CITY HIGHLIGHT, AUGUST 2007

CINCINNATI CITY HIGHLIGHTS
Chuck Ciolino, Adam Simon, Mike Hartmann, Bob Ryan and Gladys Risma

Cincinnati Retail Market

It is a good time for retail in Cincinnati. Not only are the consistent growth markets still growing, urban infill is entering a new cycle of activity. And while construction may have put development slightly ahead of demand — raising average vacancy rates to 12.1 percent as compared to a 3-year average of approximately 10 percent — retailer and investor interest is closing the gap. Promise for the future also lies in rental rates, which, at an average of $14.36 per foot for neighborhood space, are up 1.5 percent compared to last year.

As in other major cities, lifestyle centers are a preferred retail product type in Cincinnati, and Rookwood Commons, located northeast of downtown on Interstate 71, is one of the most prominent centers in the market. At 760,000 square feet, Rookwood Commons has consistently been fully leased to retailers such as Eddie Bauer, Gap, Pier 1 Imports, Sur la Table and Z Gallerie. The center also recently scored an investment home run, selling for $220 million, or more than $280 per square foot, to Casto and JP Morgan at a reported 5.5 percent cap rate.

To compete, owners of local regional malls have been forced to reinvent their properties. Tri-County Mall, on the Interstate 275 belt loop in northwest Cincinnati, and Northgate Mall, also on the belt loop, are among the newly announced renovation projects. The most inclusive renovation, however, may be Kenwood Towne Center, which is located in Cincinnati’s first suburban ring. Virtually every inch of the strip-center-turned-indoor-mall-turned-lifestyle-center has been renovated with exceptional results, including the attraction of the market’s first Cheesecake Factory and a Nordstrom, which was simultaneously being courted by downtown and suburban locations.

On the northwest side of the city in Colerain Township, Trinity Development is building an expansive shopping center on approximately 65 acres of land. The project, including owner-occupied space, outlots and restaurant pads, will total approximately 540,000 square feet when complete. Meier and JC Penney will anchor the center, and other tenants will include Bed, Bath & Beyond, Old Navy, and Starbucks. Two retailers will own their own properties. The project is similar to Rookwood Commons, with a heavy emphasis on aesthetics and amenities. An additional 9 acres on the site will hold a 1.5-mile bike trail and green space, which Trinity plans to deed back to the township in the future. There are five restaurant pads, one of which is expected to be occupied by Starbucks Coffee. The anchors wil open this month, with ancillary retailers filling space from later this year through fall 2008.

In outlying areas, new retail development continues at a brisk pace. Among the most significant projects is Ohio’s first IKEA, a 340,000-square-foot store located to the far north in West Chester. Also entering the Cincinnati market is Regal Cinema —Casto opened a 16-screen theater in July in West Chester. And now that voters have approved Hal Silverman’s plans for Legacy Place, the development is proceeding in the far west submarket, and is rumored to include JC Penny and Dillard’s. Construction also continues from Cincinnati-based Bear Creek Capital, with a new Crate & Barrel in Kenwood, Ohio, and the groundbreaking of River’s Crossing, a phased 2.25 million-square-foot mixed-use development in South Lebanon, Ohio.

Interest in urban infill sites also is steadily being realized. In the densely populated Red Bank Road corridor, office and retail construction is turning former industrial land into service-oriented space for locals, as well as opening doors for new residential development. Regency Centers is constructing a Wal-Mart Supercenter with additional shops and outlots, and Miller-Valentine Group has purchased a parcel at Red Bank Road and Madison for more retail development.

Downtown Cincinnati also continues to evolve, with an announcement in early July that the city will provide Atlanta-based developer Howard Dawson Jr. with a subsidy increase of $45 million to build The Banks, a project with 70,000 square feet of retail, 200,000 square feet of office, 300 apartments and a 1,100-space garage that will be located between downtown’s two professional sports stadiums. Coupled with the ongoing development of the Fountain Square District, downtown is making solid headway in a market that is truly offering new depth and breadth in its retail offerings.

— Chuck Ciolino is a managing director in the Cincinnati office of Sperry Van Ness.

Cincinnati Industrial Market

Despite four consecutive quarters of increased vacancy and negative industrial employment growth, the Cincinnati industrial market remains stable. Costar Group reports a vacancy rate of 8.7 percent at the close of the first quarter, compared to 8.2, 7.5 and 7.3 percent for the prior three quarters, respectively. Employment continues to decline in the industrial sector, albeit moderately, as it has since 2004.

