Cleveland Office Market Sees String of New Projects
Cleveland’s central business district (CBD) continues to make headlines as events like the Republican National Convention, the 2016 and 2017 NBA Championships and the 2016 World Series earned national attention. Within the office market, trends such as “flight to quality” and office-to-residential conversions, which are driven by a hot apartment market, have reduced surplus supply and lowered vacancies. This has shaped metrics positively, and has put Cleveland in a position of strength for the upcoming years.
The news of the year has been the purchase of Key Tower by Millennia Cos., a local real estate developer known mostly for multifamily. The company moved its headquarters from a property in Valley View to two entire floors spanning approximately 40,000 square feet in Cleveland’s signature office tower.
Almost immediately after, Forest City announced its headquarters move from the historic Terminal Tower to the Key Tower, backfilling almost 150,000 square feet of space that KeyCorp gave back in a downsizing strategy. By the first quarter of 2018, Key Tower will benefit from lobby and building amenity upgrades, and should see a vacancy rate of less than 10 percent.
Another story on the horizon is the potential move of Medical Mutual of Ohio, now occupying approximately 380,000 square feet at the Rose Building, a struggling office asset that could be a candidate for repurposing into residential apartments. Although the company’s lease is up in 2020, it is considered to be a tenant in the market now.
The Fortune 1000 firm could ultimately be inspiration for a new office tower within the CBD, or an anchor tenant for one of the several mixed-use developments currently proposed for the CBD, such as Trammell Crow and Cumberland Development’s Harborview project, which will be positioned on the lakefront next to the inner harbor and the Rock & Roll Hall of Fame.
Don’t discount the suburbs
Cleveland’s suburban office market has quietly become one of the nation’s most noteworthy, having seen a dramatic decline in vacancy and an increase in lease rates over the past several years. Often overshadowed by the CBD in terms of headlines, the suburban submarkets remain a very attractive home for several of Cleveland’s most notable firms, and should remain a stable market for the near future.
In recent times, the CBD has been the place to go for modern, efficient office space. However, improving metrics have encouraged developers to break ground on several multi-tenant projects that will deliver new space to some of the region’s most intriguing locations.
Perhaps the most interesting project is within Shaker Heights, a mixed-use development called the Van Aken District. This multi-faceted project not only improves traffic flow and parking within the neighborhood, but also adds new public and street-retail space, and a 60,000-square-foot Class A office building to be delivered in 2018. The office component is already over 80 percent leased at rates comparable to Class A product downtown.
The mixed-use development Pinecrest in Orange is under construction, boasting a growing roster of new-to-market retailers and two Class A office buildings, which will combine for approximately 150,000 square feet. Like the Offices at Van Aken, the Offices at Pinecrest are set to deliver in 2018. Offering full-service rents around $35 per square foot and tenant improvement packages of $60 per square foot, the developers have managed to pre-lease about 20,000 square feet.
When these projects are complete, Class A vacancy in the suburbs could see a slight increase, but the positive trend it has enjoyed since the second quarter of 2013 should render that temporary. Although the CBD continues to be in demand as young talent flocks to the live-work-play atmosphere of urban areas, new suburban projects that embrace that same concept are likely to generate similar demand. The competitive lease rates and the ease of parking that the suburbs offer can often override the need to be downtown.
— By Douglas S. Leary, Senior Vice President, CBRE. This article first appeared in the August 2017 issue of Heartland Real Estate Business magazine.