Office developers in the Cincinnati market are exercising caution since the economy took a nosedive after September 11, 2001, and the last round of development activity was cut short before over-building could occur. “The buildings that came online through 2000 and 2001 have experienced success in leasing but mainly at the expense of older Class A and Class B product as tenants took advantage of deeply discounted rates, generous concession packages and first generation space constructed to their needs,” says Loren DeFilippo, a senior sales associate with Cincinnati-based NAI Eagle.

In addition, steadily rising vacancies during the past 2 years and decreasing demand for office space, has resulted in a battle for tenants — therefore pressuring rental rates downward, in some cases, between 15 percent and 20 percent. The Cincinnati office market also posted net negative absorption for the first time in a decade during 2002. This trend continued through the first half of 2003 as the market lost an additional 85,000 square feet of occupied space.

“The first half of the year saw very little activity, and the majority of deals in the market were small,” DeFilippo says. “However, some signs indicate that the market may have bottomed out.” For example, available sublease space did not increase significantly since the end of 2002, and it still hovers at 1.3 million square feet — or 4 percent — of the total market. The central business district (CBD) saw some large blocks of sublease space absorbed. The decline in rental rates slowed and concessions, such as rent abatement, that were offered to tenants did not increase significantly as owners correctly attributed the problem to a lack of demand rather than to a price issue.

“The effect of historically low interest rates on the leasing market cannot be underestimated,” DeFilippo says. “Many small companies took this opportunity to purchase a building, and the office condominium market saw some good activity. Build-to-suits are also happening, although most new construction is occurring in the industrial sector.”

There are a number of projects in the market that are in various stages of development, according to DeFilippo. Eagle Realty Group is developing Phase I of Queen City Square, which will break ground in the CBD upon city approval. The 200,000-square-foot office building comprises the first phase of a downtown block development that will eventually include an 800,000-square-foot office tower. Corporex Company is redeveloping a manufacturing facility into the Dolwick Business Center, a 230,000-square-foot, Class A office facility in northern Kentucky. In Midtown, the Ackerman Group and Al Neyer, Inc., have broken ground on the 135,000-square-foot Cornerstone at Norwood. Also in Midtown, Jeffrey R. Anderson and the Miller Valentine Group are developing Rookwood Exchange, a 400,000-square-foot expansion to the Rookwood lifestyle center. LandBank and Neyer Properties have entered into a joint venture to redevelop a manufacturing facility into a 200,000-square-foot office, of which Shaw Environmental has already leased 30,000 square feet, in Midtown. In the Mason/Interstate 71 submarket, Koll Development Company has proposed Kingswood Corporate Center, a 1.5 million-square-foot development on 100 acres.

“A secondary trend is the construction of small office projects located in niche markets near rapidly growing suburban residential developments,” DeFilippo says. These projects, ranging in size from 6,000 square feet to 18,000 square feet, have experienced success in attracting tenants, primarily in the medical and financial services sectors.

“The vast majority of office development activity is occuring, and will continue to occur, along the I-71 corridor between downtown and the northeastern suburban market of Mason,” DeFilippo says. “While the area has experienced significant negative absorption due to corporate downsizing and consolidation, and the relocation of major tenants to build-to-suit projects, it should recover well as the economy improves.” Large parcels of land remain in developer's hands, available for additional speculative and build-to-suit construction.

A tremendous amount of interest has arisen in the Midtown submarket, an under-served market near the affluent city neighborhoods of Hyde Park and Mt. Lookout, and near the first generation suburbs of Indian Hill, Madeira and Mariemont. This area's proximity to downtown, the airport, retail and other amenities makes Midtown a desirable location for many companies including Northwestern Mutual, Huntington Bank and Gateway Investment Advisers. With virtually 100 percent occupancy in its emerging Class A office market, Midtown should continue to experience great success as economic conditions improve. “On the flip side, this success could cause trouble for the downtown office market because the Midtown area offers the convenience of a suburban location and easy access from the entire metropolitan area,” DeFilippo says.