It seems counterintuitive to call the market stable while occupancy and employment growth continue to decline. Despite some negative signals, there are three important indicators to watch over the next few quarters to determine if the market remains stable, shows increased weakness, or appears strong and robust.

First, despite the fact that the two important aforementioned indices are trending downward, the movement is slow-to-moderate. Moderate movement in either direction is read as stable. Despite four straight quarters of increased vacancy, occupancy has decreased less than one percent, which could be corrected with one strong quarter. If the market starts to experience greater declines, or declines continue for another year or so, then the market will show signs of instability.

Second, quoted rents increased in the first quarter of the year, as they have year-to-year. Landlords raise quoted rents when leases are being signed and the market is experiencing solid rental activity. On the surface, this appears to be a paradox — how can it be that landlords are signing leases if vacancy is increasing overall? Different factors can create this effect, such as renewing a stable tenant to a downsized space, or having strong leasing activity but taking a net loss because of the loss of a large tenant. This is an important factor to watch, as rental rates will not increase in step with rising vacancy rates indefinitely.

The final indicator that our market is currently a stable one is that industrial construction starts remain low. New construction that is moving forward in the Cincinnati area continues to be driven by pre-leasing. Industrial properties under construction so far this year total approximately 50 percent of the amount of product brought to market each year in 2005 and 2006. Again, this is not a sign of a strong or robust market but, when coupled with increased vacancy, it is the sign of a stable one. Destabilization occurs when construction outpaces absorption. Lenders and developers have learned from the mistakes of their predecessors, and have managed to keep supply in check with demand. Most new construction is build-to-suit space or satisfies significant pre-leasing requirements.

The fortitude of a given real estate market can be measured by its ability to remain stable despite a downturn. Although the Cincinnati industrial market has endured successive quarters of negative absorption, it remains statistically on par with cities nationwide, and is poised for a strong upturn.

— Adam Simon is a vice president with The Everest Group/TCN Worldwide, a Cincinnati-basetd real estate brokerage firm.

Cincinnati Office Market

New development continues to shape the suburban Cincinnati office market, while the downtown market vies with its suburban counterparts for tenants. Amidst this backdrop, the central business district (CBD) is undergoing a renaissance, with the renovation of Fountain Square as the centerpiece. Restaurants and condominium developments are occurring in greater concentration in the city, as developers strive to make the downtown area the place to live, work and play.

Overall, Cincinnati’s office market gathered momentum in the second quarter, with approximately 475,000 square feet of positive net absorption recorded, which is more than double the 202,000 square feet of absorption recorded in the first quarter of the year. While more than 40 percent of this absorption came from two major leases — AK Steel’s lease of 138,816 square feet at Centre Point V in West Chester and Anthem’s 69,796-square foot lease at Governor’s Pointe in Mason — activity has picked up substantially throughout the market. The big second-quarter absorption numbers have dropped the area’s vacancy rate more than a full point to 17.38 percent, down from 18.57 percent at the end of first quarter.

While the CBD boasts a lower vacancy rate than most of its suburban counterparts, vacancy shot up last year, as the downtown office market showed negative net absorption of more than 402,000 square feet. A majority of the open space can be traced to one large move, as Convergys permanently vacated 350,000 square feet at The Center at 600 Vine to occupy its own building at Atrium One.

This year’s first quarter showed some slight improvement, with smaller leases absorbing approximately 25,000 square feet of space in the CBD. Activity accelerated in the second quarter, with more than 91,000 square feet of net absorption in the downtown office market, lowering the overall vacancy rate to 16.55 percent, down from 17.29 percent in the previous quarter.

Several large leases in the second quarter benefited the Class A downtown office market, including KeyBank’s 35,479-square-foot transaction at 303 Broadway, the E.W. Scripps Company’s expansion into an additional 24,256 square feet in the Scripps Center and Jack Rouse Associates lease of 22,021 square feet at The Center at 600 Vine. These deals helped bring the downtown Class A vacancy rate down more than a point and half, ending the first half of the year at 17.2 percent.

Moving forward, the CBD faces challenges, but it also boasts considerable assets aiding the efforts to surmount any obstacles. The completion of the Fountain Square public space and the Government Square transit hub, along with expanding retail and residential development, bode well for the future. Additionally, landlords are aggressively structuring deals to attract tenants, and the area offers opportunities for quality tenants that need large blocks of contiguous space.

The suburban office market continues to flex its muscle, with both improvement and growth. Overall vacancy declined substantially in the suburban office market during the first half of the year, dropping to 17.95 percent from a 20.43 percent rate at the start of the year. More than 177,000 square feet of space was absorbed during the first quarter. The second quarter saw even more activity, with 384,210 square feet of space absorbed in the suburban market. And the Class A vacancy rate dropped to 15.23 percent, a significant improvement from 17.63 percent at the start of the year.

