CITY HIGHLIGHT, AUGUST 2009

CINCINNATI CITY HIGHLIGHTS
Andy R. Feinblatt, John Hermann and John Schenk Cincinnati Office Market

The Cincinnati office sector currently reflects the pressures of the economic downtown, as tenants remain frozen or retract and landlords play defense by reaching out to preserve occupancy. The 3-year renewal has replaced the once-common 5-year extension in lease negotiations. Lower rents and diminished tenant improvement allowances have become the norm in the face of decreased demand and increased competition among owners.

There was negative net absorption of 178,595 square feet during the second quarter, which nearly erased the first-quarter gain of 186,940 square feet. However, this earlier gain, which was attributable to Humana and Senco taking occupancy of two new buildings, masked underlying market conditions. Velocity has been markedly diminished since mid-2008, and prospect activity in the suburban markets has decreased by more than 40 percent.

The overall vacancy rate has been on the rise since late 2007, and the past quarter was no exception, as vacancy increased 50 basis points to 20.9 percent. The availability rate increased as well, from 21.7 percent at the end of the first quarter to 22.9 percent, pointing to further erosion in occupancy levels. Over the past 2 years, approximately 1.8 million square feet of new office space has been delivered to the Cincinnati market; however, a lack of financing, coupled with tepid demand, has put further new projects on hold indefinitely.

News of consolidations and downsizing by large corporate users dominated the commercial real estate headlines in the first half of the year. Most of this activity has occurred in the northern suburbs. Procter & Gamble will move 650 workers from 200,000 square feet at Governor’s Hill in Symmes Township, Ohio, to its downtown headquarters. Senco is expected downsize or vacate its new 100,000-square-foot headquarters at Ivy Pointe in Clermont County, pending the result of its bankruptcy proceedings. There are at least a half-dozen corporate tenants with a need for 50,000 square feet or more that have been scouting for early renewal deals in the wake of large pending vacancies by G.E. Aircraft Engines and other companies. The Kroger Company has seized an opportunity, acquiring Cornell Plaza in Blue Ash, Ohio, for just under $60 per square foot.

Significant absorption in the metro area office sector is coming from one industry — secondary education — which is illustrated by a variety of recent leases from Antonelli College of Design, Strayer College (two locations), Daymar College, Kaplan College and Miami Jacobs Business College.

In the CBD, leasing activity primarily has consisted of lateral moves or lease renewals, resulting in no new net absorption. The steel frame of the 805,000-square-foot Great American Building at Queen City Square, which rises above the corner of Sycamore and Third Streets, looms as a reminder of the 430,000 square feet that will come to the market in early 2011. Activity continues downtown in the form of renovations of former industrial buildings for office use. This trend primarily has been driven by the branding and package design industry that has benefited from the presence of Proctor & Gamble and Kroger’s corporate headquarters.

Over the next few years, the Cincinnati market will be dramatically impacted by a number of upcoming large vacancies. Are these events already priced into the market or will the resulting increased competition further erode market fundamentals? It is likely that vacancy will increase, especially in older product, rental growth will be negative and construction activity will be limited.

— John Schenk is the senior sales vice president and a partner in the office services group of Grubb & Ellis|West Shell Commercial in Cincinnati.

Cincinnati Retail Market

Within the heartland of the United States, Cincinnati remains a stable and viable major metropolitan area for new retail development, redevelopment and market entry. Despite the current national economic negatives, Cincinnati is moving forward with a solid retail base. With a metro area comprising more than 2.1 million people, 10 Fortune 500 companies and a diverse economy represented by multiple sectors, the Cincinnati economy continues to perform ahead of the national average.

After years of following urban sprawl, the city’s retail real estate decision makers have turned inward to focus on the fundamental rule of real estate: location, location, location. The trend is evident in most submarkets within the MSA, as new developments, redevelopments and renovations have become more concentrated in the most viable locations.