“Convergys, the customer relationship and billing services company, has been the 800-pound gorilla in the market for the past 2 years,” DeFilippo says. The company has been searching for a facility of up to 1 million square feet to consolidate 700,000 square feet of operations spread throughout four different buildings. The city of Cincinnati, the state of Ohio, and the state of Kentucky — along with suburban jurisdictions — each competed heavily to land this economic development plum. The company recently reached an agreement with the city for an incentive package that assists Convergys in purchasing the 555,000-square-foot Atrium One building, current home to the company's executive offices. The agreement will retain more than 2,000 highly compensated jobs in the CBD and promises the creation of 1,450 more jobs during the next 15 years. The negative aspect of the deal is the 350,000 square feet of space at Convergys Center that the company will vacate in 2005 when it moves to Atrium One. “The space will take time to absorb and could delay a recovery in rental rates and new development activity,” DeFilippo says.

Recent major leases in the area include Lenscrafters lease of a 225,000-square-foot build-to-suit in the Mason/I-71 submarket (the company vacated a 200,000-square-foot building at 8600 Governor's Hill Drive); Anthem’s 223,000-square-foot addition to its campus in the Mason/I-71 submarket; Ethicon’s lease of 120,000 square feet in One Ashview Place in Blue Ash (the company vacated 95,000 square feet in Northmark Business Center II); Great American Insurance Company’s lease renewal of 250,000 square feet in the 580 Building in the CBD; Dinsmore & Shohl’s lease renewal of 140,000 square feet at Chemed Center in the CBD; Fifth Third Bank’s lease renewal and expansion to 110,000 square feet at the 580 Building in the CBD; Clear Channel’s lease of 50,000 square feet at Bank One Towers in Kenwood (the company vacated a long-time downtown periphery location); IBM’s lease of 32,000 square feet in McCauley Place in Blue Ash (the company vacated 60,000 square feet at the 580 Building in the CBD); and Ernst & Young’s lease of 33,000 square feet in the Scripps Center in the CBD (the company vacated 40,000 square feet at the Chiquita Center in the CBD).

Rental rates for Class A space in Cincinnati range between $18.50 per square foot and $23.75 per square foot in the CBD, and between $16.50 per square foot and $23.90 per square foot in the suburbs.

The overall vacancy rate for the CBD is 13.38 percent, with 10.23 percent vacancy for Class A space and 16.08 percent for Class B and Class C space. In the suburbs, the overall vacancy rate is 19.76 percent with 22.46 percent vacancy in Class A space and 15.96 vacancy in Class B and Class C space. The market’s overall vacancy rate is 16.67 percent, which is the highest level since 1992. With sublease space included, the total vacancy is slightly more than 20 percent. As vacancies increased, rental rates declined but not to the extent that has occurred in the volatile East Coast and West Coast markets. Cincinnati is generally balanced, because it does not experience extreme spikes in rental rates during good times, and it does not experience a crash during a downturn.

“The Cincinnati office market is poised for a recovery during 2004 as the diverse local economy begins to pick up steam. Forecasts indicate job growth of 1.3 percent over the next year, primarily in the business services sector,” DeFilippo says. “The office market should benefit greatly from these new jobs, and begin to put a dent in the 7 million square feet of vacant and un-utilized space throughout the region. The rent bargains will continue, which benefits the Class A market as tenants upgrade from older facilities.”

In the CBD, the strong demand for housing is taking some of the older, outdated office product out of the market. Class C properties are being rapidly converted to both rental and condominium multifamily units. “This trend will only help the downtown office market as tenants relocate to existing vacant space while their old space is recycled to a different productive use,” DeFilippo says. “The suburbs, however, do not benefit from the adaptive reuse of older structures. Older suburban office buildings will suffer as companies continue to gravitate toward new product. This trend will worsen as more new buildings are added to the inventory.” Owners of Class B and Class C properties have responded with renovations and upgrades to their buildings, especially in the areas of building systems and technology solutions.

©2003 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.