CITY HIGHLIGHT, SEPTEMBER 2005

CINCINNATI CITY HIGHLIGHTS
Scott Abernethy, John Gartner III, Bart Weprin, Melissa Williams, Andrew Sellet, Erick Koehler, Rob Taylor

Cincinnati Office Market

While some submarkets still need more time to heal, the greater Cincinnati office market is entering its healthiest stage in the past 5 years. After recovering during the past 2 years, the Queen City’s office market shows signs of expanding in 2005.           

In particular, absorption in Class A space was positive in every submarket except the CBD, a first since 2000 and a leading indicator that the office market is beginning to expand. Coupled with this, new development has been relatively light and developers have wisely chosen selected markets for new deliveries, which further allowed the market’s recovery. Job growth is kicking in despite the challenges of rising oil prices and interest rates. In fact, in Kenwood, Midtown and Blue Ash, landlords are finally regaining control of rental rates and beginning to realize some rent growth.

The CBD office market experienced little activity during the first half of the year, and the Class A market posted more negative absorption than Class B, 83,650 square feet and 14,610 square feet, respectively. The market still remains healthy, though, with Class A space showing a vacancy rate of only 7.7 percent. Rental rates in the CBD average around $22.15 gross but vary widely from $27 to $17.50 per square foot gross in Class A space.

By year’s end, the CBD will open its first office tower since 1933 when Western Southern opens its 180,000 square-foot 300 Broadway Building. This, along with moves by Convergys and the exit of Cinergy, a byproduct of its buyout by Duke Energy, will pressure lease rates as the vacancy rate increases.

Looking forward, the downtown area received positive news with the long delayed riverfront project moving forward after the county signed an agreement with the Banks Development Company. Additionally, 3CDC pledged $42 million and the government another $14 million to renovate and reinvent the Fountain Square area.

Positive absorption of Class A space in the suburban markets signals an impending expansion. More than 226,000 square feet of Class A space was absorbed during the first half, which knocked almost two percentage points off the vacancy rate. Mid-sized and smaller companies fueled this absorption, with no major leases greater than 50,000 square feet. Rental rates average about $19.40 a square foot in the suburban markets, and Class A rates range from $24.50 to $15.50 gross.

Kenwood and part of the Midtown market have led the charge.

Kenwood Towne Place, which is set to be under construction in the fourth quarter, will include 175,000 square feet of office space and 300,000 square feet of retail. The project is being developed by Scott Street Partners and Cincinnati Capital Properties.

First will be Kenwood Towne Place, a project backed by Bear Creek Capital, Dove BOC and Neyer Holdings. Set to begin in the fourth quarter, the project will include 175,000 square feet of office space and 300,000 square feet of retail. The highly publicized Sycamore Square will be developed by Scott Street Partners and Cincinnati Capital Properties. When completed, this project will bring 220,000 square feet of office space to the area. The third major project will be at I-71 and Montgomery Road. While details are not finalized, it is anticipated that Neyer Properties will develop more than 500,000 square feet of office space on this site.

In the Midtown market, activity is brisk in the Norwood portion of this submarket that is on the periphery of the CBD.

For starters, Norwood, which is farther out from the CBD than the Red Bank sector that also comprises Midtown, had the year’s major lease deal. Cincinnati Bell inked a 230,000 square-foot lease in Belvedere’s Central Parke, with the lease commencing during the third quarter.

Cornerstone I, an office development located at Smith-Edwards and I-71, is cuurently 92 percent occupied. Cornerstone II will open this fall.

And Miller-Valentine and Jeffrey Anderson Real Estate have finally ended their eminent domain struggle and will begin construction of Rookwood Exchange. With an expected completion date in 2007, the project will bring more than 400,000 square feet of office space to the Norwood market.

Northern Kentucky and the Mason submarkets continue to lag, with both areas having large chunks of office space available. Tenants can find seven properties offering more than 50,000 square feet of contiguous office space in Northern Kentucky, and four such properties in the Mason market. Both markets did report some good news during the first half, posting positive absorption in Class A space. With no new construction on the horizon, both markets face slow but steady absorption in the coming months.

These pockets of strength demonstrate the office market’s move from recovery to expansion. Moving forward, the office vacancy rate, which now stands at 18 percent and less than 16 percent for Class A, should continue to decline. All in all, the greater Cincinnati office market is poised to become healthier as expansion becomes the rule rather than the exception.

— Scott Abernethy (CCIM, SIOR) is a second vice president specializing in office sales and leasing in Colliers Turley Martin Tucker’s Cincinnati office.

