CITY HIGHLIGHT, JULY 2010

CINCINNATI CITY HIGHLIGHTS

Retail

The retail real estate market in Greater Cincinnati/Northern Kentucky has come a long way in the past 12 to 18 months. Currently, vacancy rates average 14 percent across the market. However, vacancy rates of 10 percent or less can be found in the stronger trade areas, including, Kenwood, Florence and Hyde Park. These stronger markets, as well as a few others, will be interesting to watch over the next 6 to 12 months. In fact, rental rates in these areas may even increase as tenants scramble for limited available space. These markets could be the first to see new development as tenants still desire to be there, or as tabled projects are brought back to life.

Shock waves from national economic woes have reverberated through the market with closings of retailers like Circuit City and Linens N’ Things and now that dust from those closings has settled we are looking towards the future. Currently, there are a limited number of truly new projects on the horizon. The majority of recent development has been relocation or redevelopment, much of which has been driven by grocery anchors such as Cincinnati-headquartered Kroger, expanding or repositioning.

The majority of new developments are within the Interstate 275 beltway where the densest trade areas are located. This is a change from 4 to 6 years ago, when development was pushing further out into green space and new suburbs. That type of development has essentially stopped and new development is now found in the dense, high population, mature markets and areas where there were previously barriers to entry.

Truly bright spots in our market have been, and will be, the Downtown, Midtown and University Heights areas. The Banks project along the riverfront, although slow to come together, is making significant progress and could ultimately add approximately 200,000 square feet of retail space and 150 hotel rooms. The first phase should be delivered in the fourth quarter with tenants opening in the second quarter of 2011. The first downtown office tower to be constructed in 20 years, Queen City Square is nearing completion with delivery expected in the first quarter of 2011. This will add nearly 800,000 square feet of office and 25,000 square feet of retail space, much of which is pre-leased, to the inventory.

Also, with the recently passed gambling legislation in Ohio, the downtown area will be home to one of the four approved casinos. The Cincinnati Casino is scheduled to open in 2012 on 21 acres of land on the north side of downtown. In the University Heights area, around the University of Cincinnati, two major projects will take shape. Uptown Commons is a new mixed-use development on the south side of campus and includes 80,000 square feet of restaurants and retail space, 155 apartment units, 716 parking spaces and a hotel to be delivered in the third quarter of 2012. The Kroger-anchored University Plaza will be redeveloped to enlarge the Kroger to 70,000 square feet and reposition Walgreens. This will be delivered in the third quarter of 2011.

As vacancy rates continue to rise and rental rates trend lower, it has been a good time for tenants looking to enter or expand in the market. Besides the automotive and discount/dollar concepts, other tenants are taking advantage and expanding or entering the Greater Cincinnati market. Besides Kroger, locally based Frisch’s Restaurants has been actively looking to expand and reposition their many locations. Planet Fitness, Marshall’s and America’s Best Contacts and Eyewear are just a few of the newest retailers to bring their concepts to Cincinnati. There is particularly strong demand among the quick service and quick casual restaurants, including Firehouse Subs and Five Guys Burgers and Fries.

The financial trouble of a few developers has dramatically impacted the market. Bankruptcy, foreclosure and receivership issues have entangled some more than 2.5 million square feet of prime retail space throughout the market. Multiple projects in many key trade areas have been affected, hindering the ability to move forward with any new deals and in some cases halting development related to these projects.

Eventually, cash strong buyers will obtain these properties. These buyers will be tasked with finishing development, but will also have the ability to reset market rates and should be able to offer tenant incentives to retain existing tenants and attract new ones to finish these projects. This has not been a swift process, but it will be key to our complete market recovery.

The most distressed retail assets can be found in the Kenwood, West Chester, Lebanon and Newport submarkets. Market watchers, will also want to keep an eye on the regional Tri-County and Northgate malls which are facing foreclosure.

The recovery in our markets will take time but we are looking to the future and the many opportunities ahead. We are exceedingly optimistic that during the next year we will see renewed development activity, as well as the resolution of many of our distressed asset situations, which will undoubtedly increase market activity.