The suburb of Kenwood, Ohio, with a vacancy rate of 4.46 percent for Class A and 5.09 percent for Class B office space, remains the tightest submarket, while the Northern Kentucky submarket across the Ohio River wrestles with Class A and B vacancy rates of 27.39 percent and 30.27 percent, respectively.

The completion of Centre Pointe V in West Chester and the pre-leasing of its entire 138,816 square feet of space to house AK Steel’s headquarters was a major factor. Other notable suburban Cincinnati deals include Farmers Insurance 12,829-square-foot lease at 4680 Parkway Drive in Governor’s Pointe. In Sharonville, Ohio, Data Recognition has leased the entire Park 42 Atrium III building and John Morrell Meats has taken 24,789 square feet in the SharonView Corporate Center. Fidelity Investments has expanded its space by 27,000 square feet in Madison Place at RiverCenter in Covington, Kentucky.

New development continues to be strong in the suburbs, with 10 new office buildings totaling more than 560,000 square feet completed last year. Approximately 70 percent of this space was leased by year-end, following on the heels of healthy development in 2005, when 470,000 square feet of new product entered the market, with nearly 85 percent leased by the end of 2006.

This year, developers are continuing to rapidly build new product, with 1.27 million square feet of office space under construction that is expected to be finished by the end of next year. Another 3 million square feet of office product is in the planning stages.

Following the construction boom along the Interstate 75 corridor, Duke Realty Corporation has completed the build out of the aforementioned AK Steel corporate headquarters in the recently completed Centre Pointe V building. Duke plans to further build out its development in the West Chester, Ohio, submarket, with work to begin soon on Centre Pointe VI, a four-story, 135,000 square-foot building.

In Norwood, Ohio, the 94,078-square-foot Linden Pointe I was completed in July, and construction of the 62,000-square-foot Keystone I office building has begun. Miller-Valentine has a contract for a 30-acre site at Madison Road and Red Bank Expressway, which was the former home of Nu-tone. The mixed-use project will be called Cincinnati Encenter, and will include 200,000 square feet of office space.

In the Kenwood area, the Safeco building has been demolished for construction of Kenwood Towne Place, a mixed-use project that includes 175,000 square feet of office, with expected completion by the end of 2008. Redstone of Kenwood is a 160,647-square-foot office building that should also be finished in 2008. These projects should help relieve the tight office market in an area where the vacancy rate for Class A office space has dipped below 5 percent.

Duke is also pushing the Blue Ash, Ohio, submarket forward with The Landings of Blue Ash project. CitiGroup has leased the entire 175,000 square feet first building to house its information technology center. Blue Ash II should be completed by year’s end, and has had significant preleasing to CitiGroup, HDR Engineering, Oracle and Wilmington College. While much of Blue Ash has been built out, and few land sites are available, Duke has another 29-acre site ready for development in the submarket. This $100 million project will include three office buildings, each approximately 175,000 square feet.           

Corporex is constructing a 249,845-square-foot regional headquarters for insurance provider Humana in its Baldwin Center complex in midtown Cincinnati.

In the midtown area, Corporex is constructing a 249,845-square-foot office building to serve as the Cincinnati regional headquarters of insurance provider Humana. Building on the success of the Baldwin Center development, Corporex has big plans to expand the center. Centrally located at I-71 on the edge of downtown, Baldwin Center is the foundation of an urban campus environment that will feature up to three additional office towers and a new, full-service hotel. Corporex will locate the new facilities across Eden Park Drive from the original buildings and connect the development through a skywalk.

The Grand Baldwin is the development’s centerpiece. Originally built more than half century ago, it was home to the legendary Baldwin Piano Company. The nine-floor, red brick structure was completely renovated and now features more than 245,000 square feet of Class A office space. Baldwin 200 opened in 1990, with nearly 210,000 square feet of Class A space in its 12 floors. Baldwin 300, a 200,000-square-foot office building, is in the planning stages. Corporex also is marketing the development for build-to-suit opportunities.

— The team of Mike Hartmann, principal and executive vice president, and Bob Ryan, principal and senior vice president, specializes in office sales and leasing for the Cincinnati office of Colliers Turley Martin Tucker.

Cincinnati Multifamily Market

Economic cycles produce winners and losers. While it remains to be seen how the current cycle will impact Cincinnati’s multifamily market, a number of factors point to a favorable investment climate for the area’s multifamily sector.