Cincinnati Retail Market

Retail development continues to be driven by the growth of big box development. Wal-Mart has entered Kroger’s backyard with an aggressive push. There are currently 17 Wal-Mart Supercenters open, under construction or planned for greater Cincinnati. Kroger and Meijer are fighting back and making headlines by rapidly increasing store numbers and store footprints. Kroger unveiled the first of the area’s super-sized stores last year in Anderson Township. The 104,000-square-foot store includes an in-store Starbuck’s and a jewelry store. Kroger also is planning to relocate and expand an existing 50,000-square-foot store to a 112,000 square-foot store in the fast-growing suburb of Liberty Township in Butler County.

Across the nation, and here in Cincinnati, regional malls are making the transition toward a streetscape environment to capitalize on the success of lifestyle centers. (Regional malls sales average $366 per square foot versus the estimated lifestyle center average of $420, according to ICSC Research.)  General Growth Properties has enjoyed tremendous success with the streetscape renovation at Kenwood Towne Centre, attracting tenants to one of Cincinnati’s top regional malls. New additions include Magginao’s, The Cheesecake Factory, Pottery Barn and Ann Taylor Loft, along with the planned fall opening of Restoration Hardware.

Additional malls announcing plans to redevelop with the streetscape/ entertainment environment include Northgate Mall in Colerain Township along the Interstate 275 west beltway, Eastgate Mall in Union Township along the I-275 east beltway; Tri-County along the I-75 north central beltway (JC Penny’s exodus of Tri-County for the area’s first freestanding location in the growing Fairfield Township allows room for continued growth); and Florence Mall located along the I-75 south beltway in Florence, Kentucky.

Lifestyle centers continue to enjoy unparalleled success. Local developer and area concept pioneer Jeffrey R. Anderson Real Estate announced plans for the addition of three local projects. Deerfield Towne Center in Mason, Ohio, will begin the Phase II 150,000-square-foot expansion that will include a mixed-use component. The redevelopment of former regional mall Crestview Hills Town Center in Crestview Hills, Kentucky, will open in late October and will be anchored by Dillard’s, Borders Books, Coldwater Creek, Banana Republic and Mike and Jimmy’s Chophouse. And finally, the long anticipated third phase of the Rookwood projects, still battling itself through the Supreme Court in an effort to resolve issues with eminent domain, is a multi-use project that will include 400,000 square feet of retail, 500,000 square feet of office, a hotel and a large residential component. Jeffrey R. Anderson Real Estate, in a joint venture with Miller Valentine Group, is actively negotiating with tenants such as Capital Grill, Cona Grill, Mitchell’s Steak and Seafood House, Bravo and Crate & Barrel.

Retailers are trying to accommodate stores closer to population inside the beltway in sites that historically were considered difficult. Creative site selection tactics are being employed in areas previously believed to have barriers of entry.  Examples include land on former industrial sites, in residential areas and with challenging topography. Pioneers include Bear Creek Capital, with redevelopment projects in Crescent Springs and Newport, Kentucky, using industrial revenue bonds to finance 400,000-square-foot plus developments. Vandercar Holdings stimulated the revitalization trend with the redevelopment of a former Milacon plant along I-71 in central Cincinnati. Vandecar’s project in Florence, Kentucky, also was built on difficult terrain and is anchored by a relocated and expanded Wal-Mart Supercenter. Anchor Properties is the latest developer to reveal plans for revitalizing a former industrial site, with a Wal-Mart Supercenter to anchor its development in Evendale, Ohio.

Also located within the Downtown Cincinnati submarket, developer Miller Valentine Group is proposing a mixed-use development along the Ohio River that will connect Newport, Kentucky, along the river to downtown Cincinnati. The development will be anchored by 140 luxury condominiums, a proposed 50,000-square-foot grocer and a limited assortment of high-end restaurants and retail.

The 1.3 million-square-foot Millworks in Cincinnati, which is being developed by Vision Land Development, will mix office, retail and entertainment uses.

Currently, vacancy rates range by submarket from 5 percent to 12 percent. Rental rates average by product and submarket, but tend to fall within the following ranges: suburban grocery anchored centers in the high teens to mid twenties per square foot; suburban unanchored centers range from low teens to mid twenties per square foot; and lifestyle centers average between $30 and $45 per square foot.

— Melissa Williams, senior associate, and Andrew Sellet, retail specialist, in retail brokerage services, and Erick Koehler, senior associate, and Rob Taylor Jr., CCIM, senior sales vice president in retail investment services, contributed information for this story. They work in Colliers Turley Martin Tucker’s Cincinnati office .

