298
The weather in Cleveland in the springtime is notoriously changeable — sunny and warm one minute and then cloudy and chilly the next. The current state of Cleveland’s office market is similarly uneven.
The sunniest segment is clearly the Class A market in the Central Business District (CBD). Ernst & Young Tower, Cleveland’s first multi-tenant downtown office building in more than two decades, recently opened at close to a 90 percent occupancy rate.
Despite an asking rental rate in the low $30 per square foot range, which represents the top of the market, this 487,000-square-foot tower illustrates a substantial pent-up demand for new, efficient office space. The balance of existing Class A properties in the CBD are also performing well, with an average vacancy rate of 15.7 percent at the end of the first quarter. And the overall momentum downtown is strong.
Nearly $1 billion of development has occurred during the past 24 months, including a new casino, convention center and medical mart completed this year. Additionally, a new headquarters for the Cuyahoga County government will be completed next year. All of these factors increase the likelihood that another office project in the CBD will start soon.
Downtown’s Class B and C submarkets are a little cloudier and cooler. Bruised by a few large-scale tenant relocations (to Ernst & Young Tower as well as to suburban alternatives), the vacancy rates for both of these downtown submarkets have increased.
The vacancy rate for Class B and Class C properties stood at 23.2 percent and 26.9 percent, respectively, at the end of the first quarter.
While the conversion of select office properties to hotel or residential uses will give a boost to these submarkets, long-term improvement will depend on job growth among legal and financial tenants that dominate occupancy at Class B and C properties.
Suburban Highs and Lows
The uneven landscape is also apparent in Cleveland’s suburban office submarkets, with some performing well while others are struggling. The South suburban market, which had languished for the better part of a decade, has benefitted from a nice rebound during the past six months.
The overall vacancy rate of 17.5 percent in the South suburban market is still relatively high, but it is the strongest performer among Cleveland’s five suburban office submarkets. Activity in this market includes a mix of relocations, such as Sedgwick Consulting, from other submarkets.
The storyline isn’t as positive for the East suburban market, as it gave up some ground during the past few quarters. Vacancy has crept up to slightly more than 19 percent and could climb higher with several vacancies looming. Movement by Progressive Insurance is the primary culprit, as the Fortune 500 company continues to balance its occupancy requirements between owned properties and third-party properties.
Dissect this submarket and it becomes apparent that much of the large-scale vacancy is located in the Landerbrook/Landerhaven corridor, where the vacancy rate is approaching 25 percent. The Chagrin Boulevard corridor is much healthier, with a vacancy rate close to 14 percent.
In Cleveland’s West suburban submarket, rapid population growth throughout much of the late 1990s and early 2000s has propelled it to be a mainstream suburban office location.
The announcement in 2011 by American Greetings of its intent to build a new 650,000-square-foot headquarters in the West suburban submarket initially appeared to have solidified this standing. But a series of events at American Greetings, ranging from bumpy financial performance to job cuts to a movement to take the company private, has postponed this move, if not put it in outright jeopardy.
While the submarket has enough mass and diversity to overcome this potential setback, it would certainly blunt the positive momentum the West submarket has achieved.
The Rise of MidTown
Finally, there is an area of Cleveland emerging as a sixth office submarket. Formally known as the MidTown Corridor, the geographic area is bordered by Cleveland’s CBD to the west and University Circle to the east. The MidTown Corridor has actually been evolving during the last 15 years, pioneered by companies such as Applied Technologies and Pierre’s Ice Cream.
However, more recent infrastructure improvements, including the new $197 million mass transit HealthLine and more than $500 million in renovations at Cleveland State University, have served as a catalyst for new office development. During the past 36 months, nearly 500,000 square feet of new development and redevelopment has occurred in the MidTown corridor. While most of this activity has been high-tech/R&D-oriented in nature, the MidTown Corridor will continue to attract office space users going forward.
— Alec Pacella, managing partners and senior vice president specializing in investment for NAI Daus