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CITY HIGHLIGHT, JULY 2011
CINCINNATI CITY HIGHLIGHTS
Joshua Caruana, Joel Dumes and Joshua Gerth
Cincinnati Retail Market
Retail leasing activity in the Cincinnati market will increase this year as regional and national chains take over blocks of dark space in suburban areas. Both necessity-based and cash-positioned retailers continue to expand into outlying areas proximate to major transportation routes, better tenant mixes and cheaper rent structures. For instance, The Peddlers Mart recently leased more than 125,000 square feet at the Highland Square community center along Interstate 275 in the West/Northwest Hamilton County submarket. Smashburger, Aldi, Shoe Sensation and Great Clips have all recently signed various leases throughout the Cincinnati MSA. Additionally, Target moved during the first quarter into nearly 130,000 square feet near Interstate 71 in Northern Kentucky, where elevated household incomes and high traffic counts support retail sales.
As local and regional retailers lease smaller in-line space around many sites, metrowide vacancy will fall to the lowest rate in more than two years. Properties in Butler and Warren counties will receive the strongest demand, as more mom-and-pop retailers enter the areas to capitalize on discounted rents and record-high concessions. As a result, vacancy in the Outer Counties submarket will decrease 90 basis points this year to 15.4 percent, though it will take several more quarters of healthy demand for rates to drop to pre-recession levels.
Looking at market fundamentals, during the first quarter of 2011, Cincinnati employers expanded payrolls by more than 13,000 workers, equaling growth of 1.3 percent. In the preceding quarter, local companies cut 2,400 jobs. The professional and business services sector outperformed over the past year, adding nearly 7,000 positions — growth of 3.1 percent. However, the financial services segment shed jobs for the third straight year, slashing more than 900 workers. As the local economy progresses further into a recovery and companies strengthen payrolls, the Cincinnati unemployment rate will continue to improve. Since peaking at the 10 percent mark in early 2010, unemployment has fallen 110 basis points to 8.9 percent.
Approximately 168,000 square feet of retail space was completed in the past year, far less than the 1 million square feet delivered in the previous 12 months. Currently, 369,000 square feet of retail space stands under construction, all of which will be delivered this year. This is a significant increase from last year, when just 152,000 square feet was completed. The Outer Counties submarket is slated to receive more than 60 percent of this new stock. The largest project currently under way in the Metro is the 236,000-square foot Springsboro Landings power center, due in mid-2012. In 2011, builders will deliver 369,000 square feet of retail space in Cincinnati.
In the past 12 months, a spike in job growth and record-low construction activity supported a slight improvement in the retail vacancy rate, with the average slipping 20 basis points to 13.4 percent. Neighborhood/community center vacancy outperformed all other segments in the last year, bolstered by expanding mom-and-pop retailers. Vacancy fell 60 basis points in that time to 14.6 percent, including a drop of 40 basis points in the first quarter alone. Northern Kentucky operators boasted the tightest vacancy rates in the metro during the past 12 months, with the average decreasing 240 basis points in that time to 7.1 percent. Conversely, owners in the Outer Counties submarket continued to struggle, with vacancy surging 160 basis points year over year to 16.1 percent. As employers strengthen payrolls through 2011, retail sales will spike, propelling an increase in tenant demand. As a result, vacancy will recede 30 basis points by year end to 13.1 percent after contracting 50 basis points last year.
Investment activity will pick up over the coming months as eased lending criteria, low interest rates and assets priced at a discount combine to attract both local and regional buyers to the market. Single-tenant transactions will dominate activity in 2011, as well-capitalized investors reposition portfolios into less management-intensive properties for their long-term stability. Bidding will intensify in core pockets of Hamilton County, such as Kenwood and Hyde Park, pushing down cap rates for assets leased to creditworthy tenants like Walgreens into the low-7 percent range. Meanwhile, yield-seeking buyers will purchase strip centers with a quality-anchor tenant like Family Dollar in middle-class suburban areas in Warren and Boone counties to reconfigure tenant rosters. Properties in these areas currently trade for well below replacement costs with first-year yields beginning in the mid-10 percent range.
— Joshua Caruana is the regional manager of the Cincinnati office of Marcus & Millichap and Joel Dumes is a vice president of investments with the Cincinnati office as well as senior director of the firm’s National Retail Group.
Cincinnati Office Market
It’s no secret that Cincinnati has a beautiful landscape, a world-class arts and culture scene, and a rich history, but it is little known for its vibrant business community. Cincinnati is truly located in the “heart of it all” and many people are indeed surprised by the economic influence that exudes from this market. Cincinnati is the 24th largest U.S. metro area with a population of just over 2 million. Cincinnati is home to 10 Fortune 500 company headquarters, and, per capita, that places the city higher than New York, Boston, Chicago, or Los Angeles. Kroger Company, Procter & Gamble and Macy’s Inc. are all headquartered in the city, and it has recently been chosen as the North American headquarters for First Group and dunnhumby, both of which have tapped into the local labor pool.
With the strength of the city’s business community, Cincinnati’s office market has been relatively stable over the last 15 years, with overall vacancy rates hovering around 15 percent. Unfortunately, it has not been immune to the economic woes of the last several years and many companies have made cuts or downsized. The Cincinnati office market is approximately 37 million square feet and around 13 million square feet is located downtown.
This year marks the completion of the first new high-rise building in Cincinnati in 22 years. The 42-story Queen City Tower opened its doors a few months ago and is more than 85 percent pre-leased. However, it comes at a hefty price to the other buildings. The current vacancy rate in Cincinnati’s Central Business District (CBD) is now more than 21 percent. For example, Great American Insurance is anchoring the new tower by leasing 540,000 square feet, and law firm Frost Brown Todd took just over 100,000 square feet. However, they vacated nearly 800,000 square feet in neighboring properties — leaving a large cluster of empty space on the market.
