Office Vacancy Down as Rents Inch Higher

Transcription

1 Office Vacancy Down as Rents Inch Higher The Greater Cleveland office market bounced back in the second quarter of 2016 with positive market fundamentals across all metrics. After giving back space in the first quarter, the office market posted positive net absorption, while vacancy decreased and average rental rates continued to climb. Current Conditions All 5 suburban submarkets net tenancy gains Terminal Tower under-contract Rental rates tick upward Landlords propose more office conversions New York Life Insurance moving 350 jobs downtown Net absorption totaled 59,373 square feet in second-quarter 2016, a welcome change from the first quarter, when the market gave back 9,788 square feet. The net gains in moves dropped the vacancy rate 20 basis points from the previous quarter to 17.. Year-over-year vacancy is down 70 basis points from 18.3% in second-quarter The Central Business District (CBD) was the only submarket not to post positive net absorption in the second quarter. Market Analysis Asking Rent and Vacancy $22 $ % Average rental rates continued to climb steadily, finishing the second quarter at $17.93/SF for all classes, the fourth consecutive quarter of rental rate gains. Dating back two years, the average rental rate has increased $0.55/SF. The CBD paced the market in terms of rental rate, finishing the first quarter up $0.49/SF at $18.52/SF. Insurance Company Moving Downtown New York Life Insurance Co. leased 110,000 square feet at 200 Public Square in the second quarter, with plans to bring 350 jobs to three floors in late The insurance company currently occupies 77,000 square feet at Lakewood Center North in the West submarket. The new space in 200 Public Square is an expansion of more than 4, as the company may add as many as 250 additional jobs to the CBD. The future of Lakewood Center North, the tallest building in Lakewood, is now very much in flux, as the property was more than 5 vacant prior to New York Life s decision to relocate. The building s owners, Kowit & Company Real Estate Group, announced plans to convert more than 200,000 square feet to upscale apartments. The proposed conversion plans mimic those of RAIT Financial Trust in the CBD, where the landlord is planning to convert up to 225,000 square feet of office space at 1301 East 9th Street to 82 apartments in Iconic Terminal Tower under Contract as Forest City Weighs Options Forest City Realty Trust, Inc. agreed to sell the Terminal Tower on Public Square to the K&D Group, Inc. The second-tallest building in Cleveland, Terminal Tower is slated for a partial conversion from office to residential. The new ownership, K&D Group, plans to convert approximately 250,000 square feet of the building s lower levels to 300 apartments. K&D Group has recently purchased two buildings in the CBD, with plans to convert former office space into mixed-use projects combining apartments, retail and offices. A conversion is currently $18 $16 $14 $12 2Q06 2Q07 2Q08 2Q09 2Q10 2Q11 2Q12 2Q13 2Q14 2Q15 2Q16 Net Absorption Square Feet, Hundred Thousands Q06 2Q07 2Q08 2Q09 2Q10 2Q11 2Q12 2Q13 2Q14 2Q15 2Q16 Market Summary Average Asking Rent (Price/SF) Vacancy (%) Current Quarter Prior Quarter Year Ago Period 18% 14% 1 12 Month Forecast Total Inventory 39MSF 39MSF 39MSF Vacancy Rate % 18.3% Quarterly Net Absorption 59,373-9, ,078 Average Asking Rent $17.93 $17.69 $17.50 Under Construction 47,000 47,000 0 Deliveries 0 0 0

