Commercial Real Estate and Office Space Market in Kentucky

Thanks to its excellent connectivity and long-standing reputation as a hub for advanced manufacturing and logistics, the state of Kentucky is seen as a business-friendly destination and as a very attractive commercial property market. This report describes the most recent performance of the commercial real estate market in the Bluegrass state.

Office Space Market

The office market in Kentucky is at its most active in the state's largest city, Louisville. The local market has benefited from substantial job growth in industry sectors that typically require office space, including finance, insurance, and information technology. The most recent data suggest that the office sub-market in Louisville favors tenants, as average rental rates have remained stable across the city despite the decreasing vacancy rates and higher leasing activity levels. However, investment activity levels remain subdued(1).

The market has also been recently characterized by an above-average level of transactions involving Class B properties, especially in the city's CBD and in some suburban markets, like Hurtsbourne / Eastpoint. Vacancy rates in downtown Louisville are down for the 9th consecutive quarter, averaging 13 per cent, whereas Class B properties in the city core show average vacancy rates of 13.8 per cent. Supply is particularly limited in areas to the southeast of the city center and in St. Matthews. With regards to the average asking prices for office space in Louisville CBD, rates remain mostly unchanged at $16.99 / sq ft, but are higher in Hurtsbourne / Eastpoint ($20.07) and the north eastern districts ($22.21). At the other end of the scale we find the lowest property prices in Old Louisville ($9.50) and the south eastern neighborhoods ($13.39). The development pipeline remains rather limited, as new developments are clustered around the Hurtsbourne / Eastpoint area and are not due to be delivered until 2016(2).

Click here for currently available office space in Louisville, Lexington and Florence.

Retail and Industrial Space Markets

In Louisville, the retail property market continues to display an upward trend and is becoming increasingly tight, with availability rates averaging 5.1 per cent. Since late 2014, the delivery of new retail developments and a positive economic outlook has helped push net absorption figures to record-high levels and bring vacancy rates down to just over 5 per cent. Across the city, average asking rates average $17.21 / sq ft for small shops, dropping to $7.77 / sq ft for larger retail units(3).

Likewise, the industrial real estate market in Louisville has been marked by increased activity levels and ever-rising demand that have been partly fueled by the healthy status of the local export market, which is among the top three in the United States. In fact, and according to market analysts at Cushman & Wakefield, absorption levels for industrial properties in the city rose by nearly 85 per cent in just 12 months, and so did direct asking rates, which currently stand at $3.61 / sq ft / year. Rental values remain above the city's average in Middletown / Eastpoint ($5.25), Bishop Lane ($4.05), and the airport ($4.19). Vacancy rates for industrial space are also among the lowest in the country, and according to the most recent dataset they average 5.4 per cent. Industrial space is especially scarce along the I-64 corridor, Middletown, Iroquois, and Floyd County. The local market has also echoed the national trend in that e-commerce has been behind the development of new industrial complexes. By the end of 2016, nearly 1 million square feet of newly developed industrial space will become available in Louisville, particularly in Clark County, the airport district, and Bullitt(4).

Tax Breaks, Business Incentives and Support

Although the local economy is largely reliant on the manufacturing sector, Kentucky has a diversified industrial base that is appealing to small, medium, and large businesses. Business expansion and job creation has been a priority for the Kentucky Economic Development Finance Authority, which works alongside the Cabinet for Economic Development to foster growth across the state. Tax credits, business incentives, and financial assistance programs have been made available to suit the needs of firms in a variety of industry sectors, from agriculture to tourism and including high tech and retail. Some noteworthy programs include the following:

- Kentucky Small Business tax Credits offer substantial income tax reductions to small businesses that have created at least one job during the 12 months preceding the application and that have invested in eligible equipment for a minimum value of $5,000(5).

- Kentucky Enterprise Initiative Act. This program is available to firms involved in the service sector or manufacturing, and provides tax refunds against the expenses that arise from real estate improvement projects(6).

- Industrial Revenue Bonds can be used to finance land and equipment acquisition and are available to manufacturing, transportation, and healthcare companies(7).