CITY HIGHLIGHT, SEPTEMBER 2004

CINCINNATI SHOWS IMPROVEMENT IN MOST SECTORS
Steve Bove, Scott Abernethy, David Birdsall and Jennifer Holcombe

The Cincinnati market is seeing positive indicators in all major sectors of real estate this year. Developers have displayed caution before building new projects causing leasing and sales in the industrial market to pick up. The office market also is seeing increased leasing, with the Kenwood and Blue Ash submarkets seeing the biggest decrease in vacancy. Developers in the retail market are emphasizing lifestyle centers through new construction and conversion of existing malls. The multifamily market has felt the ill effects of renters becoming homeowners and has tried to counter this with a number of condominium conversions and new condominium developments.

Industrial

Cincinnati’s industrial real estate market has gained momentum as 2004 has progressed. While many developers have exercised patience before proceeding with proposed projects, they have continued to actively market them. Also, small- to mid-size manufacturing companies have purchased space rather than lease it.

While warehouse vacancy remained high this year, a boost in leasing activities has shown signs of an improving economy. At mid-year, both bulk warehouse and office/ warehouse vacancy remained relatively stable at 26 percent and 21 percent, respectively. Rental rates ranged from $2.60 per square foot to $2.90 per square foot for bulk warehouse space and from $3.50 to $5 per square foot for office/warehouse space.

At mid-year, high vacancy challenged the bulk warehouse market, with more than 80 buildings offering more than 100,000 square feet each. Despite this high number, an increase in leasing activities has signaled an improving industrial market. The airport submarket in Northern Kentucky has reigned supreme, scoring the largest deals during first half of 2004, including a few deals more than 200,000 square feet. UPS Supply Chain Solution has leased 250,000 square feet in Park West International Park. Qualis Automotive has relocated from a nearby subleased space and has expanded into a nearly 200,000-square-foot distribution center at RREEF’s Southpark project.

Cincinnati’s northern submarkets also signed a number of significant deals. In West Chester, Cornerstone Brands, distributor of Frontgate and other upscale catalogs, took another 220,000 square feet in the Port Union Distribution Center. Also in West Chester, Consolidated Logistics has moved into 200,000 square feet at First Industrial’s NorthPark Business Center IV, and Jack of All Games has signed up for a 400,000-square-foot build-to-suit with Duke Realty.

After years characterized by a sluggish industrial market, construction activities strengthened as 2004 approached its midpoint. Northern Kentucky maintained its dominance with the largest construction projects. IDI is building a 543,000-square-foot speculative distribution building. Paul Hemmer Companies continues to market its proposed five-building, 1.1 million-square-foot Southpoint Business Park in Northern Kentucky. The developer is also marketing proposed buildings — ranging from 130,000 to 247,000 square feet — at Airpark Business Center II in Northern Kentucky. Another major project, FexEx Ground’s distribution hub — a 335,000 square foot distribution warehouse on 96 acres in Toebben Companies’ Enterprise V industrial park — is under construction and completion is expected by mid-2005.

Major companies have expansion plans in the northern submarkets, the region’s other leading industrial area. In Forest Park, National Bedding has opened a 150,000-square-foot factory in the Carillon Business Park. In Mason, Basco Shower Door Company is building a 50,000-square-foot addition to its 85,000-square-foot headquarters.

As 2004 winds down and the economy improves, industrial real estate activities should accelerate, especially in bulk warehouse leasing. Rental rates for large manufacturing and warehouse facilities should remain at record low levels for another 6 to 12 months. However, rental rates on smaller properties should increase as the supply dwindles and demand surges. Other than build-to-suits, which may be required as the supply of smaller product declines, limited new construction will break ground in the next 6 months.

— Steve Bove is sales vice president, industrial with Cincinnati-based NAI Eagle.

Office

While Cincinnati’s office market has not completely turned the proverbial corner, it’s beginning to get a good peek at better days ahead. Office market conditions stabilized in the first half of the year, and the economic recovery is producing “office-using” employment. These signs point to continued recovery for Cincinnati’s office sector during the latter half of the year and into next year.

In 2004, the central business district (CBD) has seen positive absorption for Class A space and the suburban market has posted the highest positive absorption for a 6-month period in more than 2 years. Additionally, limited supply of new product continues to allow the market to catch its breath, paving the way for continued absorption.

