KNOWLEDGE REPORT The Office Market Takes a Pause MARKET STATS AT A GLANCE Office Research & Forecast Report Q3 2020 Colliers International | Greater Cincinnati The Cincinnati office market recorded its second consecutive quarter of occupancy loss in excess of 100,000 square feet, as net absorption during the third quarter of 2020 totaled negative 114,897 square feet. This brings the year-to-date total net absorption to negative 283,023 square feet, compared to positive 176,182 square feet through the same time period last year. Overall market vacancy increased by an additional 20 basis points (bps) during the quarter to 14.4%. While certainly on the rise, vacancy has remained fairly stable over the past five years as properties converted to new uses were removed from the inventory and little new speculative product was added to the market. While leasing remained active during the quarter, the average transaction size decreased by 56%. As has been the case since the onset of COVID-19 and subsequent, government-mandated lockdowns, large corporations have put their requirements on hold in order to re-assess their long-term real estate strategies. In contrast to other major office markets, Cincinnati has yet to see a barrage of sublease space come to the market. Sublease availability was on the decline until recently, when Fifth Third Bank announced that they would be vacating 195,000 square feet in the AT580 property downtown and offering this space for sublease. It is anticipated that others will be making similar announcements. Total sublease availability of 684,924 square feet currently represents 1.1% of total inventory. Most of the region’s submarkets suffered losses or, at the least, recorded negligible activity during the quarter. Exceptions included the Tri-County submarket, which posted a gain of 42,189 square feet and Kenwood with positive net absorption of 33,306 square feet. Of the eight office projects under construction, totaling 918,500 square feet, only two will deliver vacant space to the market upon completion. The 180,000-square-foot Uptown Gateway Bldg 2 in the Uptown Innovation Corridor and the renovation of the 12,500-square-foot Brunswick Commerce Lofts downtown are the only two projects in the pipeline that are speculative. Overall market asking rental rates, currently averaging $18.50 per square foot (full service/gross), have increased by nearly 2.0% year-over-year. Overall market Class A asking rents average $22.97 per square foot, an increase of 1.4% year-over-year. Class A asking rents in the Central Business District have increased over the past 12 months by 1.6% to $23.78 per square foot, while suburban Class A recorded a 1.7% gain to $22.64 per square foot. MARKET ASKING RENT $18.50 (Psf/Yr, FSG) VACANCY RATE 14.4% -283,023 YTD ABSORPTION (SF) 918,500 UNDER CONSTRUCTION (SF) Market Indicators Relative to prior period Q3 2020 Q4 2020* VACANCY NET ABSORPTION CONSTRUCTION RENTAL RATE** * Projected, relative to prior period ** Class A rents
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KNOWLEDGE REPORT
The Office Market Takes a Pause
MARKET STATS AT A GLANCE
Office Research & Forecast Report Q3 2020Colliers International | Greater Cincinnati
The Cincinnati office market recorded its second consecutive quarter of occupancy loss in excess of 100,000 square feet, as net absorption during the third quarter of 2020 totaled negative 114,897 square feet. This brings the year-to-date total net absorption to negative 283,023 square feet, compared to positive 176,182 square feet through the same time period last year.
Overall market vacancy increased by an additional 20 basis points (bps) during the quarter to 14.4%. While certainly on the rise, vacancy has remained fairly stable over the past five years as properties converted to new uses were removed from the inventory and little new speculative product was added to the market.
While leasing remained active during the quarter, the average transaction size decreased by 56%. As has been the case since the onset of COVID-19 and subsequent, government-mandated lockdowns, large corporations have put their requirements on hold in order to re-assess their long-term real estate strategies.
In contrast to other major office markets, Cincinnati has yet to see a barrage of sublease space come to the market. Sublease availability was on the decline until recently, when Fifth Third Bank announced that they would be vacating 195,000 square feet in the AT580 property downtown and offering this space for sublease. It is anticipated that others will be making similar announcements. Total sublease availability of 684,924 square feet currently represents 1.1% of total inventory.
