By Rob Roe and Jessica Urbin, JLL
What does the future of the office in Cleveland look like? While there isn’t one straightforward answer, there’s no doubt that the office of today looks much different than it did five years ago.
Though some companies still maintain a traditional office space, the onset of hybrid work has indisputably changed the way many companies use — and choose — their real estate. This adoption of hybrid work has driven the market’s evident transformation.
Smaller office spaces
As companies adopt hybrid work models, the need for larger office spaces decreases. This doesn’t mean companies are eliminating their office real estate, though. In fact, 60 percent of office workers want to work in a hybrid style today, and 55 percent are doing so already.
These downsized spaces support this work model by creating shared spaces, such as cubicles or lockers, as well as incorporating more conference rooms and small team rooms to hold private video calls. They also encourage something employees can’t get at home: in-person collaboration. New spaces are being outfitted with intentional spaces to meet, such as lounge areas, desks in open areas, cafés and more.
In addition, having small spaces doesn’t necessarily translate to lackluster spaces. Instead, many companies are downsizing and investing the saved money into their new spaces, upgrading them to incorporate high-value amenities for their employees.
A flight to quality
Given employers want to attract and retain the top talent in their market, it’s no surprise that they’re investing in high-quality, amenitized spaces. On the opposite side, landlords are also investing in their buildings, especially as tenants decrease their footprints and leave their previously rented office spaces vacant.
According to JLL’s latest research, demand continues to favor Class A space over Class B space by a factor of three to one, with Class A absorption year to date at 124,843 square feet and Class B absorption at 45,042 square feet.
This demand has also driven rent for Class A spaces higher than rent for Class B spaces, with Class A space averaging $24.21 per square foot and Class B space averaging $18.58 per square foot. Simply put, this means spaces with desired amenities hold more value for tenants — even if they cost more.
Many of these amenities, in particular, focus on health and well-being, as well as diversity and inclusion. While some of these attractions are more obvious — such as fitness centers, onsite restaurants and upgraded lobbies — other unique conveniences include community gardens, an emphasis on natural light, rooftop terraces, comfortable lounges, walking paths, prayer rooms, mothers’ rooms and more.
Examples of Cleveland companies and landlords implementing these characteristics include Equity Trust’s Convergent office complex in Westlake and Bendix Commercial Vehicle Systems’ new headquarters in Avon. Plus, Benesch, Friedlander, Coplan & Aronoff LLP signed a lease for eight floors at the Class A Key Tower, marking the largest central business district deal in more than 10 years.
Each of these buildings touts high-value attractions: Convergent is Northern Ohio’s first Fitwel project, providing a safe, sustainable and comfortable environment for tenants, while Bendix’s LEED-certified headquarters offers floor-to-ceiling windows, a state-of-the-art fitness facility and private meeting rooms. Bendix also incorporated a wellness clinic for employees and their families, an employee garden and composting and recycling options throughout the facility and surrounding walking path.
In parallel with these buildings, Key Tower boasts an outdoor pavilion, high-end dining options and a fitness and spa facility with wellness programs, personal trainers, classes and more.
The growing flight to quality has also resulted in rising construction in the Cleveland office market.
While supply chain issues, labor shortages and increased materials costs have contributed to rising construction costs, companies are continuing to invest in their office spaces to attract and retain top talent. Though tenant improvement dollars might not cover the cost of completely retrofitted office spaces, companies are paying out of their own pockets to make their spaces more attractive and appealing.
Of the 2.1 million square feet of space currently under construction in the Cleveland market, several projects have recently completed or are currently under development in the suburbs, including CBIZ’s 57,000-square-foot national headquarters in Independence and ICP’s nearly 100,000-square-foot office, dining and residential complex in Seven Hills.
Office construction is expected to maintain momentum at nearly 2.1 million square feet, with several headquarters projects scheduled to deliver in 2023 and 2024. Among the deliveries is Sherwin-Williams’ highly anticipated new headquarters building in downtown’s Public Square and its suburban R&D facility.
Declining vacancy rates
While rising vacancy rates have continually risen in the U.S. office market, the Cleveland office market has recently experienced slight relief, from 15.5 percent to 14.5 percent year to date. This comes as a result of office buildings being converted to apartments, as well as companies signing new leases.
Comparing the second quarter of 2022 to the first quarter of 2022, the total vacancy of Cleveland’s urban area fell 3.7 percent, and the total vacancy of Cleveland’s suburbs fell 7.4 percent. Plus, sublease vacancy as a whole has declined for the third consecutive quarter — a key indication that companies want to keep their office footprints and are beginning to implement their return-to-office strategies.
Here to stay
While there’s no doubt that hybrid work is here to stay, the office still plays a paramount role in employee attraction and retention. This rings especially true for companies that are incorporating high-value amenities into their real estate — ones that their employees can’t get in the comforts of their homes.
Rob Roe is a managing director and Jessica Urbin is a vice president with JLL. This article originally appeared in the August 2022 issue of Heartland Real Estate Business magazine.