With the local economy recovering from the Great Recession, the commercial real estate industry in Cincinnati is heating up. Strong office leasing activity in recent quarters has driven down the vacancy rate. From a high of 21 percent in the first quarter of 2011, total vacancy has steadily dropped to its current rate of 19 percent, the result of approximately 700,000 square feet of positive absorption, according to Jones Lang LaSalle.
The real estate services firm tracks Class A and B office properties greater than 20,000 square feet, excluding owner-occupied medical and government buildings.
The growth of Cincinnati businesses has sparked increased demand for office space, leading to approximately 1 million square feet of product currently under construction or planned for the next year. Meanwhile, the lending climate has improved greatly since the depths of the recession.
Cincinnati has welcomed corporate relocations and expansions during the past year. Following several years of short-term lease renewals and tenants giving space back, this is welcome news that is already improving market fundamentals.
Driving the increase in office demand is job growth in the healthcare industry as well as the professional and business services sector. The three largest leases within the last year have all involved healthcare-related companies.
Humana, one of the nation’s largest health insurance providers, leased 175,000 square feet at Executive Center One in Cincinnati’s Tri-County I-275 submarket. This lease is an expansion for the company, which already occupies space in two other locations.
Omnicare, a pharmaceutical company, secured a 150,000-square-foot lease at Atrium One in the CBD, representing both a corporate relocation from Kentucky and an office expansion.
On the patient side, Christ Hospital, a Cincinnati-based health system, leased a 143,000-square-foot building in Mount Auburn. Christ Hospital plans to move its nonclinical and support staff to a redeveloped facility this summer, thereby freeing up space at its main hospital to accommodate patients.
In the professional and business services sector, large leases include First Financial Bancorp, which expanded its rapidly growing firm by securing 85,000 square feet in the CBD at 255 E. Fifth Street, which has now been renamed the First Financial Center. The law firm and lobbying group Vorys, Sater, Seymour and Pease LLP is also expanding, as shown by its lease of 75,000 square feet in the Great American Tower. The Nielsen Company, a global marketing and advertising research firm, secured 78,000 square feet at the Chiquita Center.
Trends in Transactions
Though capital markets activity has steadily increased in Cincinnati since the downturn, a significant portion of transactions apply to distressed properties.
While the transaction volume has increased by square footage, the median transaction value per square foot has dropped in each of the last four years (from $76 per square foot in 2007 to 2011’s depressed average of $49).
An example of a distress trade diluting pricing is Massachusetts Mutual Life Insurance Co.’s acquisition of the recently foreclosed 580 Building in the CBD.
This 640,000-square-foot, Class A office tower recently sold at a sheriff’s auction for $16 million, or $25 per square foot, half of the price tag of $47 per square foot in 2003. Massachusetts Mutual Life’s bid was the minimum acceptable bid, or two-thirds of the property’s $24 million appraised value.
By no means do troubled assets exclusively define the property sales market in the Queen City. OA Development, a Georgia-based commercial real estate investment firm, recently purchased the 135,000-square-foot, Class A Hawthorne Center in Blue Ash for $16.6 million, or $123 per square foot. Hawthorne was 92 percent occupied at the time of the sale. Half of the property is leased through 2016 to Coca-Cola Refreshments. F&W Media Inc. is leasing another large portion through 2021.
Development Pipeline
When businesses move to Cincinnati, they turn to new office construction to make spaces their own and to accommodate workforce growth. As previously stated, 1 million square feet of construction is planned or already under construction this year. While construction activity may be less than in previous years, the amount of activity is strong compared to other Midwest markets.
The Great American Office Tower, delivered in early 2011, was the largest speculative office development in Cincinnati in nearly two decades.
Although the building quickly reached its current occupancy of 88 percent, the overall market vacancy will deter any additional large speculative office construction for some time.
Most of the office product in the
pipeline or existing stock currently under renovation is either build-to-suit or owner-occupied space. The largest office building undergoing renovations and nearing completion is a 152,000-square-foot property in the Midtown submarket.
The office building, located at 237 William Taft Road, was built in 1959 and sat vacant since the Hamilton County Department of Job and Family Services moved out in 2010. The building has been fully leased to Christ Hospital, which will take occupancy this summer when renovations are complete.
With the Cincinnati office stock maturing and space requirements evolving, the city and its surrounding submarkets, specifically the northern suburbs, prove enticing to companies building their headquarters.
Blue Ash will be the new site for Intelligence Inc.’s 70,000-square-foot U.S. headquarters, while the city of Mason welcomes Seapine Software’s 50,000-square-foot headquarters.
Among the projects slated to break ground this year, dunnhumbyUSA will begin building its 250,000-square-foot headquarters downtown.
Total Quality Logistics will begin constructing a second 100,000-square-foot building adjacent to its current headquarters.
From its downtown CBD to its suburbs, Cincinnati’s office market has proven itself a welcoming market for people and businesses of all sectors looking to grow — and is positioned to grow with it.
— Andrew Batson is a research analyst with brokerage firm Jones Lang LaSalle in Ohio.