AT&T’s lease at 525 Vine Street gave the downtown market a big boost. Class A space has shown positive absorption of 109,541 square feet, and the AT&T lease accounted for 88,000 square feet of this. Additionally, Mitsui Sumitomo Marine Management has signed a 40,000 square-foot lease at 312 Elm Street. These transactions have pushed the Class A vacancy rate for the CBD down from 9 percent at year-end 2003 to 7.2 percent by mid-year 2004.

The downtown’s Class B market, though, has remained static, with no significant transactions or absorption, and the vacancy rate has inched up slightly from 16.4 percent (year-end 2003) to 16.7 percent.

Looking ahead, Cincinnati Bell will make a decision to stay or leave the CBD. The telecommunications company has 150,000 square feet in the CBD, and must vacate Atrium 1 to make way for Convergys, which bought the building last August. In turn, Convergys will vacate the Convergys Center (350,000 square feet) at the end of 2005. A decision by Cincinnati Bell to stay put would certainly buoy the CBD’s future prospects after the Convergys move.

In the suburbs, a first-quarter blip gave pause for concern. After significant absorption during the last 6 months of 2003, this year’s absorption turned sour — negative 190,000 square feet — during the first quarter. But this year’s second quarter more than made up for that, with positive absorption of 438,131 square feet.

The overall vacancy rate for the suburban office market has decreased from 18.9 percent to 17.5 percent. Positive absorption should continue. Developers and lenders have shown restraint, allowing the market to recover more quickly. Still, tenants have the upper hand even though asking rents and lease rates are showing stability.

Suburban submarkets are in various stages of recovery or distress.

The Blue Ash submarket has been helped by several large transactions. Sara Lee’s 25,000-square-foot expansion in the Hawthorne Center makes it the sole tenant in the 130,000-square-foot building. The company also has taken the entire 38,000-square-foot Park Place building. Lockwood Greene has signed a lease for 25,000 square feet in Northmark Business Center II, a property bought by Duke, along with Northmark I, in March.

These moves signal that Blue Ash has turned the corner after several years of negative absorption and rising vacancy rates. The area’s mid-year vacancy stood at 17.9 percent, a marked improvement from 19.7 percent at the end of 2003. A planned lease by Sunny Delight for 22,000 square feet and no new construction on the horizon will further help in Blue Ash’s recovery.

Kenwood has seen the biggest turnaround, rebounding strongly from its vacancy of 23 percent at year-end to 15 percent by mid-year. Clear Channel and McGraw-Hill have taken large blocks of space, 50,000 and 10,000 square feet respectively, to boost the area’s fortunes. Similarly, The Hauser Group has signed a 17,000-square-foot lease that will further Kenwood’s favored status as an office address.

Neyer Properties completed a 46,000-square-foot building at Kenwood Crossing across from Jewish Hospital. In a trend seen in other Midwestern cities, the building has attracted specialty medical users — pediatrics, an outpatient surgery center, orthopedics and sports medicine. These users have filled all but 11,000 square feet of the building, and Neyer has started on Kenwood Crossing II, which will offer three 15,000-square-foot office condominiums.

Midtown also continues to draw attention from tenants. While the area’s vacancy rate increased from 13 percent at the end of 2003 to 15 percent at mid-year, this can be traced to three large tenants — McGraw Hill, DigiTerra and OKI — leaving the Midtown market. Still, there are only three Class A buildings in Midtown that currently offer direct leases.

Midtown’s stature will be elevated when the Ackerman Group opens the Cornerstone in Norwood this November. The 140,000-square-foot Class A building already has several tenants — Lincoln Financial, Gold’s Gym and a number of medical users’ — ready to move in. The building should be 90 percent full by the time its doors open, so expect Ackerman to break ground on a second 120,000-square-foot building early next year. The success of this project, along with another across the Interstate, positions Midtown as the hot spot for developers in the foreseeable future.

On the flip side, Northern Kentucky continues to experience problems. Negative absorption of 120,000 square feet pushed its vacancy rate to more than 32 percent by mid-year. With no active large tenants and several buildings coming online, Northern Kentucky faces another 18 months of difficulties. Silverman has nearly completed the second 55,000-square-foot building at the Florence Executive Center, and Wessels Construction is close to finishing its first 38,000-square-foot building at Wright’s Summit. Neither building has signed a tenant. Added to this, more than 1.2 million square feet will be put on the Kenwood market as tenants leave or sublease space.

All in all, Cincinnati is gaining ground as conditions improve. Restrained development and slow, steady job growth are bolstering occupancy and vacancy trends. Rent growth will lag the gains in occupancy, but substantial effective rent growth is possible by year’s end and is moving forward into next year.

