The contemporary Columbus metropolitan statistical area (MSA) economy has demonstrated enviable recession-resistance compared to many other parts of the nation. The economy is anchored by state government, one of the nation’s largest universities, outstanding geographic positioning, interstate access — Columbus is within a one day’s truck drive of 60 percent of the U.S. population, a former military base converted into a free trade zone and major air carrier hub, a professional sports team and desirable corporate headquarters, including one of the nation’s largest insurance firms and Wendy’s Hamburgers.

The Columbus MSA unemployment rate is holding steady at 4.5 percent for Franklin County, with a total work force of 640,000 people. But recession-resistant doesn’t necessarily mean “recession-proof,” as most real estate submarkets are experiencing challenging conditions in occupancy, rental rates that landlords can command and slackened interest in asset acquisition. Still, it does not resemble the recession of the late 1980s when activity was frigid and several long-established Columbus-based developers failed. Today, committed projects are coming on-line, the stronger submarkets are retaining their intrinsic appeal and targeted deals are being accomplished.

Office

Despite softness in the office sector, downtown’s Arena District is a vibrant area, attracting new tenants. The 600,000-square-foot office component is 85 percent leased, with new users including law and accounting firms, American Electric Power and the U.S. Attorney’s Office. In comparison, the entire Columbus office market, which comprises about 10 million square feet downtown and 12 million square feet in the suburbs, has a vacancy rate as great as 22 percent.

Overall, The Arena District, developed by Nationwide Realty Investors and the Columbus Dispatch, is expected to comprise as much as 1.3 million square feet of office, 350,000 square feet of entertainment and restaurants, 252 apartment units and 500 condominium units.

Using rental rates as an indicator of the slower office market, it is estimated that Class A office rates have decreased on average 10 to 15 percent for suburban space and about 20 percent for downtown space (not including The Arena District, which is holding pro forma). Columbus has devised a financial incentive to attract office users with more than 10 employees downtown, which can apply from between 2 to 5 years, tied to the amount of city income tax paid by workers.

The north suburban office markets of Dublin, Polaris and Easton continue as the Columbus area’s strongest. In addition to the partnership of The Limited and The Georgetown Company at Easton, Daimler and Duke Realty Investment Trust remain major suburban office developers. Prospective developments include: a 100,000-square-foot Easton Way III by Duke, slated for the third or fourth quarter of 2002; a 65,000-square-foot building on Frantz Road by Daimler; and a second 120,000-square-foot Westar building at the Polaris complex.

Multifamily

Factors driving the Columbus multifamily market toward higher-end, residential in-fill locations, justified investment-wise, are greater achievable density and rental rates. This return to urbanism and upscaling of the apartment industry is a result of the diminished economic feasibility of suburban sites, given the infrastructure and land costs of open-field development; the maturation in Columbus’s residential stock; and the appeal and convenience of new lifestyle-oriented retail and entertainment.

Cocooning is passe. In a nutshell, quality urban or urban-like locations are attracting the highest rents, from as much as $0.90 per square foot to $1.30 per square foot. In Columbus, retail within walking distance of residences has found new appeal, even to those who could own a home if they chose to. At the same time, developers search for ways to extract more hours-per-day economic activity from their investments.

There are a number of developments pushing the bar for renters in Columbus. One is Easton Commons, developed by Continental Communities, a joint venture of Continental Real Estate Companies and Nationwide Realty Investors, where 200 units were occupied late last fall and another 293 units are leasing now.

Brewer’s Yard in central Columbus’s Brewery District, just south of the Interstate 70 loop, features as many as 750 units, a 9,000-square-foot clubhouse and an attached parking garage.

Nationwide Realty Investors’ Arena Crossing is 252 units, built six- to seven-stories high on top of a two-story parking deck, which can also serve Nationwide Arena and related developments. The project will track the parking patterns of assigned cars to learn how to manage such multi-purpose parking in the future.

The Meridian, by Fairfield Residential, is being developed at the former Columbus Showcase site.

Multifamily development in Columbus’s city center is being helped by property tax abatements, ranging from 75 to 100 percent for 10 years. Under this program, about 1,400 units are under construction or planned to be by year’s end, according to Tom Heaphey, manager of financial incentives for the City of Columbus Downtown Development Office.

At present, however, we face a concession-driven market in most locations due to greater vacancies. Investors are also sitting on the sidelines. Within 12 to 15 months, pent up demand is expected to match the supply of new product currently being completed.

Retail

As with multifamily housing, over the last 5 years emphasis shifted toward lifestyle centers and town center developments. This shift has followed the residential growth and strong demographics of north Columbus-area communities, such as north of Interstate 70. The new wave began in 1997 with Tuttle Crossing, developed by Taubman. Since then, 3 million square feet of retail and related space has been added to the Columbus MSA by two phases of Easton Town Center, a joint venture of The Limited, The Georgetown Companies and Steiner + Associates, and Columbus-based Glimcher Realty Trust’s Polaris Fashion Place.

