A study of Lexington's commercial office space availability has found for the first time in recent years that vacancy rates are declining across all categories.
"Generally, the market is improving," said Al Isaac, president of NAI Isaac Commercial Properties, which prepares the semi-annual analysis. "We're showing increases in absorption of all the areas. Some of them are small increases, but they're still increases — which is certainly a step in the right direction."
The declines in vacancy rate were small for office space both downtown and in the suburbs, but "it shows it's stabilizing," Isaac said.
Among the changes downtown was the addition of Kentucky Spirit Health Plan, a managed-care plan serving state Medicaid participants, taking up more than 36,000 square feet in Chase Tower.
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"We've got another couple of floors in the building that are being negotiated," Isaac said. "There's activity going on in other areas, too.
I do feel like the market is improving and coming back."
There is more than 450,000 square feet of office space available downtown — with a vacancy rate of 16.6 percent — but Isaac cautioned that people should not look for it to fall too low.
"There's more vacancy than you would like downtown from a landlord's perspective, but you have to have a certain amount to conduct business," he said. "If you get down around 10 to 11 percent, it gets harder and harder to find space to put somebody in."
In fact, the availability of high-quality office space, called "Class A" in the trade, has already posed an issue for Tim Haymaker of Haymaker Bean Commercial Real Estate.
"We've had several office clients in town and have had a very difficult time putting larger tenants into space that's up to their quality standards," he said. "I just had to put a 10,000-square-foot tenant new to the area in two different suites across from each other in a common hall.
"We just couldn't find the Class A vacancy that we needed."
Haymaker said that's why he expects to see some new construction of high-quality office space beginning in the next six months to a year.
He also expects to see construction in the industrial sector, which saw the largest decline in vacancy rates.
Bob Quick, president of Commerce Lexington, said the report shows that "businesses are confident now to invest more and invest it in this market."
"It may be slower than we like, but we're feeling the effects of the economy now picking up," he said.
The report also found that the availability of retail space fell more dramatically than office space in the latter half of 2011.
Jeff Stidham, president of Stidham Commercial Partners, said he's beginning to see renewed interest from big-box retailers.
Stidham, which represents the Turfland Mall property on Harrodsburg Road, said the owners there have seen interest from large retailers for the spot. However, at this point, they remain interested in luring a large office tenant for the site's former Dillard's building. Filling that spot is the first step in a redevelopment plan, which would see offices, some retail and residential space.
He said he expects sales or leases to be executed in the next three months on two large properties he represents: the 50,000-square-foot former Verizon operator building near Turfland Mall and the 45,000-square-foot former IBM building at Coldstream.
Stidham said potential tenants interested in the Verizon building include Health First Bluegrass, a Fayette County primary-care group that operates at the county health department building on Newtown Pike.
"We've got a couple of other very interested parties," Stidham said.
He said that level of interest is becoming common to hear from others.
"The brokers are all talking about transactions they're working on," he said. "That's a change. That hasn't happened a lot the last couple of years."
As for the next two years, Isaac said, he expects vacancy rates to continue to improve, "but I don't think it's going to be an awful lot quicker than it has been."
"I think we're going to have slow and steady absorption," he said, "which will probably match the growth in the economy."