Class B Office Space Conversion

The Downtown Development Corporation convened a working subcommittee to determine whether the existing Class B office vacancy rate was deleterious to the overall economic health of downtown and if so, what strategies might be employed to affect this situation in a positive manner. Not surprisingly, the Committee’s assessment corroborated that there was indeed a glut of Class B office space, and that it was in fact serving to depress the downtown office market. A strong trend appeared to be that many Class B users were moving up to Class A space, particularly as Class A rates remained only slightly higher than many Class B properties.  A second trend confirmed that as Class B leases expired, tenants would use their clout of move to another Class B property or renegotiate with their existing landlord for reduced lease rates, partly due to the availability of such space.  There was consensus that there were a number of Class B properties that remain strong – and will likely remain strong – due to the condition of the property, the willingness of the owner to maintain and renovate on a regular basis, attached or controlled parking, and the character of the property.  However, many existing properties do not exhibit these characteristics and appear to be in a relatively weak market position, particularly those with large blocks of space in leases nearing their expiration dates.  Many of these latter properties are worthy candidates to consider conversion to alternative uses.

As a result of this assessment, the DDC identified a number of downtown properties that appear to be worthy candidates for potential conversion to residential use, a trend that is becoming more and more common in other cities with similar amounts of vacant Class B and Class C space.  With a much stronger demand for residential use than for Class B/C office space, some of these properties can experience a renewed usage, as well as greater return for their owners.

The Downtown Development Corporation is currently working on a unique collaboration with the University of Louisville Business School’s MBA Association to develop a program in which the MBA Association and its students will assist in further analysis of these properties, in association with their owners, as potential residential conversions.  This will not only provide U of L’s MBA students with practical real-world experience in urban real estate development, it will also provide useful financial assessment and market analysis to downtown property owners interested in breathing new life in existing properties.

The program is currently under development and will likely begin shortly after the first of the year.