U.S. economic growth in 2018 is expected to be the strongest in three years. The steady momentum in the Cleveland office market fully supports this forecast. Overall vacancy rates in the Cleveland metro area align with national trends in the range of 12 to 14 percent, rental rates are increasing modestly with averages in the low $20s per square foot and the market for Class A office space continues to be very tight.
Tenant improvement allowances offered by landlords are rising faster than rents in a competitive leasing environment, ranging from $20 to $60 per square foot. Larger, multi-floor blocks of quality space are becoming especially difficult to come by in both the central business district (CBD) as well as the suburbs, making new office construction projects more viable than in the past.
When it comes to attracting the best and brightest workforce, office occupiers are seeking vibrant, walkable locations, rich with amenities and character. Building owners and developers in the Cleveland CBD continue to introduce office conversion projects that bring more apartments downtown, helping in turn to strengthen the office market.
The K&D Group is currently converting a portion of the iconic 52-story Terminal Tower to half apartments and half office space. This property has the beautifully overhauled Public Square as its front yard, which includes a restaurant, green space and a seasonal water feature and ice rink.
Also located on Public Square, the 57-story Key Tower, owned by Millennia, is undergoing significant renovations to increase the amenities available to its tenants. Millennia will also redevelop more than 1 million square feet at 925 Euclid in the center of downtown, which will include a mixture of office and hotel space as well as apartments. Locally based K&D Group and Millennia are now two of the largest owners of real estate in the Cleveland CBD.
Playhouse Square Real Estate Services is another example of a large local owner of CBD office real estate that is investing in the need for more residents. Construction is underway on a luxury 34-story apartment tower on a parking lot site in Playhouse Square, which is the largest theater district outside of New York City.
Local building ownership in the CBD is a new trend that is becoming more common. But, there is a new owner in town as well. New Jersey-based Rugby Realty has acquired the 575,000-square-foot AECOM building with plans to renovate the lobby as well as add a fitness center and update the existing conference facilities.
In the suburbs, high-end mixed-use developments such as the Offices at Pinecrest and the Van Aken District, both in the Chagrin Corridor submarket, are attracting significant occupier interest along with achieving some of the healthiest Class A rents in the suburbs in the mid $30s per square foot. Overall, the Cleveland office market as a whole is raising the bar to establish work environments that foster energy and excitement for a talented workforce, and landlords are ready to accommodate.
Cleveland is seeing a healthy variety of directions companies are taking in terms of office space. Examples include relocating within a submarket or existing building, renewing in existing space, moving from the suburbs to downtown, or most importantly, establishing a brand-new presence and office location in Cleveland (true positive absorption).
Boyd Watterson Asset Management is a great example of a company that is moving from one location downtown to another, and is expecting to add 30 new jobs in the process.
In the suburbs, fast-growing companies such as ExactCare Pharmacy maintain a very strong presence in the office market, and law firms like Jackson Lewis have expanded its footprint. Other organizations like Fisher Phillips LLP and Electronic Merchant Systems have chosen to relocate their offices from the suburbs into the CBD.
As for companies completely new to the Cleveland market, staffing services company Insight Global is establishing a brand new office in downtown Cleveland, and Covia is entering the market in the suburb of Independence. There will always be some element of “musical chairs” with tenants moving from property to property, but there has been an undeniable uptick of companies interested in Cleveland and on the hunt for the best office space to maximize productivity and attract the best talent.
— By Katie Watts, First Vice President, Colliers International. This article originally appeared in the August 2018 issue of Heartland Real Estate Business magazine.