Home sales continue to drop throughout the nation. As of May, greater Cincinnati home sales have declined only 8 percent locally from the previous year’s monthly total, which is better than the average national drop of 10 percent. Average home prices in the area also dipped approximately 0.7 percent, compared to 2 percent nationally.

Despite the decline in home values, supply is outstripping demand, with inventory climbing as many homeowners face foreclosure and problems with sub-prime mortgages. According to the Mortgage Bankers Association, Ohio ranked first in the nation for homes in foreclosure during the first quarter, with an estimated 50,000 homes in trouble.

Credit standards have tightened against this backdrop, and average rates for 30-year mortgages increased to 6.6 percent in June, the highest level since July 2006. Coupled with rising fuel and energy costs, home ownership has become a more expensive option.

The housing market’s stuttered steps have increased demand among renters, giving landlords more pricing power both in rental rates and in limited concessions. Rental rates continue to inch upward as landlords gain pricing power. Rents now average $676 per unit per month, up from $670 per month in 2006 and $657 per month in 2005. In tandem with the rising rents, landlords have reduced concessions, which are down to an average of a half-month’s free rent, compared to 1.5 months in the past few years.

Vacancy rates continue to decline. Apartment vacancies were above 9 percent 2 years ago, but now hover around 8 percent. While this is still higher than the Midwest’s 6.7 percent average multifamily vacancy and the national average of 6.1 percent, the rate is expected to drop in the coming months as new renters enter the market.

These conditions, along with a wealth of capital, provide incentives for investors looking for opportunities in real estate.

More than $100 million of multifamily product was acquired during the first half of this year. This is off the pace set during the past 2 years, when $370 million and a record $420 million was invested in multifamily real estate in 2006 and 2005, respectively. However, many purchases occurred during the second half of the year during that record stretch, so the possibility of heavy investment activity for the rest of the year remains. Additionally, interest-sensitive loans may force sales, which was the case last year when banks sold four large properties at auction or through foreclosure.

Cap rates remain historically low, averaging 7.2 percent during the first half of the year, according to RC Analytics. High-quality, Class A properties are seeing lower cap rates in the 6 to 7 percent range, while aggressive investors can command cap rates in the 8 to 11 percent range for older Class B and C properties. As in other midwestern cities, Cincinnati’s returns are more attractive than in big cities on either coast. Steady population growth of 1 to 2 percent annually since 2002, along with stable employment gains of 1.2 percent, offer further protection for investments in multifamily product.

On the development side, the resurgence and revitalization of the central business district (CBD) market continues to draw interest from traditional multifamily developers, as well as newcomers looking at condo conversions and mixed-use projects. While developers have become more cautious and lenders more stringent in financing requirements, downtown and surrounding areas continue to be a focal point for development.

New and infill developments are aimed at two core audiences: young professionals and empty nesters that are willing to pay a premium to experience the urban lifestyle. Downtown renters pay a 20 percent premium in rents per square foot and occupancy is at 94 percent. For owner-occupied housing, the region’s average home price is $172,702 in the first quarter of 2007. By comparison, the average sales price for downtown condos is $201,631, with select riverfront condos selling upwards of $1 million.

One significant new multifamily development is Middle Earth Developers’ 617 Vine building, which is the former home of the Cincinnati Enquirer newspaper and will be converted into 150 apartments with 54,000 square feet of commercial space. Other multifamily offerings underway include Eagle Realty’s Fifth and Race development, a mixed-use project with plans for 300 residential units; Gateway Quarter, located in the historic Over-the-Rhine district, which includes 100 condominiums; and Miller-Valentine Group’s One River Plaza, a mixed-use development that will feature 140 luxury riverfront condominiums.

These projects will complement several others that were completed in the first half of the year, including The McAlpin, located downtown and 40 percent sold, and, in Bellevue, Harbor Greene (60 percent sold) and Water’s Edge (80 percent sold). The Ascent, from Corporex, also continues to move forward, with 54 of its 72 residential units sold. All told, with 5,200 multifamily units either built, on the drawing board or in the proposal stage, the riverfront and downtown population is expected to double by 2010.

Developers are expected to face challenges as lenders tighten the reigns, but the Cincinnati multifamily sector should see further activity around the CBD, and in areas such as Mt. Adams, Columbia Tuscolum, Over-the-Rhine, the University/Uptown area and the Incline District to the west of downtown in East Price Hill.

Overall, the multifamily market should continue to strengthen as renters return in droves, landlords find pricing power, and investors and developers look for opportunities.

— Gladys Risma is a senior associate for Colliers Turley Martin Tucker’s regional office in Cincinnati. She specializes in the investment market for multifamily properties.


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