As a result, Columbus’s retail radar screen is no longer spotty. Easton brought Nordstrom to the Columbus market as well as raised the bar on quality restaurant offerings. Polaris brought the area’s first Saks Fifth Avenue, Lord & Taylor, Kaufmann’s and The Great Indoors. Other merchants attracted to the Columbus area in recent years include the Big Bear grocery chain, The Container Store, Galyan’s and The Cheesecake Factory.

With multiple new retailers added so quickly, Columbus is in a “digestion and hold” mode and at Easton and Polaris, in particular, the surrounding areas will grow within the orbits of those powerful commercial magnets. Other attractive submarkets for retail include New Albany and Grove City.

Scheduled to open in the fall of 2003, Broad-Nel Shoppes is a 25,000-square-foot upscale center designed to blend the historic architecture of Bexley and Broad Street with modern lifestyle center elements. The project, which is being developed by JND Properties of Cleveland, is located on the northwest corner of Broad Street and Nelson Road. Goodman Real Estate Services Group is the exclusive listing agent for the property. The company is targeting restaurants, banks, and other tenants such as coffee shops, beauty salons and day spas for the center.

National chains continue to refine their platforms, as developers place local and regional operators of cinemas, cabaret entertainment and restaurants at their centers to provide entertainment draw. The growth of lifestyle centers and mixed-use office, residence and retail will also lead to a re-evaluation of traditional tenant slots, especially the Class B support tenants found between anchors in regional malls or larger strip centers. New opportunities in ground levels of multifamily housing, offices and even parking structures for reinvented neighborhood retail. Natural tenants here include “mom and pop” coffee shops, fitness centers, cleaners and tailors or specialty grocery markets.

Industrial

Several trends in industrial real estate reflect modern manufacturing principles and major business distribution. The goal is to move product more quickly through warehouses, located near overnight hub markets, allowing companies later day pick-ups for delivery the next day. The warehouse and distribution product type is being revolutionized by design, occurring from the inside out. Companies are hiring logistical consultants to determine the ideal configuration for optimum efficiency in product movement, then constructing a box over it. The new warehouse also features higher clear heights with narrow-aisle formats, as companies invest more in sophisticated material handling equipment, emphasizing cubage over square floorage; dual transportation modes, truck and rail, to move product to and from warehouses; and the continued integration of larger offices and call centers into distribution centers, for improved efficiency and cost savings compared to conventional office space.

Significant recent industrial developments and transactions include:

• Kroger: 750,000 square feet, with large portion of cold storage, on 165 acres in Delaware, Ohio;

• Target: 1.2 million square feet on a 150-acre site in West Jefferson ($135 million project, including land, building and equipment);

• Amerisource Bergen: 300,000-square-foot build-to-suit/lease at Eastport Industrial Center in Rickenbacker Area (IDI);

• Trane, 125,000-square-foot build-to-suit at Citygate Business Center by Daimler;

• Silver Line Windows: 300,000 square feet in Marion, Ohio (Fed One Dublin );

• Springs Window Fashion: 208,000 square feet by Duke Spec Building at the Groveport-345; and

• Pizzuti Portfolio Sale of nine distribution centers valued at $110 million to US Industrial REIT of San Antonio.

Submarkets where industrial development is most active include Groveport, Obetz, Rickenbacker (30 million square feet) in the Southeast; Grove City (12 million square feet) in the Southwest; and more outlying areas (10 million square feet and growing), with the most active industrial developers being Continental, Duke, Opus, Prologis, Pizzuti and Ruscilli.

The current vacancy rate for industrial properties in the area is approximately 16 percent, having improved almost 1 percent in the last 9 months, but when sublease space is tallied, the total vacancy rate approaches 19 percent.

Average rental rate is $2.78 per square foot for industrial with $0.35 per square foot operating expenses for tax-abated buildings and $0.75 per square foot operating expense for non-tax-abated structures. Concessions offered by landlords and municipalities include free rent, increased tenant improvement allowances, rental reductions and governmental tax incentives offered by the Ohio Department of Development and local municipalities.

Submarkets to watch include outlining areas such as Newark/Heath/ Etna, London/West Jefferson and Zanesville. The Rickenbacker Area, Foreign Trade Zone #138, which offers combinations of duty-deferral, duty reduction (inverted tariff), duty elimination, avoidance of Ohio’s inventory tax and tax-free zone-to-zone transfers. The importance of free trade zones to modern commerce and business attraction efforts is reflected in the 11 pending applications, primarily by industrial developers, to increase the zone beyond its present 1,200 acres.

In summary, the current industrial market in Central Ohio is as stagnant as throughout the Midwest. The tenant’s market will likely continue through the third quarter of 2003, with limited speculative development. Rental rates for first generation space will continue to be depressed, approximately 10 to 15 percent lower than 2000 rates. Mitigating these realities is that the cost to borrow money is also decreased, reducing the carrying cost of buildings.

Wayne Harer is executive vice president of Continental Real Estate Companies. Gus Cook, Jeff Zeigler and Darin Manning of Continental Real Estate Companies contributed to this report. Market data information was provided by Continental Realty and Grubb & Ellis Adena Realty Advisors.


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