HEARTLAND SNAPSHOT, MAY 2006
Columbus, Ohio Office Market
This year, the clouds should begin to clear for the Columbus office market. Though lagging behind other office markets across the nation, Columbus has started to show signs of recovering from 4 years of high vacancy rates.
Market absorption has been a challenge, as new construction has outpaced tenant demand for the past 3 years. Consequently, the overall vacancy rate stood at 20.3 percent at the end of 2005, well above the national average of 13.7 percent and nearly three times the 7.2 percent vacancy rate Columbus showed prior to the 2000-2001 recession.
Three factors contribute to today’s historically high vacancy rate: corporate consolidation and downsizing occurred following the recession, nearly 1.5 million square feet of space has been added to the inventory in the past few years, and Banc One gave up more than 1 million square feet of space throughout the area when it consolidated into the company’s Polaris regional headquarters.
Subleased space further clouded the market as companies with long-term leases began dumping excess space for gross rents that were 50 percent or more below the going rates. Fortunately, much of this sublease space has been taken, and the majority of the 568,000 square feet of sublease space still available will expire in the next year or so and return to landlords for direct leasing.
Tenant velocity increased last year as existing businesses expanded and new companies relocated to the area. Much of the new product delivered last year was pre-leased, so its impact on supply should be short-lived.
Last year, just more than 312,000 square feet of product was completed. Primarily located in the Easton and New Albany areas, all of these projects benefited from tax abatements. Heading into 2006, seven buildings were under construction, with four build-to-suit projects for major corporations — Lane Bryant, BMW, Nationwide Insurance and OhioHealth. More than 270,000 square feet will be available in the remaining three buildings, giving landlords some concern. If tenant demand remains strong, though, absorption should outpace the increase in new space.
Vacancy rates vary greatly by submarket. The northeast submarket ranks as the most active, with the lowest vacancy rates among the suburban markets even as new inventory entered the submarket. Community incentives and tax abatements led to the construction of three new buildings in 2005, and two more are set to open this year. The Easton area in the northeast continues to attract both corporations and build-to-suit opportunities through aggressive tax incentives.
Easton Commons 1 opened in December 2005 with 100,000 square feet of totally speculative space. The nearby EMH&T build-to-suit added another 100,000 square feet but was completely occupied by its owner in September of last year. And the 40,000 square-foot Signature Office 1 building in the New Albany Business Park was 50 percent pre-leased when it opened in July 2005.
Duke Realty Corporation has developed a 135,000-square-foot build-to-suit for Lane Bryant/Charming Shops, one of three new buildings opening in the Columbus market this year. The company moved into its new headquarters in the Easton development in February. The 100,000-square-foot Creekside building, set to open in November, is already 50 percent pre-leased.
The New Albany submarket recently attracted another large tenant as well. American Electric Power Company announced that it will move its operations center from downtown to New Albany, Ohio, with plans to break ground on a $44 million center this summer. The 83,500-square-foot center will house 115 employees when it opens in 2007.
All told, only 120,000 square feet of the new construction is available for lease and several corporate users are interested. This gives the northeast submarket a bright outlook, with expectations that its Class A vacancy rate may drop from 16.4 percent at year-end 2005 to less than 10 percent by the end of this year.
The CBD is recovering from historically high vacancy rates in 2004. The situation is improving through the conversion of older office buildings to residential and increased tenant demand for Class A space, which posted positive absorption of approximately 94,000 square feet last year.
No new construction took place in the CBD last year. This year, Nationwide Realty is building a 100,000-square-foot complex that it expects to complete by year’s end in the Arena District.
While landlords still feel pressure to remain competitive, the vacancy rate should continue to drop in the CBD. We expect it to fall from 17.8 percent at the end of 2005 to approximately 15 percent by year-end.
The north and northwest submarkets continue to struggle. In the north submarket, large blocks of second-generation space are available, as Bank One consolidated operations to its Polaris campus and then merged with Chase Manhattan. AT&T and Huntington Bank also put approximately 100,000 square feet each back on the market. These moves pushed the submarket’s vacancy rate to 24.6 percent.
Two large speculative projects in the Westar development will add another 230,000 square feet of inventory in the north submarket. Opus also entered the Columbus market with its 90,000-square-foot speculative Altair 1, which is expected to deliver in September. These developers are seeing strong interest from large tenants, so the north submarket may see vacancy rates dip slightly by year’s end.
The northwest market showed some improvement last year, with its vacancy rate dropping nearly a full point to 21.7 percent from its record high of 22.6 percent in 2004. Most properties saw healthy activity toward the end of last year.
Vacancies should further stabilize since developers have backed off to backfill existing properties. No new construction took place last year in the northwest. Developers have been active this year with two build-to-suit projects. Duke Realty completed a 221,000-square-foot building for BMW Finance in the northern portion of Hillard, and Daimler expects to finish a 75,000-square-foot building for OhioHeath this fall.
As leasing activity increases and developers refrain from new construction, this submarket should continue to recover. By year’s end, we expect the vacancy rate to drop five points in the northwest submarket, ending the year at close to 15 percent.
— Randy Stephens is a senior vice president and oversees office services for Colliers Turley Martin Tucker’s regional office in Columbus, Ohio.
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