Market Snapshot: Cleveland Office Overdrive
- Mar 31, 2015
By Adrian Maties, Associate Editor
Marcus & Millichap predicts that 2015 will be a good year for the Cleveland office market. In its Cleveland Office Research Report for 2015, the commercial real estate brokerage firm said that developers will hold back on new office construction. And, with companies expanding, hiring and leasing new space, the market’s office operations will return to pre-recession levels.
According to Marcus & Millichap, new development will be limited this year. Developers will only deliver 71,000 square feet, down from last year’s 292,000 square feet and well below the five-year annual average. They will also start work on more conversion projects that will turn obsolete office buildings into apartment complexes, relieving competition among existing office space. One such example is the Halle Building, one of Cleveland’s oldest landmarks. Forest City Enterprises sold the 400,000-square-foot office property last year, to K&D Management LLC, for $20 million. The new owner now plans to turn the structure into apartments.
The 2016 National Republican Convention is expected to bring 50,000 people to Cleveland. According to market analysts, this will have an economic impact of around $400 million. This positive outlook has already motivated local companies to continue to relocate or expand in the metro area. Marcus & Millichap reports that office users will add 4,500 new jobs this year. The total employment will rise by 1.6 percent in 2015, as companies are expected to hire as many as 16,500 workers.
As a result of the restrained construction and the rising office demand, metrowide office vacancy will drop 40 basis points this year, to 16.3 percent. This modest decrease will be enough to lift rents by 0.8 percent, to $17.18 per square foot.
Over the past few years, Cleveland-area office owners have opted to hold on to their assets. However, this may change in 2015, as fundamentals and access to acquisition financing improve. The area has already registered two important transactions in the first quarter. In a deal that closed on February 13, Duke Realty Corp. sold its last six office buildings in Northeast Ohio to Time Equities Inc. for $20 million. Earlier, in January, an unnamed investment group from New York paid $13.1 million for Twinsburg’s Canyon Falls Corporate Center, a three-building, Class A office complex.
Chart courtesy of Marcus & Millichap