Demand for office space 'soft'

Lexington developers and real estate brokers are looking for something — almost anything — to put life into an office market that hasn't had a strike-up-the-band project since the 1980s.

The basic need, they say, is large new tenants from out of town who want lots of space in one big chunk downtown or in several smaller suburban locations.

"We need a spark plug," said Tim Haymaker of Haymaker/Bean Commercial Real Estate.

Bob Cole, president of Coleman Group, calls them "drivers" and he sees three possibilities over the next few years: The proposed $250 million CentrePointe complex downtown, the seemingly continuous construction on the University of Kentucky's main campus and the proposed new Central Baptist Hospital complex east of Interstate 75 near Hamburg.

A more distant possibility is any new City Hall complex for Lexington-Fayette Urban County Government, he added.

Any of these projects have the potential to create demand for general office and medical buildings, although Cole isn't holding his breath.

CentrePointe developer Dudley Webb is hopeful the high-rise hotel-condo development would have a positive impact on downtown. But it also includes plans for office space, although not enough to make much of a difference downtown, he said.

An early design called for 85,000 square feet of office space, but that is being scaled back to probably no more than 50,000 square feet, Webb said. It could end up with zero if an unidentified, potential tenant drops out.

Three nearby office buildings each have 242,000 to 357,000 square feet so 50,000 square feet would be "inconsequential," Webb said.

Al Isaac of NAI Isaac agreed with Webb.

Even if CentrePointe had 85,000 square feet and no tenant, "it wasn't going to impact the market tremendously," Isaac said. "It's just too small an amount. If it sat vacant, it wasn't going to move the vacancy rates tremendously."

Webb said the potential CentrePointe tenant is a local company, so the net gain for the city would be zero, although the move could be a net gain for downtown.

That's a familiar pattern in Lexington.

"The only thing I see right now is tenants moving from one building to another," Haymaker said.

No net gain

Wachovia Securities, for example, is moving from the Lexington Financial Center on West Main Street to Main & Rose on East Main later this year.

The brokerage will occupy 12,000 square feet on the first floor of the loft apartment/retail/office complex, said Phil Holoubek, one of the developers of Main & Rose.

Main & Rose now has leased 17,000 of Main & Rose's 25,000 square feet of retail/office space. (Two other retail tenants, Jimmy John's Gourmet Sandwiches and Dunkin' Donuts, are also in the complex.)

The addition of Wachovia "truly turns this project into a mixed-use development," which was the developers' intention, Holoubek said

But Wachovia's move would be a net gain of zero for downtown.

"There is a lot of trading of tenants (between buildings) downtown, but not a tremendous expansion," Isaac said.

Recent surveys by NAI Isaac and the Coleman Group put the downtown vacancy rate for the best space, class A, at 4.9 percent to 9.4 percent and lower quality space, class B, between 10.2 and 18.2 percent.

In the suburbs, NAI Isaac found a class A vacancy rate of 19.7 percent while Coleman said it was 15.9 percent. Class B was 10.9 percent, NAI Isaac said. Coleman put it at 9.15 percent.

Overall, NAI Isaac found a 17 percent increase in vacancy rate since January and Coleman a lower 9.4 percent increase for all of 2007.

Small office buildings that resemble townhouses or other types of residences have been built in many suburban locations and sold as condominiums, the brokers say. These structures are popular with small firms and professional tenants, but too many have been built in some areas.

"The construction sort of out-stripped the demand," Isaac said, "but that seems to have ceased for the most part, so I think we can start steadily absorbing the space. There's not a lot of new construction going on now."

Parking a plus

Holoubek said there is something the government can do to rev up the downtown office market: Improve infrastructure, especially parking and specifically parking garages.

"The No. 1 infrastructure any tenant is going to want is quality parking," Holoubek said. "We are at the point where new parking structures are needed, even if they are not immediately filled, in order to recruit new companies downtown."

An underground parking garage beneath Phoenix Park remains a possibility as part of the CentrePointe project.

Government investment in garages and other types of infrastructure form "a safety net" that bring tenants and investors to downtown properties, he said. "You don't have that assurance of continued investment in infrastructure if you are in the suburbs."

Haymaker described the current Lexington office market as "very soft," even by local standards where slow steady growth has been the norm.

"We seem to avoid tremendous highs and lows," he said. "We are not a boom-and-bust type of community."

Cole agreed. "We just kind of hang in there and bounce around," he said.