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 region’s 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.” Wendy’s 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 Nationwide’s 140,000-square-foot building in West Columbus, which is approximately 65 percent pre-leased. Projects set to debut this year include Duke Construction’s new development in Easton and Daimler’s 65,000-square-foot building in Dublin.

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