Dayton Office Market Continues Steady Recovery Amid Urban Renaissance
For the Dayton office market, it’s all about timing. In one of Miami Valley’s largest office leases in recent memory, CareSource early this year signed a five-year lease to occupy 50,000 square feet on two floors at the 486,000-square-foot Kettering Tower downtown.
The nonprofit managed healthcare plan is the largest Medicaid plan in Ohio and the second largest in the United States.
CareSource said it will assess current and future business needs and redistribute business units from corporate headquarters and offices at 40 W. Second St. to Kettering Tower. In addition, some staff hired during the first quarter of this year also will be placed at the new location.
The CareSource location at Kettering Tower increases the company’s footprint to nearly 600,000 square feet in downtown Dayton. The four downtown Dayton locations — including CareSource’s corporate headquarters at 230 N. Main St., Ballpark Village at 220 E. Monument Ave., offices at 40 W. Second St. and Kettering Tower will support 2,200 staff.
The $6 million build-out of the multi-tenant Kettering Tower is specifically designed to accommodate CareSource. Tower Partners LLC, an entity whose investors include New York businessman Albert Macanian, owns the building.
But the deal bringing 300 new jobs to the region had little impact on the vacancy rate downtown or in the office market overall in the first quarter due to official move-outs in January and February of other tenants who last year relocated to new offices within the market.
The bottom line is that Dayton’s overall office vacancy rate remains near 25 percent, continuing a steady trend of small quarterly improvements since 2013 when the rate was consistently above 28 percent.
Despite 60,000 square feet of absorption downtown during the first quarter, the vacancy rate in the downtown market remained at a relatively high 33 percent.
The inventory of the Dayton office market totals approximately 14.3 million square feet, of which 4.6 million square feet is located downtown and 9.7 million square feet is in the adjoining suburbs.
Impact of job gains
Despite the high vacancy rate, the enthusiasm for downtown hasn’t been this high in more than two decades. The urban renaissance taking place all over the world is happening in Dayton, albeit on a smaller scale, amid a backdrop of a continuing U.S. economic recovery.
Although the region suffered through a period in which it lost more than 30,000 jobs since 2000, it has regained all but 10,000 of those jobs. In 2015, some 5,500 jobs were added, with 2,600 of those coming from economic development efforts.
Site Selection magazine has ranked Greater Dayton No. 2 among markets its size for economic development. That includes job growth and job retention. This is the 10th year the region has been ranked in the top 10 for economic development for metros with populations between 200,000 and 1 million.
One of those big wins is Fuyao Glass America, a Chinese firm setting up the world’s largest auto glass manufacturing plant at a former General Motors auto plant in Moraine. The company plans to hire 1,500 workers by the end of 2016.
Meanwhile, the region is seeing a surge of investment in logistics and distribution, building on a $2.5 billion annual industry that already supports 20,000 local jobs.
The positive news has clearly spilled over into the office sector based on the fact that nearly 20 Dayton office properties saw positive absorption during the first quarter, while half that number posted negative results. Overall, the office market recorded nearly 34,000 square feet of positive absorption in the first quarter.
Downtown Dayton saw positive absorption of 60,000 square feet during the first quarter, but the suburbs posted 26,000 square feet of negative absorption, primarily due to UBS’ departure from Washington Park I in Centerville and Beavercreek Office Suites’ relocation from a building in the six-building, 281,000-square-foot Acropolis at Fairfield Commons complex.
The UBS consolidation of its Centerville and downtown offices to Austin Landing and the Beavercreek Office Suites relocation to the nearby Signal Hill complex were recorded in a previous quarter.
Future prospects brighten
As the tallest and most prominent office building in downtown Dayton, Kettering Tower has recorded the biggest improvement in occupancy. The building has reached 62 percent occupancy, up from less than 50 percent a year ago.
In addition to CareSource, Westminster Financial, Wells Fargo and Eagle Registration each have signed leases for more than 5,000 square feet in Kettering Tower during the past few months.
Prospects in the market appear to be at an all-time post-recession high. In the last five quarters, positive absorption of office space in the Greater Dayton market has totaled more than 100,000 square feet. But there is still an abundant amount of office space available. Fortunately, little new construction is underway or is planned for the market.
The newest development, Austin Landing at Interstate 75’s Austin Boulevard exit (located about 10 miles south of downtown), as well as the Water Street development and Tech Town Downtown, are all seeing strong occupancy rates.
Austin Landing is at 95 percent occupancy, Water Street is at 90 percent and Tech Town is at nearly 80 percent. Overall, however, more than 300,000 square feet of Class A space remains vacant downtown, translating into a 17.5 percent vacancy rate for Class A space downtown.
The East market is driven largely by activity at Wright-Patterson Air Force Base, the largest single-site employer in the state of Ohio. The base, which has a $4.3 billion economic impact on the region, supports 62,000 jobs in the 14-county western Ohio region.
The base is a magnet for the East office market to support defense contractors and defense-related servicing firms, including MacAuley-Brown, which expanded in the first quarter by nearly 4,000 square feet at the three-building, 130,000-square-foot Apple Valley Office Center.
Had it not been for the CareSource lease downtown and the recording of the Beavercreek Office Suites loss in the first quarter, the East market would have posted the biggest absorption during the quarter at nearly 16,000 square feet.
— By Tony Witt SIOR, CCIM, Senior Vice President, Cushman & Wakefield. This article originally appeared in the April 2016 issue of Heartland Real Estate Business.