Recently, the real estate community received some breaking news — First Financial Bank has committed to approximately 90,000 square feet at 255 East 5th Street, and the building will be renamed First Financial Center. This is a great addition to the already impressive roster of downtown tenants. Downtown also saw some investment activity as Duke Realty recently sold a portfolio of CBD properties that included 312 Elm and 312 Plum office towers after the portfolio had been on the market for almost three years. This increase in investment activity is expected to continue as investors seek higher yields in the Midwestern markets as opposed to the coastal cities, where cap rates are approaching levels reminiscent of 2007. There is simply less competition in the Midwest and better deals for investors.
Cincinnati suburban markets run hot and cold. Former winning submarkets Mason and Blue Ash have now been replaced by West Chester and the Red Bank Corridor, where there has been new construction for companies like GE and Medpace. The Kenwood market, home to every major financial firm, remains the healthiest market. Class A vacancy rates are in the single digits and the new regional headquarters for the FBI is located there, as is a 200,000-square-foot speculative office development on Montgomery Road, which is expected to fill up to healthy capacity in the next 18-24 months. This is the only market with any new and significant development.
Blue Ash, Cincinnati’s second largest office market has been stable, with vacancy rates at the 16 percent mark. As mentioned, the once notable Mason, Tri-County, and Northern Kentucky markets are now sporting the highest vacancies of around 22-25 percent, even after Fifth Third Bank Processing Solutions’ lease of 200,000 square feet in Mason. These high vacancy rates will continue into the forseeable future. The healthcare industry has been the saving grace for many of these suburban markets, with Children’s Hospital, Christ Hospital, Kettering Hospital, and Mercy ramping up with more office, medical and outpatient space requirements.
There is a sense that the worst is over, the economy is improving, and the Cincinnati region has the labor pool, prestigious projects, incentives and commercial real estate product to attract new businesses. But with recent setbacks to other markets, lending restrictions, mounting debt, and a continued housing crisis, there is still a great deal of hesitation in the office real estate sector. Ask any commercial broker and they will tell you that the life cycle of today’s deals is three times longer than they ever have been. Patience is a virtue….at least, that is what people keep telling me.
— Joshua Gerth, is a vice president with the Cincinnati office of Jones Lang LaSalle.
Dayton, Ohio, Office Snapshot
While Dayton faces challenges, the region has a much to be hopeful about – Wright-Patterson Air Force Base is flourishing, the city is gaining a reputation as a center for aerospace research and advanced manufacturing innovation, and the medical community continues to thrive.
In terms of the office market, Dayton ended 2010 with 83,380 square feet of positive net absorption. The total net absorption for 2010 was negative 58,325 square feet. Despite the gains in absorption, direct vacancy remained steady at 28.34 percent throughout last year and the trend is continuing in 2011.
During recent years, population changes, corporate relocations, and mergers and acquisitions have all led to higher vacancy in the central business district (CBD) and an increase in distressed downtown assets. THMG 10 West Second Street LLC recently purchased KeyBank Tower at 10 West Second Street. In conjunction with the Greater Downtown Dayton Plan for revitalization, the company invested nearly $200,000 in mechanical systems and lighting upgrades to make the building more energy efficient.
Unfortunately, despite the improvements, law firm Thompson Hine recently decided to move from KeyBank Tower to new space at Austin Landing. Hopefully, the improvements will help attract new tenants to the 27-story office tower, which will have significantly increased vacancy as a result of the relocation. THMG further invested in the Dayton CBD by purchasing the Leigh Building at 100 West Second Street. Its 40,404 square feet of office space will be refurbished and the 295 space parking structure will provide convenient parking for neighboring KeyBank Tower.
With the proximity of Wright Patterson Air Force Base and the University of Dayton Research Institute, technology and research will continue to be driving forces in Dayton’s economy in 2011 and beyond. GE Aviation broke ground on its $51 Million, 115,000-square-foot Electrical Power Integrated Systems Research and Development Center (EPISCENTER) on the University of Dayton’s campus. Construction is slated for completion in the third quarter of 2012. Anticipated research will include the development of electrical power improvements for hybrid and electric vehicles and aircraft.
The CBD’s technology-oriented research and development campus, Tech Town, opened its second building, a three-story 42,000-square-foot facility at 711 East Monument Avenue, and construction is nearly complete on a third, a 61,339-square-foot structure at 241 Taylor Street.
Miamisburg’s Austin Landing, located on Interstate 75 just south of Dayton is a 142-acre mixed-use project. Construction was recently completed on both the new 60,000-square-foot Teradata Headquarters and a 120,000-square-foot, Class A office building. The rest of this year and 2012 promise more deliveries including the 300,000-square-foot Motoman Robotics headquarters.
The Austin Landing project illustrates the growing connection between Dayton and Cincinnati along the I-75 corridor. The two cities are only a 60-minute drive from each other and every year they seem to be growing closer to each other. Competition is heating up between the traditional CBD and new development for prominent tenants in the Dayton market.
Hopes are high that Dayton’s focus on aerospace, manufacturing and healthcare will create the jobs that are so important for driving the commercial real estate market. It remains to be seen what the specific impacts will be or how soon they’ll become apparent in the office market. Nevertheless, there has been an increasing focus on Dayton as a center for technology and innovation and the general buzz around Dayton is that good things are coming.
— Beth Gibbs is an associate vice president with the Dayton, Ohio, office of Cassidy Turley. |
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