by Dan Rafter
Midwest Real Estate News recently spoke with Al Isaac, president of Lexington’s NAI Isaac. He told us that the Lexington market continues its rapid recovery from the days of the Great Recession. Every sector in the market – with the possible exception of office — he said, is showing steady improvement.
Midwest Real Estate News: We know that Lexington is a strong commercial real estate market today. How are the different commercial sectors faring here?
Isaac: The retail vacancy rate is just 5.45 percent, which is strong. The neighborhood retail center has seen the most absorption in the last six months. I think that is because of an increase in new business start-ups in the local community than what we had seen previously. There has been an easing of lending policies at local banks. That has made it easier for a local person to go in and fund a start-up.
MREN: What about available space for the retail market?
Isaac: Even before this recent drop in vacancy there was not a phenomenal amount of space available for retailers. Today that space continues to be eaten up. Since there wasn’t that much space, it doesn’t take an inordinate amount of decent-size leases to impact that. Retail zoning is in short supply. There are a few new projects being built, but what are primarily seeing is the absorption of space at existing projects.
MREN: How about the industrial market? How is that performing?
Isaac: Industrial: is another sector that is doing very well. The most recent survey that we’ve taken indicates that the vacancy rate is 6.5 percent in industrial. Developable vacant land for industrial is in short supply. There is not a lot of land to build new projects on or for build-to-suits. That bodes well for the existing supply that is already ready to go.
MREN: Will you start seeing spec development in industrial in the Lexington market?
Isaac: I think we could. But again because the developable land zoned for industrial is in such short supply, there will have to be some rezoning taking place so that there is land to do spec building on. I think we will start seeing some spec building in the industrial sector once that happens. The market is tight enough that I can see that happening. It helps, too, that for some reason, industrial seems to be the easiest sector to get approved for financing on a spec building. It’s much easier to get financing for a spec industrial building than it is for office or retail.
MREN: Office has been lagging in most markets. Is it the same in Lexington?
Isaac: The best I can say about the office market is that it is stabilized. It is holding its own. There have been no dramatic decreases or increases in office. The suburban office market is very stable. There have been some move-outs and some closings. There has been some backfill and some absorption. The absorption is not outpacing the compaction in the market.
MREN: What has to happen for the office market to show significant improvement?
Isaac: It comes down to the national economy picking up speed and consistently showing gains, which helps our local economy. There is also a confidence factor. There are a lot of industries that corporately seem to be doing well, making good profits. Still, hiring is not back to a significant pace. Also, the skill set of the labor pool might not match up with where the jobs are and what kind of jobs are available. What we need to see is a combination of a much steadier growth factor in the economy and the an increase in the confidence of people who run companies to put in place permanent plans for expanding their businesses.
MREN: What about some of the changes that have come in the working world? Is that having an impact on the office market?
Isaac: Companies tend to use smaller spaces to operate in than they did 10 years ago. Some of that is because of a change in office layout. More companies are going with an open concept versus private offices. Some of these changes are because of technology.
MREN: Multi-family is hot across the entire Midwest, it seems. How about in Lexington?
Isaac: It is the same here. We have high occupancy rates and a high interest level. Investors are purchasing multi-family in big numbers. The cap rates are very low. Multi-family properties still produce a high sales price. There is still a large market for multi-family products.
MREN: Has there been much new product in the multi-family market?
Isaac: We have not had much new construction in this sector in the last six to 12 months. Prior to that, there was an awful lot built. Some projects are under construction now. Also, there has been some renovations of existing older projects into nicer, more modern properties that are better able to compete in today’s market.
MREN: Why is Lexington a good place to do business?
Isaac: The quality of life is high here. That attracts interest from companies looking to potentially relocate. We also have a real broad-based economy. There are a lot of legs to it. It’s hard to significantly impact the city’s economy if one or two sectors are struggling when there are so many legs to it. Lexington has the tendency to be more buoyant than a lot of markets. It’s not a wildly inflationary market. We do not have the gigantic highs. But we don’t have the terrible lows, either. We trend more in the middle.
Location helps, too. From an industrial perspective, we are bordered by I-75 and I-64. We are in reach of 70 percent or 60 percent of the entire population of the United States within a day’s drive. That makes Lexington a great place for a warehouse. You can get your product out quickly to the rest of the country. From a retail perspective, we serve a much larger trade area than just Lexington. We serve possibly twice as large of a trade area than the population of Lexington.
MREN: Are there any projects in construction now that you are particularly excited about?
Isaac: There are. The CentrePoint development in the CBD of Lexington is one. That is an office development that will also have a Marriott hotel and an apartment component to it. There will also be a small retail and restaurant component to it. They just finished blasting for the underground parking garage. We should see steel out of the ground pretty. That is a $400 million project. That is a significant project for Lexington by the Webb Companies, a company that is local in Lexington.
There’s also the Summit Lexington by Bayer Properties. That will be a high-end retail development with a multi-family component to it. This will be 550,000 square feet. They have not yet started construction, but are in the pre-leasing and planning stage. Directly across the street from Summit Lexington is the existing Fayette Mall, a 1.2-million-square-foot shopping center. That mall is in the middle of a redevelopment project. It is adding an H&M store and a Cheesecake Factor in addition to a mix of smaller retailers and restaurants. It will be a significant addition to what has already been one of the best malls in the entire southeast part of the country. It will bring new retailers to the market.