From Cleveland to Cincinnati, speculative Class A office development is on the rise in Ohio for the first time in at least five years. Primarily occurring in the suburbs, 3 to 4 million square feet of spec development is driven by a lack of office space as well as pent-up demand for new space with an urban feel that contains retail and multifamily components.
Most spec office development reflects the demands of both Millennials and Baby Boomers. These significant population groups seek to locate in live-work-play neighborhoods that offer cool office and residential spaces, walkability and common green spaces.
Because these components are important to Millennials — now the largest share of the American workforce — they have become important for companies in their efforts to recruit the best and the brightest. Quality talent is more of a factor than cost. In competing for talent, these companies must look for and include such office amenities as game rooms, outdoor patios and walking trails.
Not only are the retail and residential components to an office project important, but companies are also expressing genuine interest in branding, signage opportunities, naming rights and modern amenities.
Cost of financing guides developers in Cleveland
Rico Pietro, Cushman & Wakefield
While downtown Cleveland has experienced a substantial uptick in marketing, technology and advertising firms — companies that attract Millennials in particular — the suburbs are drawing mortgage firms, insurance and financial companies due to their need for large parking lots. A spike in parking costs downtown has influenced the decision of some companies to locate in the suburbs.
Over 620,000 square feet of office space has been absorbed year to date in the greater Cleveland area, and the vacancy rate stands at 11.7 percent. With so much space being absorbed, developers are tying up land for spec projects that are not purely office.
With over 853,000 square feet currently under construction — anchored by the Pinecrest project in Orange Village — mixed-use developments will primarily feature retail space on the first floor and office space on remaining floors.
But it all comes down to financing. Most developers have at least 50 percent of the space pre-leased, although some are hedging their bets and acquiring financing with only 25 percent of the space pre-leased.
Unlike other Ohio markets, Cleveland is not seeing true mixed-use developments due to financing. Most multifamily
Randy Stephens, Cushman & Wakefield
projects are funded through government programs, and it becomes more complicated to fund a mixed-use development than a purely residential development.
Because land costs downtown are prohibitive for smaller office projects, most spec development is occurring in the suburbs, including West Lake, Beechwood and Independence. Projects include the Chagrin Highlands Center at 3900 Park East Drive and the Pinecrest project.
Companies locating downtown are most likely to look for spaces between 200,000 and 500,000 square feet. East Bank was the last spec office project downtown in the past 20 years and is currently 90 percent occupied.
Spec redevelopment projects are occurring outside the central business district. Three- to six-story warehouses are being redeveloped with the help of government programs and tax credits to subsidize the pivot from warehouse to office space.
Additionally, a handful of old two- to five-story buildings are being redeveloped near the Flats district. Flats East, a recently completed Class A office building, is helping with pent-up demand for speculative space.
Columbus: a landlord’s market
Scott Abernethy, Cushman & Wakefield
Columbus has seen limited new Class A office construction since the Great Recession, so pent-up demand is high. The overall vacancy rate of 13.3 percent is at its lowest in the past 10 years. Absorption is strong with over 158,000 square feet year to date.
The diminishing supply of prime, vacant office inventory has created an attractive environment for developers in Columbus who now have 570,000 square feet of spec
office and mixed-use office property under construction, in addition to 550,000 square feet of build-to-suit office projects.
Developers are offering mixed-use projects in one combined package for commercial users with office, residential and retail components. Retail is currently so hot that it is being included in spec developments, unlike in the past, and enhances the project by adding services and amenities to both corporate and residential users.
Examples include Pointe at Polaris by Van Trust in the Polaris development in the northern suburbs and Crawford Hoying’s Bridge Street West in the northwest suburb of Dublin. Real estate tax abatements and other economic incentives that keep occupancy costs down are critical to both developers and tenants looking to relocate.
It’s a landlord’s market with occupancies on the rise, which in turn is driving rental rates upward. Subsequently, the pricing of new spec office development is up from years past. Growth between downtown and the suburbs is nearly even. Most office users and companies are moving away from traditional high-rise downtown office towers, opting for more open and collaborative space rather than heavily demised floors and spaces common in most large buildings.
Tenants from all industry types are looking for premium office space in Columbus. Large- to medium-size businesses are taking a floor or two of an office building, and smaller tenants are filling the rest of the space. Downtown areas that are hot include Grandview Yard, River South and the Arena District. And in the suburbs, it’s Polaris, Easton and Bridge Street South in Dublin.
In Columbus, mixed-use developments offer residential amenities that can be shared between office tenants and residents. Fitness centers, lounges, rooftop bars and gathering and dining areas are in demand rather than the standard deli and dry cleaners.
At this point, corporate and residential users seem compatible and like what they see. Developers are taking a conservative approach, hedging their risks by going after a percentage of residents and office users. As long as occupancy rates climb, growth in spec and mixed-use office developments will increase to meet interest and demand from tenants in the Columbus market.
Spec in demand in Cincy
In greater Cincinnati, the overall office vacancy rate of 19 percent is steadily declining and approaching pre-recession levels. Over 490,000 square feet of office space has been absorbed year to date. There is great demand for office space, including creative office space in the Over-The-Rhine (OTR) neighborhood downtown. Cincinnati also has a minimal number of large, contiguous Class A spaces available, which is a driving force in suburban spec construction.
In addition to projects nearing completion, developers are expected to break ground before the end of this year on over 400,000 square feet of new multi-tenant office construction. All four projects are in high-demand submarkets, including OTR, West Chester and Blue Ash. Most is pure office space, especially in the suburbs. The exception is the Strietmann Building, which will offer both office and first-floor retail space in OTR.
Most of the mixed-use development has already been completed, such as Rookwood Exchange and Liberty Center in the suburbs, and the office space has leased quickly to a variety of tenants. Class A suburban vacancy is likely to be affected over the next 12 months with some major tenant relocations in the large office submarkets of Blue Ash and West Chester, combined with the delivery of new speculative buildings.
Influencing factors statewide
As Millennials continue to swell the workforce, more companies will look for the means to attract and recruit them, driving growth and synergy between Ohio office markets. Demand for new, modern office spaces with an urban feel will persist. While most spec development is occurring primarily in suburban markets, downtown markets also will continue to experience some growth in the near future. Mixed-use developments will remain the answer to pent-up demand and falling vacancy rates.
— By Rico Pietro, Principal; Randy Stephens, SIOR, Managing Director; and Scott Abernethy, Senior Vice President, Cushman & Wakeifeld. This article originally appeared in the August 2016 issue of Heartland Real Estate Business.