— Scott Abernethy is an office sales and leasing specialist for Colliers Turley Martin Tucker’s regional office in Cincinnati.

Retail

Cincinnati is rapidly moving from its older middle-America roots toward a new Midwestern lifestyle as it focuses on both urban and suburban retail development.

The commercial real estate industry in Cincinnati has seen a growing trend in its suburbs toward lifestyle centers. The concept behind these one-stop, open-air shopping centers is to give retailers a new way to cater to the needs of the community.

For example, the 432,000-square-foot Deerfield Towne Center, located at the intersection of Mason-Montgomery and Irwin Simpson roads, is one of the latest lifestyle centers in the area. Currently, the center is 90 percent leased with 67 retailers, including Dick’s Sporting Goods, Borders Books & Music, Wild Oats and Bed Bath & Beyond.

The lifestyle concept has taken off because many of the nation’s leading retailers are looking for a way to reach out to consumers beyond the typical mall atmosphere. Even malls are converting into lifestyle centers, such as General Growth Properties’ addition of 100,000 square feet of new retail space and an open-air shopping area to Kenwood Towne Centre in Kenwood.

Jeffery R. Anderson, one of the most active developers in the area, has taken on the redevelopment of Crestview Hills Mall to create a lifestyle center. Plans are in the works for a cluster of free-standing outdoor shops, including current anchor Dillard’s. The center is scheduled to open in 2005.

Also, Wal-Mart has revved up its development in the marketplace. Plans for four to five new Supercenters are in the works. Many of these will be “net new” stores for the region and will provide for a high stakes battle with Kroger, Cincinnati’s hometown grocer and market share leader.

Ultimately, these changes in retail development represent a shift in the mindset of consumers. Cincinnati residents are privy to a new level of development, bringing the community into the forefront of retail growth.

As an increasing number of Ohio residents are seeking a Chicago/ North Shore Drive-type lifestyle, Cincinnati has seen a dramatic surge in urban development in mid-town Cincinnati — sparked by the overwhelming success of Rookwood Commons and Center of Cincinnati. A steady stream of new office/retail and residential projects have been announced or started along the Interstate 71 corridor.

The Newport on the Levee Project, which is occurring on both the Kentucky and Ohio riverfront, continues to add high-quality restaurants and has dramatically improved a once downtrodden area. Plans are underway to build additional retail space and high-rise condominiums.

— David Birdsall is vice president of investments – Midwest for Regency Centers. He is based in the Cincinnati office.

Multifamily

Cincinnati’s multifamily rental markets are not expected to recover from 2004’s flat rates until next year. Rents will continue to be flat in 2004, and price wars will come into play. If job growth trends continue, occupancy will improve during the third and fourth quarters.

There have been few reports of new multifamily developments to be built in Cincinnati. Last year alone, 1,700 new units were added to the market with only 1,100 of these expected to see significant absorption.

The investment market will see positive activity as long-term fixed-late loans that originated in the latter part of the 1990s reach maturity. Aggressive and abundant buyers will entice owners to free up property.

Several redevelopment opportunities in the central business district (CBD) that were designated as apartments are now being converted to condominiums. For example, the former McAlpin’s department store located on 4th Street was originally being redeveloped as loft apartments, but will now be condominiums.

Also in the CBD, the Polk Building, which once served as office space, is being converted to condominiums by Miller Valentine and will be called Park Place at Lytle.

The largest apartment transaction for the first half of 2004 was the $10.3 million sale of Highland Ridge Apartments in Northern Kentucky near Northern Kentucky University. This 180-unit complex was sold by Dayton, Ohio-based Connor & Murphy to Columbus-based Highland Core LLC for more than $57,000 per unit.

Rental market conditions in Cincinnati were no different than most other markets in the United States. Vacancies in 2003 began at about 12.5 percent overall, and while second quarter leasing showed some signs of vigor, mid-year vacancy fell to approximately 9.8 percent.

Effective rents at the end of 2003 returned to levels that were last seen in 1999. The typical concession is 1-month free with a select few properties offering 2- and 3-month-free deals.

Rents will likely remain steady, possibly decreasing slightly, until interest rates increase enough to create a larger gap between cost-to-own versus cost-to-rent. Overall, as the economy improves, asking rents in the Cincinnati multifamily market will increase accordingly.

— Jennifer Holcombe is marketing director with Cincinnati-based Coldwell Banker United Commercial Realty Services.

©2004 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.