.
Lexington has many advantages over other Midwestern cities, O’Neill noted, including its highly accessible location, educated workforce and a diverse economy that is not as dependent on blue-collar employment as many other communities. The strong education and healthcare sectors also offer the potential for more research and development opportunities related to new technology, if the community can find ways to create the right partnerships to capitalize on them.
“In terms of challenges, we do have a shortage of available and affordable land allocated for economic development,” O’Neill said. “The [proposed] land swap with UK [and the city of Lexington] for a business park is a very good step in the right direction.”