— Andrew Sellet is a vice president with Cassidy Turley’s Cincinnati office.

Office

Cincinnati employment trends will reverse during the second half of 2010, leading to modest job gains this year. Growth in office sectors, however, will not be sufficient to offset the sharp losses recorded in the first half of the year. The delayed hiring turnaround in the professional and business services industry, in particular, will further postpone a resurgence in leasing activity. Metrowide reduced construction activity this year will ease competition among owners for the few tenants seeking space during the short term. The pending completion of the 800,000-square-foot Great American Insurance Building will significantly challenge operators of existing space downtown through the end of this year and into early 2011. The tower will be fully occupied by Great American Insurance and a large local law firm, both of which will vacate space in a number of nearby buildings. As a result, a considerable amount of upper-tier office product will become available in the central business district (CBD), boosting competition for tenants. Some owners with upcoming lease expirations have already initiated releasing negotiations ahead of the surge in vacant space. Outside of the core, office demand will remain soft this year. For example, areas with 1970s- and 1980s-vintage product will continue to expand concessions to keep tenants from transitions to newer space in lower Butler and Warren counties.

Office properties in Cincinnati remain more stable investment options than assets throughout much of the nation. Average revenues, for instance, did not surge during the run up and have dipped just 3.9 percent in the metro since the onset of the recession, compared with a decline of more than 14 percent nationwide. Still, deal flow remains at depressed levels, as tight debt markets have reduced acquisitions to a small pool of local buyers and opportunistic investors. Both groups have targeted properties built in the last 20 years with vacancy issues, as the value-add potential of these assets can be significant. Buyers remain most interested in properties in the CBD, Northern Kentucky and lower Butler and Warren counties, though assets with low per-square-foot prices throughout the metro also continue to attract attention.

— Josh Caruana is the regional manager of the Cincinnati office of Marcus & Millichap Real Estate Investment Services.

Multifamily

Due to the lagging economy and lack of financing options for developers, the Greater Cincinnati area has seen little to no new development during the past year. Only 140 units were delivered in 2009 versus 670 units the preceding year. The expectation is that developers will continue a slow path of expansion and only increase the apartment stock by 300 units, a significant drop from the historical annual average of 900 units. Additionally, Cincinnati has not experienced an influx of new developers to the multifamily market.

Currently, there are approximately 1,200 units planned across the metro area including 400 units at the Manhattan Harbour project in Dayton, Kentucky, being developed by DCI Properties. This is part of a $900 million mixed-use development with retail, hotel and marina space. An additional 310 units are being built in the first phase of The Banks project downtown. The Banks will include up to 3 million square feet of residential, retail, restaurants, office and hotel space in an urban neighborhood setting. In addition, it will have a 45-acre park and access to multiple entertainment options from neighboring venues.

A majority of the development in housing is taking place at the universities and is in the form of purpose-built, by the bed, student housing. Xavier University is building 550 new on-campus beds and several developments are planned at and around the University of Cincinnati. Both universities continue to grow and have a significant need for quality student housing.

Most the development is occurring in urban lifestyle settings. Most have a mixed-use component that allows renters to experience retail and entertainment venues in close proximity to the housing. The developers are targeting tenants that enjoy the urban atmosphere whether it is young professionals or active seniors who don’t want the maintenance of a home and enjoy being close to shopping and leisure activities.

Rents in Cincinnati have declined almost 2 percent during the past 12 months to an average of $662 per month. Class A asking rents average $878 per month, while B and C rents average $616 per month.

The market vacancy average is 8 percent, increasing 120 basis points from last year. Class A apartments report an average vacancy rate of 7.2 percent, while B and C Class apartments have an average vacancy just more than 8.5 percent. FOR GRAPH: Source: REIS, Inc.

For future development keep an eye on the urban cities within Northern Kentucky. This market could see an emergence of new development in the near future. The fundraising that Catalytic Development Funding Corporation is doing to redevelop the urban areas of Bellevue, Covington, Dayton and Newport, Kentucky, will help foster the development of new infill housing and the rehabilitation of existing stock.

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