Most of the region’s submarkets suffered losses or, at the least, recorded negligible activity during the quarter. Exceptions included the Tri-County submarket, which posted a gain of 42,189 square feet and Kenwood with positive net absorption of 33,306 square feet.
Of the eight office projects under construction, totaling 918,500 square feet, only two will deliver vacant space to the market upon completion. The 180,000-square-foot Uptown Gateway Bldg 2 in the Uptown Innovation Corridor and the renovation of the 12,500-square-foot Brunswick Commerce Lofts downtown are the only two projects in the pipeline that are speculative.
Overall market asking rental rates, currently averaging $18.50 per square foot (full service/gross), have increased by nearly 2.0% year-over-year. Overall market Class A asking rents average $22.97 per square foot, an increase of 1.4% year-over-year. Class A asking rents in the Central Business District have increased over the past 12 months by 1.6% to $23.78 per square foot, while suburban Class A recorded a 1.7% gain to $22.64 per square foot.
MARKET ASKING RENT$18.50
(Psf/Yr, FSG)VACANCY RATE14.4%
-283,023YTD
ABSORPTION (SF)
918,500UNDER
CONSTRUCTION (SF)
Market IndicatorsRelative to prior period
Q3 2020
Q4 2020*
VACANCY
NET ABSORPTION
CONSTRUCTION
RENTAL RATE**
* Projected, relative to prior period** Class A rents
2 Cincinnati Research & Forecast Report | Q3 2020 | Office Market Outlook | Colliers International
3 Cincinnati Research & Forecast Report | Q3 2020 | Office Market Outlook | Colliers International
Notable Office Leases | Q3 2020PROPERTY NAME/ADDRESS LEASE DATE LEASE SF TENANT NAME BUILDING CLASS SUBMARKET
136 N 3rd St Aug-20 85,875 Miami University B Tri-County
Wright's Summit II Sep-20 9,949 Rudler & Associates A Northern Kentucky
Governor's Pointe - 4705 Duke Dr Jul-20 9,352 Vanderlande Industries A I-71 North
Eastgate Professional Office Park IV Aug-20 8,571 Wellington Specialty Surgery Ctr B East
1600 Central Pky Sep-20 8,414 Samuel Adams Brewing Co B CBD
Fountain Pointe II Jul-20 5,939 NewVista B Blue Ash
6159 1st Financial Dr Aug-20 5,506 Boone County Transportation Cabinet B Northern Kentucky
Kenwood Crossing II Jul-20 5,394 OrthoCincy Medical Kenwood
*Renewal **Sublease
Notable Office Sales | Q3 2020
PROPERTY NAME/ADDRESS SALE DATE SALE PRICE BLDG SF BUYER SELLER CLASS SUBMARKET
7794 & 7810 Five Mile Rd Jun-20 $21,095,000 75,075 Bethesda Hospital Inc Hemmer Management Group Medical East
5300 Kings Island Dr Jul-20 $9,344,388 143,330 HJH Investments Lone Star Funds B I-71 North
2765 Chapel Pl Jul-20 $6,831,000 41,047 Cincinnati Children's Hospital Medical Ctr Hemmer Management Group Medical NKY
1171 State Route 28 Jul-20 $5,050,000 15,000 IRA Capital LLC Schuermann Properties Medical East
360 Knollcrest Dr Jul-20 $1,290,000 14,500 DOV Limited Alexander & Associates Co B Midtown
4565 E Galbraith Rd Sep-20 $1,260,000 5,956 O'Brien Family Real Estate LLC Camden Homes B Kenwood
4 Cincinnati Research & Forecast Report | Q3 2020 | Office Market Outlook | Colliers International
As the COVID-19 pandemic continues to impact the normal operation of American businesses and the U.S. economy, the office market remains in limbo. Predictions authored one day, are contradicted on the next as new information surfaces; ie, tech giant, Facebook, starts planning for permanent remote workers. Facebook signs 730,000-square-foot lease in Midtown Manhattan. Facebook buys REI’s elaborate new headquarters in Seattle.
