Lexington's Commercial real estate

Tom Martin Q&A: Retail resurgence gives boost to commercial real estate market

Special to the Herald-LeaderSeptember 9, 2013 

  • Tom Martin's Q & A will appear every two weeks in the Herald-Leader's Business Monday section. This is an edited version of the interview. To listen to the interview, find the podcast on Kentucky.com. The interview also will air on WEKU-FM (88.9) on Mondays at 7:45 a.m. during Morning Edition and at 5:45 p.m. during All Things Considered.

Attorney Richard Hopgood's practice with the Lexington office of Wyatt, Tarrant & Combs focuses on representing retailers, developers, landlords and tenants in commercial real estate with an emphasis on retail and office developments. Hopgood has represented national retailers who have constructed and now operate more than 25 million square feet of retail development in Kentucky, Tennessee and in Indiana.

Listen to Tom Martin's interview with Richard Hopgood on Lexington's commercial real estate market. The interview was recorded at Dynamix Productions in Lexington (http://www.dxaudio.com/)

Tom Martin: According to the National Association of Realtors' 2013 Commercial Member Profile, transactions and sales volume are up from a year ago, led by investment sales and land sales with retail leasing close behind. How does the national picture compare with activity in Central Kentucky?

Richard Hopgood: You're seeing the same trends here locally. National tenants of both retail and restaurants are doing very well here. Just recently Fayette Mall announced they are going to acquire the Sears Roebuck space. That will be developed into retail and restaurants. The Summit Development across Nicholasville Road from Fayette Mall is going to be a huge retail development. You're seeing at Hamburg the continuation (of growth). Costco is going in there. So what you're seeing on the national level is happening here locally as well.

Martin: In what sector of commercial real estate are you seeing the most growth? Office? Retail?

Hopgood: I think retail is probably the biggest growth area. Office development is steady here but the consumer is coming back into the market for purchasing from where they were in the recession and the national retail folks are responding to that with a lot of different developments.

Martin: Do Internet sales present challenges?

Hopgood: Probably for the brick and mortar folks. It's probably the single biggest challenge that they are going to face long term. The consumer is speaking out. They want the ability to buy both in your store and online, and they are expecting retailers to respond to that.

Martin: And how is that trend influencing how commercial real estate is being configured?

Hopgood: A lot of folks are doing smaller developments. Best Buy is scaling down the size of their stores. They know their customer is coming in and looking at merchandise in their store and then checking it online, and so they don't need as big a footprint to satisfy the electronics customer as they've had in the past. So you're going to see smaller big boxes than you've seen in the past.

Martin: We're beginning to see interest rates rise.

Hopgood: Definitely. Everybody has been waiting for interest rates to start increasing. I think you're going to see it here shortly. We've been at the same prime rate for several years, but the Ten Year Treasury, which is the instrument that a lot of folks follow, moved significantly in the last year. So I think you're going to see increased interest rates and that will definitely have an effect.

Martin: The Lexington-Fayette Urban Services Boundary has remained unchanged since 1996 when it was expanded by 5,400 acres. Our current mayor, Jim Gray, has led efforts to contain development within that existing urban area. How is this impacting commercial real estate development in the Lexington area?

Hopgood: It's made it very tight. If you look at the retail vacancy in Lexington it probably averages about 5 percent right now. But in that 5 percent average you probably have a 2 percent or less vacancy in the Nicholasville Road, Fayette Mall, Hamburg areas. That (average) is then brought up with the neighborhood shopping centers that have not responded as well during the recovery.

Martin: Between 8,000 and 10,000 acres of potentially developable land has been identified within the Urban Services Boundary that could be put to use. Are there challenges with that?

Hopgood: Yes, there are definitely challenges. Infrastructure is the biggest challenge. Going on right now — it's not getting a lot of publicity — but as a part of the consent decree with the EPA, the Urban County Government is having to manage their sanitary sewer development. And as people tie onto that they are going to have to start using credits to allow expansion, and those credits will be developed by infrastructure improvements in the sanitary sewer systems. So that's going to be a barrier to future development and how the Urban County Government handles that will definitely have an impact.

Martin: Is it clear how those credits are going to work?

Hopgood: That's still in process. I went to a meeting a few months ago, and they're working very hard on it. It's a complex problem, and their goal obviously is to not have that stymie development. But when you're dealing with the EPA, and that's continually changing based on the political atmosphere, it does present a lot of uncertainty.

Martin: As you are working with commercial developers are you seeing demand for more energy efficiency and if so what sorts of technologies are you hearing about?

Hopgood: It's a very popular subject, buildings that are green buildings. But it's very expensive to do that and it takes a well-capitalized company to try to start that process. What I'm seeing are folks that are doing it on a small scale, getting into it. And then trying to phase into it rather than just to jump in all at one time and create everything in a green fashion.

Martin: Toyota, adding the Lexus to its line in Georgetown, creating 750 jobs in Georgetown and probably a net new job count of several thousand in the supply chain in the area. As a commercial real estate professional when you hear that kind of news do you hear development?

Hopgood: Yes. When national folks are coming in and looking at adding a restaurant in this area or entering the market, they are always looking for trends locally. Not just from the tangible statistics but just intangibly there is a lot of excitement going on. They feel that and respond to it.

Martin: Wherever you turn in Lexington these days there seems to be an undercurrent of excitement about this city. Do you sense that and are we as hot as we think we are?

Hopgood: I do sense that and particularly the downtown development. You can give the mayor the credit for that. He's been very focused on development downtown, the CentrePointe Project got off to a bumpy start but both sides came together and I think they are going to create a really nice development for downtown. Rupp Arena is in the news every day. That's exciting. Everybody loves basketball and everybody is wanting to see how that's going to turn out, it looks like it's going to be a great project. Downtown is, I think, a crucial part of the excitement about Lexington. And when you have companies that are depending on intellectual capital, kids with computer backgrounds, technical backgrounds, those folks want to live downtown. They want to walk to a restaurant and to bars and other activities. I think that will help boost economic development.

Martin: From your perspective, somebody who has been involved in this and watching it for many years, is there anything you would like to see changed? Improved?

Hopgood: I think the downtown developments are on the right track. I work downtown, I see it every day when I drive to and from to work. I think that there is going to be a give and take in the next 10 to 20 years between the private sector and the public sector, like the CentrePointe Project. There was a lot of tension early on but both sides came together, compromised and are coming out with a very nice development. You're going to see more of that as we try to grow and stay within the land that's available right now.

Tom Martin's Q & A will appear every two weeks in the Herald-Leader's Business Monday section. This is an edited version of the interview. To listen to the interview, find the podcast on Kentucky.com. The interview also will air on WEKU-FM (88.9) on Mondays at 7:45 a.m. during Morning Edition and at 5:45 p.m. during All Things Considered.

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