2 underway at the Leader Building, and the Halle Building on Euclid Avenue will begin construction in early Forest City has sold a number of its Cleveland assets over the past five years, including Skylight Office Tower, the Higbee Building and most recently the Avenue, which was picked up for $56.5 million last quarter. Forest City still owns Post Office Plaza in the CBD, which lost its largest tenant in second-quarter 2016 when Quicken Loans vacated 55,000 square feet by moving into 81,000 square feet on the fourth and fifth floors of the Higbee Building. Large Requirements Lead to New Tower Speculation The 250,000 square feet earmarked for conversion at Terminal Tower is currently occupied by Forest City through Although it is widely speculated that the company will move its Cleveland offices to Post Office Plaza, two major CBD tenants are currently in the market with a combined 1.3 million-square-foot requirement and no obvious home. Medical Mutual presently has four offices in Greater Cleveland, with the majority of its workforce at 2060 East 9th Street. The insurance company has a 380,000-square-foot requirement, while its current home has been rumored for a potential office-to-residential conversion for years. The larger requirement, Sherwin-Williams, is searching for a 900,000-squarefoot headquarters in Cleveland. The company currently occupies and owns the Landmark Office Towers on Prospect Avenue but has outgrown the space and is leasing approximately 50,000 square feet at the nearby Skylight Office Tower. SHERWIN-WILLIAMS IS SEARCHING FOR A 900,000- SQUARE-FOOT HEADQUARTERS The two large requirements have led to rumors of a potential new office tower coming to the CBD, as only one CBD building, the former May Market Summary Square Feet, Hundred Thousands Company building, can currently handle the 380,000-square-foot requirement. However, that building is not a viable option in its current state and is proposed for redevelopment from office to residential and retail. When coupled with the planned NuCLEus tower in the Gateway District, the CBD could be moving toward an office construction boom not seen since 1990, when three Class A office buildings delivered. Suburbs Remain Tight All five submarkets outside of the CBD posted positive net absorption in second-quarter 2016, gaining 73,211 square feet of tenancy. The West submarket paced the suburban markets with 28,730 square feet of positive net absorption, as Roundstone Management took occupancy of the 23,000-square-foot building at Detroit Road. Roundstone Management vacated approximately 5,000 square feet at Clemens Road in Westlake THE WEST SUBMARKET PACED THE SUBURBAN MARKETS WITH 28,730 SQUARE FEET OF POSITIVE NET ABSORPTION A number of properties changed hands in the South submarket in the second quarter, headlined by Rockside Medical Center at 6701 Rockside Road. The 54,611-square-foot building sold to Community Healthcare Trust, Inc. for $10.4 million, or $190/SF. The office and medical building was 80. leased at the time of sale. Also in the South submarket, 8001 Katherine Road in Brecksville sold to Compliance Services of America for $3.6 million, or $146/SF. The Geis-built Class B office building is 10 leased to Stautzenberger College. Moving from the South submarket to the East, 5966 Heisley Road sold to its largest tenant, Lake County General Health, for $2.3 million, or $74.24/SF. The 30,510-square-foot office building was largely vacant, save for the new ownership. Cleveland Market Vacancy Rate Percent (%) % 18% 12% 28% 24% Q11 4Q11 2Q12 4Q12 2Q13 4Q13 2Q14 4Q14 2Q15 4Q15 2Q16 12% 8% 2Q11 4Q11 2Q12 4Q12 2Q13 4Q13 2Q14 4Q14 2Q15 4Q15 2Q16 Net Absorption Deliveries Vacancy A B 2

3 Landlords Reap Benefits of Apartment Boom Developers and owners in downtown Cleveland continue to propose office to residential conversions, in addition to new construction; however, demand may be slowing, as evidenced by slower-thanexpected leasing activity at the Flats East Bank II. As more office space is removed from the market, vacancy continues to decline, while rents are slowly inching upward, benefitting office landlords. The apartment boom in downtown Cleveland may be slowing, but the impact goes well beyond the residential market, leading to higher rents and new office construction. Lease/User Transactions Tenant Building Submarket Type Square Feet New York Life Insurance Co. 200 Public Square CBD Direct 110,000 Quicken Loans 100 Public Square CBD Direct 81,000 American Heart Association 1375 E. 9 th St CBD Direct 11,492 University Hospitals 5 Severance Circle East Direct 9,758 Climaco Law 55 Public Square CBD Direct 9,590 Select Sales Transactions Building Submarket Sale Price Price/SF Square Feet 6701 Rockside Road South $13,350,000 $190 54, Katherine Drive South $3,600,000 $146 24, Heisley Road East $2,265,000 $74 30, Industrial Parkway Southwest $660,000 $23 28, Euclid Avenue CBD $1,750,000 $18 100,000 3

