Why is there so much vacant commercial real estate?

Question

Hi BP,

I'm preparing to close on my first deal, an owner-occupied duplex. With this one almost done, I'm looking to forward to finding the next opportunity. I believe that may come in the form of commercial office space. That leads me to my question - WHY IS THERE SO MUCH VACANT COMMERCIAL OFFICE SPACE? I'm starting to notice it everywhere.

In downtown Louisville, there are several prime spots that are vacant in highly visible/heavily foot-trafficked areas of downtown - namely Main and Market Street. If anyone has any theories, please do share. @Clay Smith @Brett K. @Chuck B.

Thanks,

Felix

Chuck B. · Answer

@Felix Sharpe - I've always thought that anything outside of class-A prime areas could sit empty for what seemed like ridiculously long periods. The great thing about commercial though is that once leased it can stay leased for many, many years if you're lucky. If it's a really desirable area it won't be empty for long though. e.g. look at Nulu, Crescent Hill, parts of Bardstown Road, etc. Even when newer businesses are failing rapidly, it doesn't take long for a new one to take over in one of these areas. Rents are outrageous and nothing stays empty for long on the main strips.

This is one of the reasons I really like residential property... easy, fast lease up! Commercial though can rent for much more and be a lot more hands off.

Our old residence is available for commercial lease right now (it's zoned for offices or residential, one of the things that originally drew me to it) and I've recently dropped the price to $9.20 a sq foot to entice some more interest. Really hot areas might rent for something more like $14 to $20 a sq foot. East Broadway is definitely not a "super hot" area but I think it could be in 24 months or so when all of the new development is done. http://www.kcrea.com/listing/29785335 Find me a small law firm looking for impressive digs and I'll make it worth your while! :)

Best, - Chuck

Joel Owens · Answer

Office is HIGHLY CYCLICAL.

I have never been a fan of office investing but that is just me. The tenant can pull up a truck and move desks and chairs in the middle of the night pretty easily and skip town.

Medical office is a different animal. They can still move but are cemented more by heavy build out, electrical connections, equipment, etc.

With office some more space will be taken up by new business starts in an upturning economy. When the economy goes down again they tend to downsize or move back to an in home office.

Companies have started work and home commute programs where they can work remotely. This has caused office demand shrinkage and excess inventory on the market even though not much new office is being built. For example if companies reduce their footprint by 50% of space needed imagine how much inventory is on the market with no new builds.

I like retail better. The tenants need the storefront if they are a destination tenant to produce sales and it is harder to move out of the space. Retail tenants do not like disruptions in business and moving so will only do it when absolutely necessary.

Would only touch regular office in urban core areas. Suburban to rural they are much tougher. It's just not a space I like but others enjoy it.

Chuck B. · Answer

@Jay Leisten That's spot on about traffic outside of work hours, but there's something like 6K+ new units coming online between Goss Avenue to the south, Lexington Ave to the East and 10th street or so on the west. I think that downtown and the "infill" areas directly around it are going to look very different in a couple of years. (At least, I hope so, because I've been waiting for it for years. Ha!)

Neil G. · Answer

the Great COLLAPSE of 2016?

Neil G. · Answer

yea retail definitely beats 'office' space but in this dreadful economy both are lagging

Felix Sharpe · Answer

@Chuck B. Gotcha. Thanks.

Chuck B. · Answer

@Felix Sharpe prime or class A space is just the nicest, most desirable properties. It's a judgement call but for instance, that 5 story at Preston and Main where Old National and Blue Equity are... The building is incredibly slick, great area and rents are very high, maybe 18-24 a foot? (It's been a long time since I looked). I'd call that class A space.

Chuck B. · Answer

@Jay Leisten I think it's a good plan! I like the entire area. I even bought in Smoketown and that's an uphill slog but you can see the progress there too.

Jay Leisten · Answer

@Chuck B. Im looking to start buying around louisville stoneware, as they are pushing for an arts district. Being an artist and former resident of Phoenix Hill, its an area I think has plenty of growth potential as NuLu adjacent and heavy on duplex and first time buyer type shotguns.

Felix Sharpe · Answer

@Donta Busch Thank you! @Mary Davies Ms. Davies, in your area Dan Gilbert is buying up everything downtown.

Why is there so much vacant commercial real estate?

Why is there so much vacant commercial real estate?

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