CITY HIGHLIGHT, AUGUST 2008

CINCINNATI CITY HIGHLIGHTS
John Heekin, Paul Schmerge, R. Travis Likes, Steven Timmel and John Herrmann

Cincinnati Retail Market

Neyer Properties and Bear Creek Capital are developing Kenwood Towne Place, a retail and office project located along Interstate in Kenwood, Ohio. Retailers include Crate & Barrel, Borders Books & Music, the Container Store, Ethan Allen, Kroger Fresh Fare and LA Fitness.

Despite shrinking consumer confidence and high gas prices, the Cincinnati retail market shows potential. Favorable demographics, a population of more than 2 million people and a diverse economy make expansion into, and within, the market possible. There are a number of bright spots, including Kenwood, which is currently the Number 1 retail market in Ohio. Retail activity in downtown Cincinnati has increased, and lifestyle centers continue to grow in the suburbs as new concepts expand into the market. Although it is growing more cautiously than in the past, the Cincinnati market remains poised for continued activity.

The biggest new development in the market is in Kenwood. Kenwood Towne Place, a 550,000-square-foot retail and office development project led by Bear Creek Capital, is slated to open late this year. Located at the intersection of Interstate 71 and Montgomery Road, it is anchored by new-to-the-market retailer Crate & Barrel, and will also be home to Ethan Allen, Kroger Fresh Fare, L.A. Fitness and Borders Books & Music.

Adjacent to the market’s largest mall, Kenwood Towne Centre, progress continues on a 140,000-square-foot Nordstrom, which will be the first Nordstrom location in southern Ohio and is scheduled to be complete by fall 2009.

During the past year, 26 retail/restaurant/entertainment venues have moved into downtown Cincinnati, sending available retail space to a 5-year low. The impact is visible around the recently renovated Fountain Square. New dining options include the first Oceanaire Seafood Room to open in Ohio, as well as Boi Na Braza, Cadillac Ranch, McCormick & Schmick’s, Nada and Via Vite, which all opened following the $48 million renovation of Fountain Square. A new concept produced by restaurateur Jeff Ruby, Bootsy’s, will open in the fall.

The hottest growth areas in greater Cincinnati, and all of Ohio, are Warren and Butler counties, which are located north of the metro area. In Warren County, Chelsea, a division of Simon Property Group, has broken ground in the city of Monroe on 400,000 square feet of name-brand designer outlets. The Cincinnati Premium Outlets center will include 120 stores and is expected to open in 2009.

In Butler County, the biggest new brand in the market is IKEA. The Swedish retailer’s 344,000-square-foot store officially opened in March at Union Centre Drive and Interstate 75 in West Chester. Located only 19 miles from downtown Cincinnati, West Chester pulled off this retail coup because of its ability to draw consumers not only locally, but also from Indianapolis, Dayton and Columbus, Ohio, as well as Louisville and Lexington, Kentucky.

Retail investors continue to see value in well-positioned shopping centers. Regency Centers’ recent $93.3 million acquisition of the 355,070-square-foot Sycamore Plaza and 35,144-square-foot Sycamore Crossing shopping centers, which are located at the intersection of Kenwood and Montgomery roads in Kenwood, is one example of this confidence.

Looking forward, Cincinnati and its Northern Kentucky suburbs have potential for inner city and suburban growth. Location will continue to be the key to success for retailers in this uncertain economy. As both residential build-out in the suburbs and redevelopment in the CBD/Uptown district continue, retailers will find opportunities for expansion. The Cincinnati market has appeal over other markets that have reached their saturation point for big box and chain locations.

— John Heekin is a senior vice president for Colliers Turley Martin Tucker’s regional office in Cincinnati, specializing in leasing, managing and developing retail properties.

Cincinnati Industrial Market

Greater Cincinnati continues to be a prime destination for bulk distribution developments. This year, The Home Depot, Amazon, Safeway, Innotrac, BAE Systems, GSI and General Motors have signed leases for bulk distribution space in projects located across the market. Duke Realty Corporation, IDI, ProLogis, Dividend Capital and Vandercar Holdings are all building bulk distribution buildings on a speculative basis. The bulk development trend began more than a decade ago in the West Chester, Ohio, and Hebron, Kentucky, submarkets. With properly zoned, developable sites in these markets nearly exhausted, developers and the next crop of users have shifted their focus to other emerging corners of the metro Cincinnati market. The newest hot spots are in Fairfield and Monroe, Ohio, and Richwood, Kentucky. The driving forces that make the greater Cincinnati market a top choice for distribution are its demographics; transportation network and location; the city is located in the heart of the Midwest, in close proximity to a majority of the U.S. population.

Whether the mode of logistics is truck, train, plane or boat, Cincinnati is an excellent location, one that is intersected by several major interstate highways. Interstate 75, which extends from Michigan to Florida, passes through Cincinnati, Dayton, Ohio, and nearby Lexington, Kentucky. Interstates 74 and 71 connect Cincinnati to Indianapolis, Columbus, Ohio, and Louisville, Kentucky. All of these cities are within 2 hours driving time of Cincinnati. With the growing concern around rising fuel prices, locating facilities close to the customers and suppliers is increasingly important to the bottom line.