4 Submarket Statistics Total Under Total Qtr YTD Class A Class B Average Inventory Construction Vacancy Absorption Absorption Asking Rent Asking Rent Asking Rent (SF) (SF) Rate (SF) (SF) (Price/SF) (Price/SF) (Price/SF) CBD Total 21,309, , ,639 $21.83 $17.99 $18.52 East 7,682,367 47, % 19,498 59,989 $21.36 $16.78 $17.96 South 5,000, % 20,288 67,699 $20.20 $16.56 $18.34 Southwest 1,430, ,695 19,459 $18.91 $13.42 $16.25 West 3,491, % 28,730 18,077 $17.07 $13.78 $14.15 Suburban Total 17,605,016 47, , ,224 $19.90 $15.73 $17.09 Market 38,914,815 47, ,373-9,788 $20.94 $16.86 $

5 Economic Conditions The Greater Cleveland economy continued to add more jobs in firstquarter 2016, as total payroll employment grew in May 1. year-overyear. The state overall gained 9,200 jobs in May, dropping the unemployment rate in Ohio to 5.1%, 10 basis points lower than April. In terms of office-using employment, financial activities posted 1.4% year-over-year growth. Conversely, the information and professional and business services contracted 2.1% and 1.9%, respectively. Turning towards median annual wages, Northeast Ohio s hourly rate of $19.55/hour is 8. below the national average of $21.27/hour. Beyond the lower wages, Northeast Ohio is 11.4% below the national average for cost of living, according to a recent TeamNEO report. These figures, when combined with energy costs, state and local taxes and office rents, determine the cost of doing business is 10. below the national average. Employment By Industry Cleveland-Elyria-Mentor 3.2% 12.1% 11.2% % 17.9% 7.3% 5.8% 13.3% Mining, Logging, and Construction Manufacturing Trade, Transportation, and Utilities Information Financial Activities Professional and Business Services Education and Health Services Leisure and Hospitality Other Services Government. Unemployment Rate Seasonally Adjusted 1 8% 4% 2% May-11 May-12 May-13 May-14 May-15 May-16 Payroll Employment Total Nonfarm, Not Seasonally Adjusted, 12-Month % Change 3% 2% 1% -1% -2% May-11 May-12 May-13 May-14 May-15 May-16 United States United States Cleveland-Elyria-Mentor Consumer Price Index (CPI) All Items, 12-Month % Change, Not Seasonally Adjusted, =100 4% 2% -2% -4% May-11 May-12 May-13 May-14 May-15 May-16 United States Cleveland-Elyria-Mentor Employment Growth by Industry Cleveland-Elyria-Mentor, May Month % Change Seasonally Adjusted Total Nonfarm Mining/Logging/Construction Manufacturing Trade/Transportation/Utilities Information Financial Activities Prof & Bus Services Education and Health Services Leisure and Hospitality Other Services Government % % % 5

6 Cleveland 1350 Euclid Avenue Suite 300 Cleveland, OH Newmark Grubb Knight Frank United States Office Locations Gar Heintzelman Research Analyst Newmark Grubb Knight Frank has implemented a proprietary database and our tracking methodology has been revised. With this expansion and refinement in our data, there may be adjustments in historical statistics including availability, asking rents, absorption and effective rents. Newmark Grubb Knight Frank Research Reports are also available at All information contained in this publication is derived from sources that are deemed to be reliable. However, Newmark Grubb Knight Frank (NGKF) has not verified any such information, and the same constitutes the statements and representations only of the source thereof, and not of NGKF. Any recipient of this publication should independently verify such information and all other information that may be material to any decision that recipient may make in response to this publication, and should consult with professionals of the recipient s choice with regard to all aspects of that decision, including its legal, financial, and tax aspects and implications. Any recipient of this publication may not, without the prior written approval of NGKF, distribute, disseminate, publish, transmit, copy, broadcast, upload, download, or in any other way reproduce this publication or any of the information it contains.