| Columbus, Ohio
The Columbus office market remains on a difficult road that
is paved with an abundance of available space, but forecasts
call for modest improvement during the next 12 months, according
to Jonathan Lee, a regional manager in the Columbus office of
Marcus & Millichap. The market continues to feel the crunch
of the sluggish economy and robust construction. With
its limited presence of corporate headquarters, the local office
market has developed a quick-to-fall and quick-to-rise nature,
Lee says. Regional operations become the sacrificial lamb
when recessions prompt corporations to tighten their belts.
As a result, Columbus concentration of regional operations
proved vulnerable, resulting in constrained office space demand
and a vacancy rate that has nearly doubled since 2001.
The dot-com implosion in the late 1990s and early 2002 negatively
impacted Columbus economy. The downturn, however, has
been tempered by the regions economic diversity, along
with Columbus being the state capital and home to Ohio State
University, Lee says. The area has a strong tradition
of nurturing hometown enterprises into national and global powerhouses.
Wendys International and Limited Brands, both headquartered
in Columbus, support thousands of jobs in the metropolitan area.
In Columbus, competition for the limited number of tenants in
the office market has pushed the average effective rent down
by more than 6 percent compared to 2002 numbers. Effective rent
growth will be quelled during the next year as the market burns
off excess supply and concessions are reduced, resulting in
a slight 0.4 percent decline in 2004 from the expected year-end
2003 rate of $13.15 per square foot.
Low interest rates have allowed owners to carry lower economic
occupancies, placing greater emphasis on tenant retention. While
leases are being signed at a first-year rent of approximately
$11 per square foot, the lease terms usually call for annual
bumps of at least 25 cents per square foot.
Fortunately, lower debt service has saved owners in the
current down cycle, unlike the foreclosure-ridden downturn that
occurred in the late 1980s and early 1990s, Lee says.
As a result, fire sales have been limited, but opportunities
well-below replacement cost are beginning to appear. Buyers
have found viable investment returns, which have kept sales
velocity on par with recent years. Cap rates have been stable
at approximately 9.5 percent for Class A properties and 10 percent
for Class B properties.
Risk tolerance will be the key for investors during the coming
year. While leasing activity appears to be accelerating,
it exists mostly in lateral moves offering little relief to
overall vacancy rates, Lee says. Watch for overall
vacancy rates, which peaked at 23.1 percent in 2003, to improve
only 20 basis points to 22.9 percent in 2004.
The Westar area has recorded healthy leasing activity, largely
due to its favorable tax environment. Investors are challenged,
however, in finding properties for sale, because this submarket
tends to outperform others in the market.
Investors may want to look to the medical office market, an
avenue that was the only consistent growth driver last year.
Demand for such properties is expected to continue during the
near term. Smaller buildings in desirable locations, such as
the executive-rich Dublin or older infill areas including Upper
Arlington and Grandview, will continue to satisfy more conservative
investment strategies, according to Lee.
Although downtown office buildings are mired in vacant space,
two prominent office buildings have come to market. Lehman Brothers
and Trizec Properties have put their downtown office buildings
on the market. Competition from the hot Arena District, owned
and controlled by Nationwide, and other developments on the
fringe of the central business district, have investors cautious
about the downtown square, however.
A decline in construction, however, shows promise for
the already crowded market, Lee says. The construction
pipeline continues to thin, and new space totaled only 300,000
square feet in 2003 (57 percent lower than in 2002.) Further
contraction is expected in 2004 with the addition of only 100,000
square feet. One of the new projects is Nationwides 140,000-square-foot
building in West Columbus, which is approximately 65 percent
pre-leased. Projects set to debut this year include Duke Constructions
new development in Easton and Daimlers 65,000-square-foot
building in Dublin.
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