Monroe is the newest frontier for bulk distribution centers in the Cincinnati market, and the submarket located on I-75 between Cincinnati and Dayton. The momentum for Monroe is being fueled by the availability of a guaranteed 15-year, 100 percent tax abatement for users that occupy properties in the town. This is the first offer of its kind in the Cincinnati market. For a user looking to construct a 300,000-square-foot space, this tax abatement could mean as much as $240,000 per year in savings, or 5-year savings of $1.2 million, which is a very attractive incentive to most businesses. The Home Depot recently signed a 650,000-square-foot lease to locate one of its rapid deployment centers in Monroe. Later this year, the retail giant will be the first tenant in the new Corridor 75 industrial park. Vandercar Holdings currently controls the site, and is working with a collection of local developers to build the park out.

Even with leasing activity underway in various local submarkets, vacancy rates in the greater Cincinnati market have begun to increase. The vacancy rate measured 7 percent at the halfway mark of 2008, which is a 10 percent increase from the end of the first quarter. Part of that jump has been caused by the speculative construction of bulk space that has occurred throughout the market. However, Cincinnati is also experiencing slower leasing activity. The increased availability will cause downward pressure on lease rates, which had been rising steadily through 2007. This change in market conditions is expected to result in a swing in momentum from the landlords to the tenants. Landlords may not like to see the market turn towards the tenant’s favor, but it is part of the natural cycle of real estate and indicative of a healthy market.

— Paul Schmerge is sales vice president of CINCINNATI COMMERCIAL, REALTORS®, a member of the Cushman & Wakefield Alliance.

Cincinnati Office Market

The latest trend in all development/construction clearly centers on green buildings and LEED certification for builders, developers and contractors. Across the nation, a growing number of municipalities, developers and, more importantly, tenants are inquiring about the operational efficiencies of commercial real estate assets before breaking ground. In Cincinnati, the most significant green endeavor has been the development of Keystone at Dana by Neyer Properties. The developer recently constructed Phase I, a 66,000-square-foot building at the intersection of Interstate 71 and Dana Avenue. When fully built out, the complex will feature 400,000 square feet of office space, all of which is planned to be LEED certified.

Questions abound regarding the cost benefit or cost recovery of green construction, and whether tenants on a wide scale will be willing to absorb the additional cost of this construction; nevertheless, sustainable design/build is here to stay. With the crippling impact of rising fuel and energy costs on the bottom line, Americans may have finally found the catalyst to push them over the line in favor of conservation.

The Cincinnati office market posted modest positive net absorption of 34,007 square feet during the second quarter. However, because of the delivery of 282,000 square feet of new office product, the overall vacancy rate increased slightly from 19.4 percent at the end of the first quarter to 19.6 percent. Vacancy has risen approximately one percentage point since the beginning of the year. Additionally, most of the absorption in the second quarter occurred in recently completed office buildings; more than 515,000 square feet of new Class A office space has been completed since the beginning of the year. Approximately 38 percent of the new office product has been occupied or is being fit-out for occupancy in the near future.

Class A rental rates increased by almost one percent to $21.88 after posting a similar gain during the first quarter, as owners seek to recover the continued increases in building operating expenses. The Class B rental rate has remained stable at $15.83 per square foot.

Although the overall office market has slowed, there are several developments that are having a dramatic impact on the market. From a scale perspective, clearly the emergence of the Union Centre area is an exceptional story. Less than 10 years ago, this submarket, which is located 20 minutes north of downtown Cincinnati, consisted of cornfields and silos; now, it encompasses more than 655,000 square feet of Class A office space. Two exits north of Union Centre, along Interstate 75, the Tylersville/Liberty Township submarket has become a hotbed for medical office development. During the last 3 years, more than 350,000 square feet of speculative medical space has been built by developers seeking to capitalize on the new hospitals being constructed in the area by the Health Alliance and Children’s Hospital. Asking rates for these new buildings range from $15 to $17 triple-net per square foot, which represents the high end of market rental rates for office/medical space in the greater Cincinnati region.

While new construction of office product is occurring in several other markets, primarily along the I-71 corridor, Union Centre has led the way for office development for the last 7 to 10 years. There are two major reasons why: first, the addition of the Union Centre exit from Interstate 75 opened up more than 2,000 acres of raw land, including course sites with significant highway exposure, and second, the continued merging of the northern Cincinnati and southern Dayton, Ohio, markets has created an emerging mega-market stretching from Interstate 275 in Cincinnati to Interstate 675, just south of Dayton.

While it is not a development, one of the biggest news stories in Cincinnati is the search by GE Aircraft Engines for a potential campus that can facilitate approximately 450,000 to 750,000 square feet of office space. The company has been a long-time resident of the Tri-County office market, and this opportunity has developers that own controlled sites aggressively chasing the deal, while landlords that currently house GE office are wondering which way the tide will turn. This potential relocation will have a significant impact on the submarket the company chooses, as well as an equally negative consequence on any of the buildings GE potentially vacates.

