HEARTLAND SNAPSHOT, JANUARY 2008

Cincinnati Office Market

The office sector of Cincinnati is hot right now, fueled by strong leasing activity. The sector saw a total of 862,000 square feet of positive absorption for the first three quarters of 2007, with 325,000 square feet in the third quarter alone. This caused the vacancy rate to drop dramatically, from 21.1 percent overall at the beginning of the year to 18.8 percent overall by third-quarter’s end.

The pace of new construction in the city has also quickened. At the beginning of 2007, only three new office projects were under construction for a total of 406,000 square feet. Since that time, there has been an additional 1.1 million square feet of construction starts.

One of the major trends in the market is infill development in desirable inner ring suburban areas, specifically the Kenwood and Midtown submarkets along the Interstate 71 corridor. These submarkets benefit from a close proximity to downtown, as well as the rapidly growing northeast residential areas, the payroll tax advantages of locating in unincorporated townships, and a wealth of retail and service amenities.

For the same reasons, the I-75/Union Centre interchange in West Chester Township is becoming active. The benefits from proximity to both Cincinnati and Dayton, have helped the area sustain healthy growth. Both West Chester Township and the Kenwood/Midtown area have already proven that they will attract users, leading to interest in further development of the markets.

In Midtown, Humana is constructing a 250,000-square-foot build-to-suit, absorbing a lot of space in the submarket. After the move-in, Humana will give back 150,000 square feet in the adjacent. multi-tenant Baldwin building.

Two other projects include the 580,000-square-foot Linden Pointe on the Lateral and the 460,000-square-foot Keystone Parke. These phased developments will offer large floor plates and contiguous area to large users but will be slow to fill up in the longer term. The goal is to attract smaller scale retailers and service providers in surrounding under-utilized properties.

In Kenwood, two major projects are in the pipeline — the 160,000-square-foot Redstone of Kenwood, in which CNG Corporation is taking 64,000 square feet, and the 250,000-square-foot Kenwood Towne Place. Both of these developments will attract large users and command premium rents. They are also expected to draw tenants from surrounding submarkets, including the central business district (CBD) and Blue Ash submarkets.

Even if some tenants relocate to the emerging Kenwood area, these two markets are not going to suffer because of it. The CBD has seen some new tenants recently, netting 141,000 square feet of positive absorption in third-quarter 2007 — its first significant positive quarter since third-quarter 2004. The $42 million renovation of Fountain Square is also revitalizing the submarket, and the CBD is experiencing a fair amount of additional private investment in the surrounding area. This has reduced the vacancy rate in the CBD to 16.7 percent, much lower than the 20 percent the suburban markets are reporting.

The CBD is also commanding a respectable rental rate of $22.97 per square foot for Class A office space, with suburban markets averaging $20.47 per square foot. For the market as a whole, Class A office space ranges from $17.47 to $24.30 per square foot gross.

In Blue Ash, construction is advancing for Landings of Blue Ash II, a 175,000-square-foot office property. Although the Landings I building was filled by Citi’s North American Information Technologies group, this second building, which is being built by longtime Cincinnati developer Duke Realty Corporation, is attracting existing tenants from within Duke’s portfolio. The building will offer new product for tenants looking to relocate from older Class A buildings.

Duke is also active in the Tri-County submarket, where it is developing Center Pointe VI, a 130,000-square-foot, Class A office building located in a submarket surrounded by rapidly-growing residential, industrial and retail development. This new development comes on the heels of AK Steel’s leasing of 136,000 square feet in Center Pointe V. Additionally, Duke is actively purchasing acreage for future office and hotel development, a sign of its faith in this submarket’s continued success.

With the Cincinnati office market dominated by local and regional developers with a long-time presence the area, newer developers have to work harder to establish a presence in the city. Opus is working gain a foothold in the market with several recently completed industrial projects. The developer also intends to develop office projects in the near future.

There are some concerns about the slowing economy, which could lead to a slowdown in leasing activity, but recent reports are showing that the struggling sectors should not drag down the rest of the economy. The delivery of multiple new office projects in the first half of 2008 will drive up the vacancy rate, but new, well-located office product should continue to attract tenants.

— Darin J. Armbruster is an office advisor with Cincinnati-based Grubb & Ellis|West Shell Commercial.

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