thought this article might fit here too:
Cleveland Office Market Riding Record Crest
Torrid Absorption Pacing Record Investment Sales
Investors across the U.S. may not have figured it out, but the homegrown real estate community in Cleveland knows a good thing when they see it -- and the Cleveland office market is a good thing right now.
2005 was the biggest year ever achieved in terms of investment sales volume and 2006 so far is outpacing that record.
Absorption is also occurring at a torrid pace. Net absorption has totaled more than 825,000 square feet this year compared to about 695,000 square feet for all of last year, according to CoStar Group data.
The activity translates into a lucrative year so far for the brokerage community as well.
"We do not track by square feet, but on a closed commission basis we are up over 75% for the same five months of 2005," says Jim Gerspacher, president of Gerspacher Real Estate. "The greater percentage by far has been leasing commissions which are up 236%, while sales commissions are up 56% for the same time period."
The office market turnabout kicked off in late 2004 says, James P. Breen, principal of Breen & Fox.
"The effects of the tax cuts that had stimulated the national economy started to finally take hold here," Breen says. "And as decisionmakers found that the growth was sustainable, they started to make some long-term commitments to space, particularly in the past 18 months. In addition, you are actually starting to see a real tightening, as reported by employment and executive search firms here locally in the labor markets. These are all good signs for the office market."
Breen paints an interesting scenario for Cleveland's downtown given the brisk pace of absorption.
"If you look at Class A and B buildings built after 1950 or 1960, the vacancy rates are in the 14% range today, and I think the actuals are a little lower, as some buildings are 'sand-bagging' on their reporting of occupancy levels," Breen says.
"Now if you take the current rate of absorption in that class of buildings and project it out, it gets real interesting, real fast," he adds. "At the current rate of absorption, the vacancy rate for that class of buildings becomes 4% in only six quarters, or the end of 2007, and it goes to zero -- that's right zero -- in the third quarter of 2008."
"Granted these are only projections," Breen notes, "but to run reasonable projections (that don't even factor in any growth in the absorption rate) that result in zero space in that category in only nine quarters or 820 days would have been thought of as unachievable a couple of years ago."
Larger tenants are already in a bind. The law firm of Baker & Hostetler will require 200,000 square feet by January 2008, says Alex Jelepis, an office broker with Grubb-Ellis and whose name is a common sight on for lease signs in windows downtown. Right now Baker & Hostetler has only two existing options, Jelepis says, staying at National City Center or relocating to 200 Public Square.
"Gradual economic expansion coupled with a lack of new CBD inventory has driven demand especially for downtown Class A, which is approaching healthy vacancy levels of approximately 11 to 11.5%," Jelepis says. "Law firms, professional services, insurance and financial services are contributing to demand as these sectors appear to be well-performing and growing in Cleveland."
The city of Cleveland has aided the downtown resurgence, says Myrna I. Rodriguez-Previte, vice president of Midwest Real Estate Partners LLC.
"The city's new Job Creation Grant is one of the attributing factors for the year's expected strong office absorption," Rodriguez-Previte says. "Questex Media being the first recipient, relocating to Fifth Third Center from a west side suburb, and to date five other companies have been approved or awarded the grant."
Rodriguez-Previte and Kevin M. Piunno also of Midwest represented Ashley Capital, the owner of Fifth Third Center, in Questex Media Group's 19,264-square-foot lease. Jelepis represented Questex.
Building sales have surged on this wave of leasing activity in this downtown that fronts the waters of Lake Erie.
The two largest office property transfers in past year are illustrative of what has been happening to real estate values, too.
1. 200 Public Square (mentioned earlier). The 1.2 million-square-foot sold a year ago for $141 million or about $119/square foot. Jelepis was the listing broker on the deal.
2. 127 Public Square. This 1.4 million-square-foot changed control six months ago in an ownership reconstitution deal that totaled $315.7 million or about $230/square foot.
"I think there are a few things driving this," says Alec Pacella, CCIM and investment broker with Grubb & Ellis. "First is the recovering office market. Fundamentals are clearly improving, with decreasing vacancy rates, increasing leasing velocity and absorption, decreasing concessions and stabilizing rents. Bolstered by these positive signs, investors are purchasing with confidence, as the prospects of reaping future rent appreciation seem good."
"Second," Pacella says, "there remains an abundance of capital out there. Despite their recent run-up, interest rates remain at very low levels, which allows buyers to leverage up their already full war chests. And third, supply is catching up with demand."
Cleveland's suburban communities, too, are not being left out of the resurgence. An example is what happened with the 462,00-square-foot Allen Bradley Building in Mayfield Heights. Owner Rockwell Automation sold the property last November for $55.3 million or about $120/square foot. The new owners then flipped the property this past February for $61.4 million or nearly $133/square foot.
Investors have even expanded their acquisition horizon further out from downtown this year.
Cleveland developer Mark R. Munsell purchased a major interest in 13 office buildings totaling 626,000 square feet in nearby Akron this spring. The seller Dellagnese Properties retained a small interest. And while a purchase price was never disclosed, Munsell mortgaged the properties for $73.25 million. Assuming a standard loan-to-value ratio of 70%, the price for the properties could well have exceeded $100 million.
"There is no denying that the market is brisk, clearly bolstered by the Dellagnese/Munsell portfolio transaction that closed a few months ago," Pacella says. "The past few years have been characterized by a shortage of quality product. It seems as this year, the product pipeline is filling and, with the Duke office portfolio looming on the horizon, this trend is certain to continue. So considering the start that we are off to, it looks to me that this year could shape up to be even bigger than last year."