Medical, Service Industries Drive Office Absorption

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The Cincinnati office market recorded positive net absorption of 74,378 square feet during the first quarter of 2013 while the overall vacancy rate dipped slightly to about 23.2 percent. The forecast from Cassidy Turley is for Class A submarkets to become tighter as medical and service industries continue to drive absorption. However, the increasing success of the Class A sector has come at the expense of Class B space.

First-quarter Class A direct vacancy in the metro Cincinnati office market stood at approximately 20 percent, while Class B direct vacancy was about 28 percent. That’s a stark contrast from 2004 and 2005, when Cincinnati’s office vacancy rate was 10 percent for Class A space and 17 to 18 percent for Class B space. “If you look back eight to nine years, that’s where [the vacancy rates] stayed during good times,” says Scott Abernethy, senior vice president and principal in Cassidy Turley’s Cincinnati office.
When the market took a hit during the 2008 to 2010 period, large vacancies popped up, forcing landlords of Class A buildings to lower rental rates. That in turn created deal incentives for Class B tenants to move to newer facilities. “Class B tenants can move over to these Class A buildings when their leases are up and not pay much more than they are paying today,” says Abernethy.
Now, predominantly Class A submarkets are absorbing more and more space due to a flight to quality. The good news is that vacancy rates are expected to continue declining for both Class A and Class B office properties during the next several years as companies grow and move into available space — most of which will be Class B. The lack of new speculative construction also will help lower vacancy rates in both sectors.
Different Outcomes
West Chester, predominantly a Class A submarket, saw a single-digit direct vacancy rate of 4.1 percent during the first quarter, while Kenwood and Blue Ash were closer to 10 to 11 percent, and continue to drop.
West Chester has experienced diminishing vacancy rates partially because it overlaps two of the highest-growth counties in the state of Ohio. Also, West Chester is a hub for medical office buildings, all of which were built during the past 12 years as a response to the large residential population growth.
This area is matched only by “Pill Hill,” where most of the major hospitals maintain corporate campuses adjacent to the University of Cincinnati.
West Chester is located along Interstate 75, about 20 miles north of downtown Cincinnati, while Kenwood and Blue Ash both are situated along Interstate 71. These Class A submarkets have proximity to the interstates and benefit by any increase in traffic. Residential population growth in north Cincinnati has been abundant, and many high-income corporate executives reside there, resulting in healthy demand for office space in these submarkets.
In contrast, the West submarket saw a direct vacancy rate of 36.1 percent in the first quarter. This mostly Class B submarket is a combination of older buildings spread out across the west side of Cincinnati, and has no proximity to any major interstates, ultimately resulting in much higher vacancy rates than the predominantly Class A submarkets, says Abernethy.
Double-Edged Sword
The 41-story, 825,000-square-foot Great American Tower at Queen City Square was built in downtown Cincinnati during the heart of the recession and opened in January 2011. The tower was primarily built to house the headquarters of the Great American Insurance Co., as well as two large law firms. The tower is currently about 90 percent occupied.
The tower’s success in attracting tenants has come at the expense of Class B buildings, many of which are experiencing large vacancies. Some of these older properties (such as the 580 Building) are being designed for other uses, primarily residential apartments and hotels.
Office rents market-wide have been holding steady the past couple of years, according to Cassidy Turley. As some Class A space comes off the market and vacancy rates drop to single digits in select submarkets such as Kenwood, West Chester and Blue Ash, rental rates are expected to begin rising.
What about downtown office rents? “It is highly possible that 2014 is going to see the suburban rental rates start to climb, but I don’t see the downtown market there just yet,” Abernethy says. “There are too many holes resulting from the tower.”
— Jacqueline Rehe

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