Blog

Aug 10, 2023

JLL experts take a deep dive on construction activity in Louisville

According to JLL data, construction investments continue to yield optimism with elevated construction activity nationwide. How is this playing out in Louisville? We asked JLL Project and Development

According to JLL data, construction investments continue to yield optimism with elevated construction activity nationwide. How is this playing out in Louisville? We asked JLL Project and Development Services Vice President Oliver Roe and Project Manager Brooke Coleman to weigh in on current trends and what’s in store for the Gateway to the South.

What key changes have you observed in terms of construction budgets and timelines in the industry?

Oliver Roe: In Louisville, construction costs, in most material segments, are starting to stabilize towards a more historical industry inflation rate of 4-6% annually. There are notable exceptions, particularly in electrical and mechanical equipment, which continue to feel pressure created from outsized demand in data center and advanced manufacturing construction. Increasing oil prices need to be monitored, as they will have an impact on freight and any products with heavier exposure to those markets, such as PVC piping.

Construction schedules and timelines are only as good as the sum of their parts. Procuring electrical equipment, mechanical equipment, generators and elevators — all items you can’t open a building without — continue to be challenging with lead times of up to a year. Our team mitigates the impacts on schedule by procuring these items early in the process during the planning and design phases before a shovel ever hits the ground.

The permitting and zoning processes should be top of mind when planning a construction schedule, too. Having team members who are familiar with each jurisdiction's zoning and permitting processes is key.

There is growing importance of sustainability in office spaces, with features like green walls and energy-efficient lighting becoming more popular. How are businesses balancing the cost of such features with the expected long-term benefits?

Roe: Some of these sustainable building materials and systems are starting to mature, making them more affordable, but other systems require a closer look to justify their business case.

Brooke Coleman: Many of the towers downtown installed and operated low-flow plumbing fixtures years ago but have been much slower to overhaul their aging HVAC systems because of the costs and disruption to tenants. In some cases, a tenant on a middle floor of a tower might want to update their air filtration system for better indoor air quality, a shift which would benefit all the tenants above and none below, as is the case sometimes depending on the type of retrofit and system in use. This creates a fairness issue for the non-benefiting tenants as well as a financial issue when it comes to imposing increased common area maintenance costs to some tenants, but not all.

Still, some building owners are finding it necessary to make these upgrades as companies are beginning to require certain standards before leasing space.

Roe: You need to look at the lifecycle and payback periods for these items, weighing capital expenditure against the operating benefits in reduced utility usage, employee retention and workplace optimization. In cases where you have a landlord and tenant sharing capital and operating expenses, it can make sense to share these added costs and the added benefits they bring over the term of a lease.

There are also state and federal government programs that incentivize investing in sustainable building systems, particularly with the passing of the Inflation Reduction Act. These incentives can even make the sustainable building systems cheaper than conventional options.

Coleman: Helping clients save money on their construction and development projects is our job, and a part of that is staying educated on what incentives are available. We’ve helped our clients get LG&E rebates, we were quick to guide our Indiana clients in submitting for READI (Regional Economic Acceleration and Development Initiative) money available during the pandemic, and we’re currently helping a client obtain Inflation Reduction Act credit by implementing an energy efficient mechanical system in their new building.

JLL’s recent Fit-Out Guide states more businesses are taking on a 'flex-and-core' approach to their office spaces as a result of COVID-19. Can you expand on this approach and how it differs from pre-pandemic office designs?

Roe: Companies are responding to the new and changing needs of their people, recognizing that the office remains at the center of reinforcing culture, fostering collaboration, driving innovation and setting them up for professional growth. Companies are creating open flex spaces to bring their teams closer together and spark that connectivity.

While appropriate for certain companies and cultures, traditional, room-heavy office spaces can contain a lot of inefficiencies. Leveraging open flex space creates an opportunity for amenities such as conference and huddle rooms, town hall and break rooms and wellness and hospitality spaces. Reducing walls and compartmentalization on a floor plan creates more visibility and collaboration. The key is offering different spaces to accommodate different working needs and preferences, while keeping specific uses for areas of the office fluid. For companies following a hybrid work model, in-office experiences need to be prioritized, which means more than just a row of individual desks.

Coleman: After analyzing six years of data in Louisville, we have determined a flex-and-core strategy offers significant cost savings to clients. By reducing the number of walls, materials costs are cut, resulting in savings ranging from 14% to 33%. Additionally, the reduced labor effort on site becomes evident when considering the ceiling and carpet cuts that would have been required otherwise.

Can you share an example of a recent project where you were able to offer cost savings to your client without compromising on quality or design?

Roe: Our team is nearing the end of the design phase with a private school client on an expansion project where we evaluated three different mechanical system options. These options included a more traditional system with a cheaper upfront cost, but higher operating cost and less reliability; another traditional system with some advantages from an operating cost standpoint and a more middle-of-the-pack price point; and a third option for a geothermal and heat pump system that was more costly upfront but offered a greatly reduced operating cost and more reliability.

We were able to work with the design team to qualify this third and best option for what is basically a rebate via the Inflation Reduction Act, which makes it more affordable in capital cost than the other two. JLL is getting the client the highest-quality system while also achieving sustainability goals with capital and operating cost savings.

Coleman: Some cost savings are made by necessity, or what the building industry refers to as value engineering. Other cost saves are happy accidents, the products of brainstorming sessions with your design, construction and client team. We recently found a streetside stairwell wherein operable blinds were initially proposed to create privacy. However, it was found individual tenants were unlikely to raise and close blinds while coming and going. Vinyl signage was proposed instead and saved the client just over $2,500.

Have you worked on any projects recently that involved converting a former commodity office building into a different use (e.g., residential or mixed-use)?

Roe: The office conversion concept is a hot topic in the industry right now. We are seeing this in a lot of markets across the country, but less so locally here in Louisville. With reductions in companies’ in-office needs and a flight to quality across the industry, there are obsolete office buildings that need to be upgraded or repurposed. The business case for these conversions needs to be analyzed on a case-by-case basis and sometimes requires support from local governments in order to come to fruition.

In Louisville, we see challenges in adding the required residential infrastructure, such as plumbing, to these buildings. On the other hand, there are opportunities for creative solutions. Often, lenders on these buildings have underwritten a different use and need to revisit a change to residential buildings, and they need to confirm local zoning allows for it as well.

That said, conversions can and need to be done locally to revitalize central business districts and other neighborhoods to bring more bodies to those areas to live, work and play. As developers and local governments start to leverage this concept, we will see more of it coming to Louisville, but it’s going to take businesses and public officials working hand in hand to make it happen.

Learn more about the state of the construction industry via JLL’s U.S. and Canada design trends and cost guide.

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