By Mike Hartmann & Bob Ryan

Published in Heartland Real Estate Business – August 2007

New development continues to shape the suburban office market while the downtown market vies with its suburban counterparts for tenants. Amidst this backdrop, the CBD is undergoing a renaissance, with the renovation of Fountain Square as the centerpiece. Restaurants and condominium developments are sprouting up, making the downtown area the place to “Live, Work and Play.” Developers, landlords and city officials believe retail, residential and entertainment are great cards to play in retaining and attracting workers to the Queen City’s revitalized downtown area.

Overall, Cincinnati’s office market gathered momentum in the second quarter, with positive net absorption of more than 475,000 square feet, more than double the absorption of 202,000 square feet in the first quarter. While more than 40% of this absorption came from two major leases – AK Steel, 138,816 square feet at Centre Point V in West Chester and Anthem’s lease of 69,796 square feet at Governors Pointe in Mason – activity picked up substantially. This dropped the area’s vacancy rate more than a full point to 17.38%, down from 18.57% at the end of this year’s first quarter.

While the CBD boasts a lower vacancy rate than most of its suburban counterparts, vacancy shot up last year as the downtown office market showed negative net absorption of more than 402,000 square feet. Much of that, though, could be traced to one large move. Convergys permanently vacated 350,000 square feet at The Center in the 600 Vine building to occupy its own building at Atrium One.

This year’s first quarter showed some slight improvement, with smaller leases absorbing nearly 25,000 square feet of space in the CBD. Activity accelerated in the second quarter with more than 91,000 square feet of net absorption in the downtown office market, pushing the overall vacancy rate down to 16.55% from 17.29% in the previous quarter.

Several large leases in the second quarter benefited the Class A downtown office market. Key Bank took 35,479 square feet at 303 Broadway, Scripps expanded into an additional 24,256 square feet in the Scripps Center and Jack Rouse Associates leased 22,021 square feet at the Center at 600 Vine. This brought the downtown Class A vacancy down more than a point and half, ending the first half of the year at 17.20%.

Moving forward, the CBD faces challenges but not without some considerable assets to overcome these. The completion of Fountain Square and Government Square, along with expanding retail and residential development, bode well for the future. Additionally, landlords are aggressively structuring deals to attract tenants, and the area offers opportunities for quality tenants that need large blocks of contiguous space.

The suburban office market continues to flex its muscle, with both improvement and growth.

For starters, overall vacancy declined substantially in the suburban office market during the first half of the year, dropping to 17.95% from 20.43% at the start of the year. More than 177,000 square feet of space was absorbed during the first quarter. The second quarter saw even more activity, with 384,210 square feet of space absorbed in the suburban market.  And the Class A vacancy rate dropped to 15.23%, a significant improvement from 17.63% at the start of the year.

Kenwood, with a vacancy rate of 4.46% for Class A and 5.09% for Class B office space, remains the tightest submarket, while the Northern Kentucky submarket across the river wrestles with Class A and B vacancy rates of 27.39% and 30.27%, respectively.

As noted, the completion of Centre Pointe V in West Chester and its pre-leasing of its entire 138,816 square feet of space to house AK Steel’s headquarters was a major factor. Other notable deals included Anthem’s lease at Governors Pointe. Farmers Insurance took 12,829 SF at 4680 Parkway Drive in the same office complex.  In Sharonville, Data Recognition leased the entire Park 42 Atrium III building and John Morrell Meats took 24,789 SF in the SharonView Corporate Center.  Fidelity Investments expanded its space by 27,000 SF in Madison Place at RiverCenter in Covington.

New development continues to be strong in the suburbs, with 10 new office buildings completed last year, totaling more than 560,000 square feet. Almost 70% of this space was leased by year-end. This followed on the heels of healthy development in 2005 when 470,000 square feet of new product entered the market, with nearly 85% leased by the end of 2006.

This year is no exception as developers are busy building new product, with 1.27 million square feet of office space under construction that will be completed by the end of next year. Another three million square feet is in the planning stages.

Following the construction boom along the 1-75 corridor, Duke landed AK Steel’s corporate headquarters in the recently completed Centre Pointe V building. Duke plans to further build out its development in West Chester, with work to begin soon on Centre Pointe VI, a four-story, 135,000 square-foot building.

For the Cincinnati suburbs, other than the West Chester area, office development is clustered at the exits of I-71.

Norwood has the 94,078 square-foot Linden Pointe I reaching completion in July. In addition, construction on the 62,000 SF Keystone I has begun. The 30-acre site at Madison Road and Red Bank Expressway under contract with Miller-Valentine, which was the former home of Nu-tone, will be called Cincinnati Encenter. The mixed-use project will include 200,000 SF of office space.

In the Kenwood area, the Safeco building has been demolished for construction of Kenwood Towne Place, a mixed-use project that includes 175,000 square feet of office, with expected completion by the end of 2008.  Redstone of Kenwood is a 160,647 square-foot office building that also should be finished in 2008.  These projects would help relieve the tight office market in an area where the vacancy rate for Class A office space has dipped below 5%.

Duke is also pushing the Blue Ash submarket forward with The Landings of Blue Ash project. CitiGroup leased the entire 175,000 square feet in the first building to house its information technology center. Blue Ash II should be completed by year’s end and has had significant preleasing to CitiGroup, HDR Engineering, Oracle and Wilmington College. While much of Blue Ash has been tapped out, with few remaining land sites available, Duke has another 29-acre site ready for development in the submarket. This $100 million project will include three buildings, each approximately 175,000 square feet.

Two Waterstone Place, a 76,124 square-foot office building that overlooks I-71 in the Mason area, will reach completion at the end of 2007.

In the midtown area, Corporex is constructing a 249,845 square-foot office building to serve as the Cincinnati regional headquarters of Humana. Building on the success of its Baldwin Center, Corporex has plans to add to its current three buildings. Centrally located at I-71 on the edge of downtown, Baldwin Center is the foundation of an urban campus environment that will expand with up to three additional office towers and a new, full-service hotel. Corporex will locate the facilities across Eden Park Drive and connect them to the two original buildings by a skywalk.

The Grand Baldwin is the development’s centerpiece. Originally built more than half century ago, it was home to the legendary Baldwin Piano Co. The nine-floor red brick structure was completely renovated and now has more than 245,000 square feet of Class A office Space. Baldwin 200 was opened in 1990, with nearly 210,000 square feet of Class A space in its 12 floors.

Baldwin 300, a 200,000 square-foot office building, is in the planning stages. Corporex also is marketing the development for build-to-suit opportunities.

The team of Mike Hartmann, principal and executive vice president, and Bob Ryan, principal and senior vice president, specializes in office sales and leasing in the Cincinnati market. In the past three years, they have been responsible for more than $300 million in office sales and leasing transactions. Hartmann and Ryan have been the most active office brokers in the Cincinnati market over the past 10 years.