Sometimes there are benefits to being late to the party. Louisville, having lagged behind larger surrounding cities in multifamily development post-recession, is now experiencing a boom in apartment construction, much of which is being supplied by out of-state developers. For similar reasons, including Louisville’s sustained economic growth fueled by continued strength as an international distribution center alongside a stable manufacturing base, national investor demand for Louisville multifamily properties has intensified. Traditionally known for the Kentucky Derby and the bourbon industry, Louisville is now raising eyebrows with a growing population, robust job growth and balanced multifamily supply and demand. Big Business, Jobs At the heart of this burgeoning story is UPS Worldport, the primary global air hub for the world’s largest package delivery company. UPS, the largest private employer in Kentucky, continues to expand its presence in Louisville, having recently announced a $310 million expansion of its Centennial hub sorting facility. Ford Motor also recently announced that it is investing $900 million in its Kentucky Truck Plant, in addition to the $1.3 billion and 2,000 jobs created at that plant in late 2015 to build Ford Super Duty trucks. Additionally, Qingdao Haier Co., having acquired Louisville-based GE Appliances in June 2016, announced late last year that it is moving its U.S. headquarters to Louisville from Wayne, N.J. Uncertainty surrounding the future influence of Humana in its hometown was somewhat put to rest earlier this year when a federal judge blocked the megamerger of Humana and Connecticut-based Aetna. Humana, the largest office tenant in the metropolitan area, was also the beneficiary of a $1 billion breakup fee to ease the pain. With the completion last December of the Ohio River Bridges Project, one of the largest transportation improvement projects in the nation, improved access between Southern Indiana and Louisville will mean increased economic productivity and development opportunities. These announcements, in combination with a low cost of living and access to a large pool of college graduates, have influenced many professional service companies to grow their Louisville presence. Louisville has added more than 15,000 jobs each year since 2013, outpacing the national index for job growth. Late Bloomer Multifamily development activity in Louisville, until recently, was nearly nonexistent since the beginning of the Great Recession in 2008. Today, however, the amount of inventory under construction is at its highest level since the downturn, with more than 2,600 units underway in more than 15 active developments. Much of this activity is the result of out-of-state developers seeking more favorable market dynamics than their own backyards in Indianapolis, Cincinnati and Nashville in particular. Those markets rebounded more quickly than Louisville; however it’s now Louisville’s turn to be in the spotlight. Indianapolis-based Cityscape Residential is one such firm. Its first Louisville property, Apex on Preston, delivered 312 units to a workforce environment in South Jefferson County in May 2015. The project stabilized by the end of that year, averaging over 30 units per month with rents not previously achieved in that submarket. Its second Louisville development, Axis on Lexington, is a 356-unit complex immediately east of downtown Louisville. Both absorption and achieved rental rates, which are running 10 percent higher than pro-forma, lead Kelli Lawrence, principal and Louisville market leader with Cityscape to conclude that “there is a lot of runway left in this market.” This is particularly true when compared to other regional markets, echoes Charles Carlisle, CEO of Bristol Development Group. Bristol, a Nashville-based multifamily developer, having successfully developed Veranda at Norton Commons in Prospect, is currently under construction with its first urban Louisville project, Main and Clay. The 263-unit project will be one of the first downtown developments to come on line with multiple competing projects either underway or announced. While an acknowledged shortage of urban core units currently exists, perhaps the biggest uncertainty in the Louisville multifamily environment is the depth of demand for what will inevitably be record-setting asking rents necessitated by higher land costs, along with continuing construction cost escalations. One aspect of the market not in question is investor demand for Louisville apartments. Leading broker Craig Collins of Cushman & Wakefield | Commercial Kentucky reports that on his last two assignments, over 20 letters of intent were submitted from investors from California to New York. Multifamily investors seeking to trade out of more expensive markets to capture potentially higher yields along with geographic diversification are expected to continue to aggressively bid for Louisville product. Fundamentals remain strong with increases in asking rent in each of the metro area’s submarkets reported over the last 12 months. Cycle high unit completions in the fourth quarter of 2017 are expected to increase the Louisville vacancy rate to 5.2 percent, up nominally from a very respectable 4.7 percent today, according to Reis. Late in the cycle? Maybe for other markets, but for Louisville, fashionably late works just fine.
Randall Waddell in Southeast Real Estate Business: Louisville's Multifamily Proves its Better to Arrive Late Than Never
September 21, 2017