Cincinnati Multifamily Market

Cincinnati has emerged as a popular option among national multifamily investors who are looking to find higher returns on their investments. This is due to the fact that there has been very little new construction of apartment rental units, decreasing apartment vacancy, stable population growth and continued demand for condominiums.

Though multifamily construction is almost non-existent in Cincinnati, condominium conversion projects are occurring in several areas from downtown to the suburbsan areas, providing investors with solid investment opportunities.

Jefferson Development Group is investing $28 million to buy and convert the 26-story Edgecliff apartment tower in East Walnut Hills into luxury condominiums.

While condominium projects are highly profitable for investors, they also have become an attractive alternative to apartment living for renters, despite the fact that apartment rents have remained relatively stable in recent years. Since 1997, rents in Cincinnati increased by only 1 percent per year, from an average of $540 per month in 1997 to $630 per month today. That means that the average rent in 1997, which was $540 per month, has increased by less than $100 during the past 7 years to an average of $630 per month today.

Vacancies for apartments in Cincinnati average 9 to 9.5 percent, down from recent years, and with only 550 to 600 new apartment units expected to open in 2005, inventory will remain steady and demand high.

As condominium conversions continue to pop up across Cincinnati, downtown is in the beginning stages of a more significant transformation. Along the downtown riverfront, excitement is brewing for The Banks, a mixed-use project, which will include 500 units of apartments and condominiums, 90,000 square feet of retail space, 200,000 square feet of office space and a 250-room hotel along the waterfront. Led by developers Corporex Companies Inc. and Vandercar Holdings Inc., construction is expected to commence next spring. It is anticipated that The Banks, spanning eight city blocks, will revitalize downtown Cincinnati, enhancing life in the riverfront community.

Along with downtown, Cincinnati’s suburban areas, such as those along the interstates, continue to grow. The gap between Dayton and Cincinnati is narrowing and development is gravitating toward Interstates 75 and 71. New housing developments and retail centers in these areas are attracting young families who are either buying homes or looking to rent in family-friendly communities.

Cincinnati’s population is expected to increase steadily at 5 percent per year until 2008. Its stable growth and steady cash flow have pushed Cincinnati from being a locally dominated marketplace to a nationally recognized investment market. A thriving metropolis, Cincinnati still maintains the personality and charm of a small town and will persist on its unwavering path of slow and stable progress.

— Bart Weprin is senior advisor for Sperry Van Ness.

Cincinnati Industrial Market

The word recovery no longer describes the greater Cincinnati/Northern Kentucky industrial market. The industrial real estate corridor is experiencing the highest level of success since 2001. The local vacancy rates and levels of absorption in the second quarter of this year confirm the industry growth and increased activity that has been forecasted since the end of last year.

Through the first half of this year the total net absorption has reached approximately 2.5 million square feet. This is a drastic change from the approximate 800,000 square feet of net absorption that was created in the market at the same mid-year point in 2004.

This increase in activity has been a direct result of local expansions, as well as new business entering the marketplace creating an overall gross absorption for the market for mid-year 2005 of approximately 4.75 million square feet. If the market remains at this pace for the balance of the year, the total gross absorption could equal the cumulative amount as was seen during the past 4 years.

The bulk market is the driving force for the increase in activity through the first half of 2005. The most active markets have been northern Cincinnati suburbs (Tri-County/West Chester) and Northern Kentucky. Together these two markets encompass approximately 85 percent of the bulk market. Significant transactions during 2005 include:  Werner Ladder, leasing 572,000 square feet at the former Gap Distribution facility in Erlanger, Kentucky; and Amazon.com, occupying a sublease of 484,000 square feet that was available by L'Oreal at Park West International in Hebron, Kentucky.

The only two major speculative buildings that have been on the market for the past few months are quickly being absorbed, including the 198,000 square feet at Park West International Q, consisting of leases with Hitachi (105,000 square feet) and PreFlex (40,200 square feet) with the balance 51,600 square feet having a pending lease in place. The 543,000-square-foot speculative facility known as Park West International M, is one of last large bulk facilities available in the marketplace.

Future development will be spurred by the creation of new industrial parks that are currently under development, as well as the new speculative activity, which is being supported by the increased activity, as well as the owner occupied build-to-suits.

— John Gartner, III, SIOR, is vice president of industrial sales with Cincinnati-based Grubb & Ellis|West Shell Commercial.

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