Significant new developments promise to have a positive impact on both the Cincinnati economy and real estate community. The CBD and surrounding communities continue to experience positive activity. Construction is progressing at The Banks, a key downtown riverfront mixed-use endeavor that is designed to include 100,000 square feet of retail, 300,000 square feet of office, a 200-room hotel and 340 residential units. Despite the economy, the project has generated interest from a wide variety of tenants, and lease negotiations are underway with retailers, restaurants and entertainment-oriented businesses.

Eagle Realty Group is developing a significant new office building, Queen City Square, at 301 East Forth Street downtown that will be the region’s tallest new office tower. The 41-story Great American Tower at Queen City Square is 72 percent pre-leased, and will provide approximately 16,000 square feet of high-profile restaurant and retail space on the street level. Corryville Crossings, which is underway just north of the CBD at Vine Street and Martin Luther King, is another example of urban redevelopment. The developers have assembled an entire city block on a heavily traveled intersection situated between the University of Cincinnati campus and five of the region’s largest hospitals. Now under construction, this mixed-use development will feature Hampton Inn & Suites and small shop and restaurant space geared to serve the local community.

Moving south of the Ohio River, the Northern Kentucky submarket has experienced its share of new development. With fundamentals in mind, core submarkets such as Newport, Highland Heights and Florence have flourished. Bear Creek Capital’s Newport Pavilion is taking shape, as Kroger is close to completing one of its Marketplace concepts and Target expects to commence construction in the coming months. Leasing efforts are moving forward, in the form of ongoing negotiations with Chipotle and Buffalo Wild Wings, among a variety of small shop users. In addition, local developers Midland Retail and Edge Real Estate Group have been capturing key locations for smaller projects, with an emphasis on the underserved market surrounding Northern Kentucky University in Highland Heights. Midland’s project is set to deliver Chipotle, AT&T and the submarket’s first Panera. Edge is following suit with proposed retailers such as Jimmy John’s and GameStop at its newest development. Florence, which is Northern Kentucky’s largest retail trade area, has experienced isolated pockets of new development. Although much of the market is developed, big box outlots have gained attention as the best current opportunities to meet the demand for retailers seeking attractive small shop space. Midland Retail has capitalized on this need of late by delivering space for Potbelly Subs, Noodles & Company, InkStop and Chick-fil-A.

Central Cincinnati has experienced its share of new development, as well. Red Bank Village, in Fairfax, Ohio, showcases Cincinnati’s first 150,000-square-foot revised WalMart Superstore prototype. The adjacent small-shop space is almost complete, outlot pads are available, and leasing efforts geared to national, regional and local players is proceeding. Three miles north of Red Bank Village, the stalled Kenwood Towne Place development planning to restart activity with its financial issues close to resolution. Crate & Barrel, The Container Store, Mitchell’s Salon and Kroger’s new Fresh Fare concept have already opened, and LA Fitness will open within the center by the end of summer.

On the west side of town, new development has taken shape through a partnership between DW Real Estate and Brandicorp’s purchase of a well-located former car dealership along the Glenway Avenue corridor. Construction is nearing completion; tenants will include Chipotle, T-Mobile, City Barbeque, Chick-fil-A and InkStop. Nearby, Centro Properties Group’s Western Hills Plaza redevelopment is close to completion. Target, which is represented by Brandt Retail Group, has opened as the anchor in the storefront formerly occupied by Kroger and Media Play. In addition, retail and restaurant prospects are in tough competition for the center’s newly created, high-profile small shop space. Stone Creek Towne Center, located at Colerain Avenue and Interstate 275, has experienced strong leasing activity, with Meijer and a relocated JC Penney now open.

On the north side of town, the city of Springdale, Ohio, which is known as the Tri-County super regional retail trade area, has positioned itself for major redevelopment in the near future. The loss of several junior anchors has resulted in a higher-than-average vacancy rate, but it has also allowed for rejuvenation of the trade area. The market’s easily accessed location, at the southwest quadrant of Interstate 75 and I-275, along with the city’s dedication to proactive redevelopment and incentive plans, will serve this area well. Two main-on-main locations are on the forefront of the redevelopment movement. Thompson Thrift Development will commence construction on a 9,000-square-foot building, with The Vitamin Shoppe and Qdoba already signed on as tenants. The project boasts an upfront corner presence and various points of access.