With so much uncertainty, it is difficult to identify the trends that will impact the U.S. office market in the coming years. In general, smaller companies remain active in the office leasing market, while large corporate occupiers have mostly gone quiet, waiting to see when the availability of vaccines and effective treatments will allow them to return large numbers of employees safely back to the workplace.
The great work-from-home (WFH) experiment continues across the country, and throughout the world. In Colliers’ initial workplace survey, conducted in May, 2020, the responses were overwhelmingly positive with regard to productivity, effectiveness and engagement. One finding indicated that 83% wished to continue working from home at least one day a week permanently, post-COVID. Respondents desiring to work permanently from home two or three days per week were surprisingly high as well.
This, and other studies, prompted many C-suite executives to immediately state that they would certainly be reducing the overall footprint of their office space portfolios in the near future according to a report by PricewaterhouseCoopers.
A follow up workplace survey is currently being analyzed by Colliers workplace solutions group and will be released soon, but evidence is emerging that the initial reports may have been a bit overly optimistic. As the pandemic drags on, work-from-home fatigue appears to be setting in. Companies are reporting decreases in productivity, while employees are having difficulty separating their work and home lives, increasing stress levels. Companies also worry about a decline in the collaboration that spurs ideation and innovation, as well as a loss of culture and employee engagement.
In an interview with CNBC, Boston Properties CEO, Owen Thomas said, “Remote work is not an acceptable replacement for the in-person interactions that happen in the office space.” Occupiers and their employees appear to agree. Attendees of a webinar conducted by CrowdComfort, HqO and Openpath responded that “they still look
to their workplace for not only a sense of community (67%), but collaboration (83%) with others.”
What this suggests is the emergence of a hybrid model that includes physical office space and remote work options. According to Kate North, Colliers Vice President, Workplace Advisory, “flexibility and choice” are the #1 non-cash benefit across all generations. However, there is not a one-size fits all strategy for a hybrid workplace model. The workplace strategy will vary by industry, company culture and other factors and should be developed using data and test scenarios to determine the best plan for each individual organization.
Ms. North also suggests, “Getting employees involved in the co-creation of the office space will make your solution better, plus their engagement and ideas will add new insights. And of course, make sure to integrate a robust change communication and management strategy.” Being pro-active during this time, before the return to the office, will create a competitive advantage in productivity, attraction/retention of talent and possible cost reductions.
As the world emerges from the current pandemic-induced crisis, demand for office space will return. Its purpose will change and continue to evolve, but it will remain central to the functioning of modern corporations. As was the case in 1897 with Mark Twain, today’s reports of the death of the office are greatly exaggerated.
Does Work-From-Home Spell the End for the Office Market?
B 29 636,072 104,206 95,206 15.0% 1,600 2,032 8,642 $15.94
C 7 181,648 47,793 47,793 26.3% 0 3,256 -2,394 $11.77
Grand Total 1,001 60,590,675 10,054,298 8,734,234 14.4% 684,924 -114,897 -283,023 $18.50
6 Cincinnati Research & Forecast Report | Q3 2020 | Office Market Outlook | Colliers International
Cincinnati | Office Submarket Map
*The statistics reported herein are calculated based on a standardized set of properties including office properties 10,000 square feet and greater, single and multi-tenant and competitive owner-occupied buildings. Office buildings occupied by medical and governmental are not included as well as properties designed for a specialized end user.
438 offices in 68 countries on 6 continentsUnited States: 155 Canada: 48 Latin America: 20 Asia Pacific: 94 EMEA: 119
OFFICE BROKERAGE SERVICES | contactShenan P. Murphy, CCIM
CEO/Principal | Cincinnati & Dayton
Fred A. Macke, Jr.Brokerage Senior Vice President
Richard P. MederBrokerage Senior Vice President
John P. Schenk CCIM, SIOR Brokerage Senior Vice President
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