After years of little or no new construction, the Greater Cleveland area is experiencing the construction of a broad range of major new projects representing more than $5 billion of new investment.
Some of the largest projects include a new convention center and medical mart, a new Caesars Horseshoe Casino, plus major new medical center facilities developed for the Cleveland Clinic, University Hospitals and the VA Medical Center.
There also are four new office developments: a 450,000-square-foot multi-tenant office tower in the Flats East Bank area of the central business district; a 580,000-square-foot world headquarters complex on 53 acres in the eastern suburb of Beachwood for Fortune 500 company Eaton Corp; a 700,000-square-foot corporate headquarters for American Greetings in Westlake, a western suburb; and a 639,000 sq. ft. global headquarters for Goodyear Tire & Rubber Co. in Akron to the south.
Not since the 1990s, when we saw the completion of a half dozen CBD office towers and new stadiums for the Browns, Indians, and Cavaliers has Cleveland seen this kind of activity.
Build new or renovate?
In mature, established cities like Cleveland, the time comes for companies and institutions to decide between building new or renovating existing structures.
The new Flats East Bank Building being built by Scott Wolstein, former CEO of DDR, and his mother, Iris, along with Fairmount Properties, is part of a major mixed-use development on 24 acres assembled by the Wolstein family.
The property faces the Cuyahoga River with views of Lake Erie. Anchor tenants include Ernst & Young, which will occupy 140,000 square feet and the Tucker Ellis law firm, which has leased 100,000 square feet. Both are vacating a 1930-vintage downtown building in order to take advantage of the efficiencies of large, rectangular floor plates, a new attached Aloft Hotel, new restaurants and a state-of-the-art fitness center.
Eaton Corp. is creating a new headquarters campus, almost doubling the space it currently occupies in a downtown office tower. The project enables Eaton to consolidate a few of its suburban locations into its main office and plan for projected growth.
American Greetings, which has grown over the years in an antiquated facility, decided its future is better served with a consolidated complex that is adjacent to a major new mixed-use complex called Crocker Park that features retail and office space as well as apartments. Goodyear Tire & Rubber Co., another of the area’s Fortune 500 companies, is building its complex adjacent to the company’s Akron Innovation Center.
The central theme for all these company commitments seems to be a move to modern facilities with amenities to attract and retain quality employees. These firms are looking to create the best work environment for their employees in order to enhance productivity and move their firms forward.
Two other major tenants have recently chosen to renovate older buildings in the CBD. Rosetta, one of the nation’s largest independent interactive agencies, recently moved to a building on historic Euclid Avenue, adding a rooftop penthouse for training, entertainment and client meetings.
Rosetta employs more than 300 people, many of whom are in their 20s and 30s. The company’s move downtown near the new, hip E. 4th Street entertainment district from its previous location in the suburbs was a perfect fit.
Also, a major law firm, Calfee Halter, decided its next home was best suited in a totally renovated, classic 1930s-era building near the new convention center and county courthouse.
Flight to quality
Higher-end buildings in the CBD and suburbs are performing well compared to the overall market. The top-tier buildings (top 20%) in both the CBD and suburbs are now experiencing a vacancy rate of only 13.7% compared with an overall vacancy rate of 23.3%.
As in past recessionary markets, quality tenants can take advantage of depressed conditions to move into higher-quality office space as the rate differential between high-end space and other space compresses.
While high-end space has held its own from an occupancy standpoint, overall vacancy rates and rental rates have either decreased or remained static throughout the office market as building owners vigorously compete during these tough times.
Capital market shifts
The challenging financial market has put well-capitalized owners in the driver’s seat when competing for deals. The ability to fully fund tenant improvements, and to maintain the quality of building systems, common areas and services has been integral to retaining and gaining tenants. There have been winners and losers in this environment.
In some instances, the losers end up shuttering their buildings or repositioning them for other uses rather than operate at a loss. This is what happened recently when the 1717 E. 9th Street building, formerly known as The East Ohio Gas Building, stopped renewing tenants, forcing them to relocate to other buildings downtown.
That winnowing effect has reduced the overall office inventory and helped fill vacancies in other buildings. Another example of this is the recent sale of the Commerce Park 1, 2, and 3 buildings in the eastern suburb of Beachwood
This 200,000-square-foot-complex (3.8% of the eastern market) will be torn down in 2012 to make room for condominiums. Office tenants that collectively occupied 110,000 square feet in those three buildings are now in the market for space.
Many landlords are working with their lenders to restructure their loans. Some building owners are structuring deals with lots of free rent in lieu of tenant improvements, while others are offering attractive “as is” deals or significant signage opportunities as a way to attract tenants.
Where are we headed?
Like most areas of the country, Cleveland has seen vacancy rates inch up over the past several years while rents remain fairly static, the result of downsizing at corporations and institutions. There are encouraging signs, however, as development projects progress and the lending market shows renewed life.
Duke Realty recently sold the Great Northern Corporate Center, a multi-tenant complex spanning 273,379 square feet, to PWA, an out-of-state investor, for $26.7 million. It’s a great example of the market starting its comeback to some sense of normalcy.
As long as the capital markets continue to improve and the economy doesn’t regress, it is likely that the momentum created by the current construction boom will pay dividends in the next year or two. Occupancy and rental rates should then start to show some improvement.
— Douglas Leary is senior vice president in the office specialty group of CBRE in Cleveland