HEARTLAND SNAPSHOT, JUNE 2006

Cleveland Office Market

In the northeastern Ohio office market, no speculative development is occurring. New developments that are not pre-leased are not taking place. “Rental rates are slowly increasing,” says Warren Morris, partner with Colliers Ostendorf-Morris in Cleveland. “This [increase] is especially noticeable in the east submarket.”  Despite substantial vacancy rates in Cleveland’s CBD, overall vacancy rates are falling. With current rates between 12 and 20 percent, rental rates are trending upward, but a dramatic increase is unlikely until vacancy rates near the 12 percent range. “The commercial real estate office market as a whole is currently seeing an increase in activity,” Morris notes. “[This] increase began in the past 9 months and continues to build.”

Several significant developments are on Cleveland’s horizon. Developer Scott Wolstein’s East Bank Flats project will be a residentially driven development that will incorporate both office and retail components. Demolition of existing buildings on the site could begin in third-quarter 2006.

Bob Stark’s Warehouse District development project is retail-driven and will feature residential and office components. The proposed $1 billion collection of buildings includes 1 million square feet of street-level retail, and 6 million square feet of mixed-use residential and office space. “Stark plans to have buy-in from national retailers, and then develop the residential and office space following the retail development,” Morris explains. Both Wolstein and Stark are developing their projects for economic and personal reasons. “The downtown developments allow Wolstein and Stark to enhance the city they care about,” Morris says. Downtown Cleveland is seeing the majority of new development projects.

Progressive Insurance is planning the addition of a 45-acre office campus in Mayfield Village, Ohio. The campus will comprise two buildings and two parking garages. The $160 million project will add an estimated 1,000 new jobs. Progressive is also the most notable tenant absorbing a significant amount of space in the area.

The $168 million Euclid Corridor project will be a 7-mile bus rapid transit system that will run from Public Square to Windemere in East Cleveland. The project, which has a targeted completion date of 2008, is the largest transportation project in Cleveland’s history. The Euclid Corridor will link the CBD with University Circle, and include enhanced streetscapes and public spaces.

“As a result of these projects, northeast Ohio commercial real estate will benefit,” Morris notes. “As these advancements move forward, millions of square feet of commercial property [will] come into play.” The northeast Ohio region is attractive to local development companies and as a result, is characterized by local investors and developers.

Recent leases include Quicken Loans’ 44,968-square-foot lease at the MK Ferguson Building in the CBD; Southstar Funding’s 13,210-square-foot lease at 5700 Darrow Road in Akron, Ohio; and Cleveland Lighthouse Academy East’s occupation of 19,875 square feet at Reserve Square, also in the CBD.

Class A rental rates range from $16.75 to $31 in the CBD, and $18 to $25 in the suburbs. First-quarter vacancy rates this year for the CBD are at 21.9 percent, an improvement from first quarter 2005 when they stood at 23.83 percent. Class A vacancy in the CBD is also an improvement from 2005, standing at 14.9 percent compared to 17 percent a year ago. Overall suburban vacancy has also decreased since first-quarter 2005 from 16.83 percent to 14.94 percent. Suburban Class A vacancy also dropped significantly in the past year from 18.78 percent to 14.4 percent.

“In the future, the Flats and Warehouse districts in downtown Cleveland are areas to be watched,” Morris indicates. “There are some very ambitious major project expansions with office, retail and residential components in infancy waiting to take hold in these submarkets.”

©2006 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.