The Cleveland office market, like the markets in the rest of the country, is fairly stagnant, but that might change in the next 18 months.
So if you are looking to move, do it now while landlords are still offering concessions.
“It’s a tenants’ market right now,” says Robert Redmond, senior vice president of CB Richard Ellis. “Tenants are beginning to loosen their purse strings and hire more people and are starting to need more space. In the next 12 to 18 months, you will still be getting good deals.”
As signs of an improving office market continue to grow, some landlords may try to stall until the market really picks up and they can reach a more landlord-friendly deal.
“I think the big picture in Cleveland is pretty much typical of what is happening throughout the entire country,” says Redmond. “At the current time, the overall vacancy rate is 18.1 percent, compared to a national rate of 17.8 percent. Cleveland is not much worse than the rest of the country.”
Anything under 9 percent is considered very healthy for building owners, while peak vacancy rates in 1993 reached into the low to mid-20 percent range.
People in the Cleveland market have learned from past mistakes. Unpaid subleases sent 19 office buildings into foreclosure during the recession of the early 1990s. During this recession, that hasn’t happened because the spaces simply haven’t been subleased at all.
“The other thing that is different is that construction activity ceases as soon as there is a hint of a recession,” says Redmond. “We haven’t had a continuation of construction activity adding to the oversupply. As an indication of that, during 2003, we have only seen three buildings completed, totaling 159,000 square feet.”
Despite the lack of new space, supply still outweighs demand — to the advantage of tenants.
“Concessions are still fairly generous, and for the right deal, that generosity would include reduced rent. But more likely, it would be stepped out over the term of the lease so you would see rents increasing even though the average deal is lower,” says Redmond. “You might also see a generous tenant improvement package, but there are not a lot of other kinds of incentives. We have not seen free-rent concessions, because landlords would rather see periods of low cash flow than no cash flow.”
Much of the activity is taking place in the suburban submarkets, which vary in vacancy rates from 22.5 percent in the south to 12.8 percent in areas east of Cleveland.
“The east has seen a tremendous increase in activity,” says Redmond. “The rest of the submarkets lie between those extremes.”
Like any market, supply and demand determines rates. If you are looking for a deal in the east, concessions and rental rates will not be as attractive as they are in the south with its higher vacancy rates.
Mergers, moves and failures have left downtown Cleveland with 1.7 million square feet vacant, but that’s not necessarily a clear picture of the situation. Of the 1.7 million square feet, 76 percent is in only six buildings, and more than half is in three buildings.
“That can be good news, because it means that there are large chunks of space available for major tenants,” says Redmond.
“Office space is all about white-collar jobs. I think as we see the recovery, you will see an increase in employment numbers and an increase in the occupancy of space. In comparison, the last recession took us eight years to get to the minimum rate. I think it will take 10 years for the same trip this time.” How to reach: CB Richard Ellis, (216) 687-1800