Princeton Plaza

In addition, the diagonal corner of Princeton Pike and Kemper Road, home to Princeton Plaza, is looking forward to a major renovation in the coming months. This site serves as an excellent representation of what owners can do to take advantage of a down market. Specifically, significant investment in a plan to modernize the center will provide updates across the board, from new pylon signs, improved landscaping, widened sidewalks, a new face to the center, and improved access will help to position the center to take advantage of it’s location and proximity to the Tri-County Mall. Brandt Retail Group’s leasing efforts have proven to be positive and will allow this center to take advantage of the market’s recovery.

Retail landlords and developers remain confident in our market and show willingness to invest real dollars. Retailers and restaurants, representing a broad spectrum of goods and services continue to show interest in the market as well.

— Andy R. Feinblatt is vice president of Cincinnati-based Brandt Retail Group.

Cincinnati Multifamily Market

Cincinnati-area multifamily developers are watching expenses, right-sizing and, if they have a management arm, expanding their third-party management operations to increase potential income streams. Buyers are seeking short sales and loan assumptions, allowing buyers to put very little money down to invest and continue to leverage their cash for future purchases. Of course, cash is still king.

There are many new buyers in the market, but developers have been extremely quiet, as they shore up their portfolios by trimming overhead, cut costs, and become more lean and efficient. Also, developers have a limited supply of cash that may be needed elsewhere to shore up the company, which prevents them from pouring any money into new endeavors. Their resources are stretched, which limits their ability or desire to purchase land holdings for future development.

As the recession recedes and demand grows, the downtown, north (Union Center and Liberty Township) and northeast (Mason and South Lebanon) submarkets will be in need of further multifamily development. In Northern Kentucky, outlying markets in close proximity to downtown that feature good access to the Interstate 75 or Interstate 275 corridors, will continue to need multifamily development.

The central Cincinnati submarket, an area north of downtown and south of Interstate 275, and downtown are the hot spots, where most of the multifamily development is currently taking place.  In Uptown across from the University of Cincinnati, a $100 million mixed-use project called Uptown Commons will comprise office, retail, 150 rental apartments, a hotel, and parking to support the project. It will be built by Towne Properties with construction potentially getting underway this fall, assuming financing is obtained.

The Banks, a $600 million mixed-use project located downtown, is finishing the necessary infrastructure for its first above-ground structure, the Freedom Way East garage, and is set to break ground this summer on a 300-unit apartment complex.

The majority of multifamily construction — and any development activity — is taking place as part of new mixed-use projects. However, due to the market, projects are being phased and developers are rethinking what is included in the mixed-use component of the development. Developers are seeking upwardly mobile singles and active adults (ages 55 and older).

According to REIS, the average effective rent is down 0.1 percent, declining to $668, in the first quarter. The overall vacancy rate is 12.6 percent. Asking rents range from $448 to $1205 per unit. Neighborhoods, such as Avondale along with East and Lower Price Hill are experiencing more vacancy and more foreclosures, symptomatic of static rent growth and deferred maintenance issues at many properties.

In light of the current economy, many properties are listed for sale and the number is creeping upward.  When the frozen credit market thaws out more and confidence in the economy improves, these properties will trade with less difficulty, which will go a long way to help reduce the supply of listed for sale property and help stabilize pricing. As for development, many projects have been indefinitely delayed or scrapped as developers have right-sized their operations, unloaded portions of their land holdings and reinvented themselves to fit the new market. This may include expanding third-party management, which seems to be the only part of the multifamily sector that is growing at this point in time.

— John Hermann is an investment advisor in the Investment Services Group for Cincinnati-based Grubb & Ellis|West Shell Commercial.

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