It’s no secret that Cincinnati has a beautiful landscape, a world-class arts and culture scene, and a rich history, but it is little known for its vibrant business community. Cincinnati is truly located in the “heart of it all” and many people are indeed surprised by the economic influence that exudes from this market. Cincinnati is the 24th largest U.S. metro area with a population of just over 2 million. Cincinnati is home to ten Fortune 500 company headquarters, and, per capita, that places the city higher than New York, Boston, Chicago, or Los Angeles. Kroger Company, Procter & Gamble and Macy's Inc. are all headquartered in the city and it has recently been chosen as the North American headquarters for First Group and dunnhumby, both of which have tapped into the local labor pool.
With the strength of the city’s business community, Cincinnati’s office market has been relatively stable over the last 15 years, with overall vacancy rates hovering around 15 percent. Unfortunately, it has not been immune to the economic woes of the last several years and many companies have made cuts or downsized. The Cincinnati office market is approximately 37 million square feet and around 13 million square feet is located downtown.
This year marks the completion of the first new high-rise building in Cincinnati in the last 22 years. The 42-story Queen City Tower opened its doors a few months ago and is more than 85 percent pre-leased. However, it comes at a hefty price to the other buildings. The current vacancy rate in Cincinnati’s Central Business District (CBD) is now more than 21 percent. For example, Great American Insurance has anchored the new tower by leasing 540,000 square feet, and law firm Frost Brown Todd took just over 100,000 square feet However, they vacated nearly 800,000 square feet in neighboring properties — leaving a large cluster of empty space on the market.
Recently, the real estate community received some breaking news — First Financial Bank has committed to approximately 90,000 square feet at 255 East 5th Street and the building will be renamed First Financial Center (formerly Chemed Center). This is a great addition to the already impressive roster of downtown tenants. Downtown also saw some investment activity as Duke Realty recently sold a portfolio of CBD properties that included 312 Elm and 312 Plum office towers after the portfolio had been on the market for almost three years. This increase in investment activity is expected to continue as investors seek higher yields in the Midwestern markets as opposed to the coastal cities, where cap rates are approaching levels reminiscent of 2007. There is simply less competition in the Midwest and better deals for investors.
Cincinnati suburban markets run hot and cold. Former winning submarkets Mason and Blue Ash have now been replaced by West Chester and the Red Bank Corridor, where there has been new construction for companies like GE and Medpace. The Kenwood market, home to every major financial firm, remains the healthiest market. Class A vacancy rates are in the single digits and the new regional headquarters for the FBI is located there, as is a 200,000-square-foot speculative office development on Montgomery Road, which is expected to fill up to healthy capacity in the next 18-24 months. This is the only market with any new and significant development.
Blue Ash, Cincinnati’s second largest office market has been stable, with vacancy rates at the 16 percent mark. As mentioned, the once notable Mason, Tri-County, and Northern Kentucky markets are now sporting the highest vacancies of around 22-25 percent. Even with the largest suburban office deal completed in Mason, where Fifth Third Bank Processing Solutions occupies 200,000 square feet, all three markets will continue to see vacancy rates well into the mid-20 percent range for the foreseeable future.
The healthcare industry has been the saving grace for many of these suburban markets with Children’s Hospital, Christ Hospital, Kettering Hospital, and Mercy ramping up with more office, medical and outpatient space requirements.
There is a sense that the worst is over, the economy is improving, and the Cincinnati region has the labor pool, prestigious projects, incentives and commercial real estate product to attract new businesses. But with recent setbacks to other markets, lending restrictions, mounting debt, and a continued housing crisis, there is still a great deal of hesitation in the office real estate sector. Ask any commercial broker and they will tell you that the life cycle of today’s deals is three times longer than they ever have been. Patience is a virtue….at least, that is what people keep telling me.
— Joshua Gerth, is a vice president with the Cincinnati office of Jones Lang LaSalle.