Office users are expected to continue to search for select infill opportunities along the main travel corridors. With the economy in its current state of flux, absorption of office space for the next two to three quarters is expected to be flat or negative as tenants get a handle on their growth needs. Employers making relocation decisions will invariably need to focus more heavily on the fuel costs their staff incurs getting to and from their offices. With no significant mass transit to speak of beyond bus service, greater Cincinnati — especially the central business district (CBD) — has a competitive disadvantage when attempting to recruit prospective tenants located in the outer lying suburbs to make the commute to downtown with gas hovering around $4 per gallon.

Despite possible challenges in recruiting new office users, the CBD will be the submarket to watch over the next few years. Great American Insurance Company’s decision to anchor a new 830,000-square-foot, Class A facility along the Ohio River will certainly have a lasting impact on the submarket. The Great American Insurance Building at Queen City Square is being developed by Eagle Realty Group, a real estate investment and property management subsidiary of Western & Southern Financial Group. Because of its anchor commitment, Great American Insurance has plans to shuffle its current holdings in various Class B buildings in the CBD to fill approximately 50 percent of the new building. The net effect will be a vacancy of approximately 400,000 square feet of existing Class B product and the addition of 200,000 square feet of speculative Class A space, which means downtown Cincinnati looks to be a tenant’s market for many years to come.

— R. Travis Likes is an office advisor for Cincinnati-based Grubb & Ellis|West Shell Commercial, and Steven Timmel is senior sales vice president, institutional investment group.

Cincinnati Multifamily Market

Although apartment fundamentals are stable and trending positively, there is very little multifamily development occurring in the Cincinnati market. In addition to waiting for more improved apartment fundamentals, including information on increased occupancy and effective rent growth, developers are waiting for better economic data, such as job and household growth, before committing to any new land purchases or development. As occupancies have improved, the economy and debt market have deteriorated, which has pushed developers into a holding pattern right now. Most of the development that is being planned or occurring was in the pipeline before the sub-prime crisis, and is being built in the Northern Kentucky or northern Cincinnati submarkets.

Commercial growth has extended far north of metro Cincinnati, into emerging northeastern (South Lebanon, Ohio) and northern (Liberty Township and the east side of Middletown, Ohio) submarkets, which are in the path of industrial, office and retail development. Because of the increased work force associated with the new commercial development, these submarkets have an increasing need for housing. Boone, Kenton and Campbell counties in Northern Kentucky are experiencing growth of all other property types as well, and are in need of further multifamily development to quell a rising demand for housing.

In the greater Cincinnati market, average multifamily rental rates range from $460 to $1,170 per unit. Vacancy rates vary by submarket from 6.5 to 10.5 percent, with an average market-wide vacancy of 8.5 percent.

Most of the product currently being developed is in the market-rate and luxury segments. The move to developer higher–end properties has been spurred by developers’ desire to capture upwardly mobile tenants in up-and-coming areas.

MV Communities, part of local developer Miller Valentine Group’s umbrella of companies, is bringing 250 to 300 rental units to South Lebanon. The development is still in the planning stages, but it is expected to help create a greater concentration of rental product in the South Lebanon market, and is adding to the initial footprint of a Kohl’s-anchored strip center that was recently developed. MV Communities is also planning to develop 150 to 200 units that will be incorporated into a mixed-use redevelopment project in downtown Blue Ash, Ohio, which is a submarket in closer proximity to the city.

Brookstone Crossing, a multifamily development from American Village Properties and Kendall Construction Group, is underway in Cold Spring, Kentucky. The project’s first phase, which will include 224 of its 303 total units, is coming online this month. Brookstone Crossing provides an upscale apartment choice located just over the Ohio River within 15 minutes of downtown Cincinnati.

The development team of Carter and the Harold A. Dawson Co. is developing The Banks, a $1 billion mixed-use development along the Ohio River in downtown Cincinnati. The first phase will include approximately 300 apartment units.

The Banks, which is a massive master-planned mixed-use endeavor on which the city is currently working, will also include a significant amount of multifamily product. Approximately 300 residential units are expected to be incorporated into the first phase of the project, which is located on the edge of the Ohio River in downtown Cincinnati. The Banks is expected to continue the momentum downtown, which has been buoyed by the prior completion of additional multifamily and condominium projects, as well as the redesigned Fountain Square. Through the efforts of the city of Cincinnati, 3CDC, Downtown Cincinnati Inc. and surrounding building owners, the Fountain Square district, which includes public space, office and retail projects, has undergone renovations that include the refurbishment of the Fountain Square parking structure; the relocation of the famed Tyler Davidson Fountain to a more prominent location on the square; residential redevelopment of the former McAlpin’s building and the 18 East Fourth Street building; the exterior renovation of the 580 building, and exterior improvements to the Fifth Third Bank building elevations.

— John Herrmann is an investment advisor for Cincinnati-based Grubb & Ellis|West Shell Commercial.

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