How the rising costs of construction are affecting tenant perception

The construction of new industrial and warehouse space in Greater Cleveland has increased about 15 percent over the past three years. But, demand for new space is even greater than the increase in supply; developers and contractors have been very selective and are pricing both new construction and renovation projects accordingly. These conditions are also driving up rents, creating a trend that is difficult news for buyers and tenants alike. 

“Buyers and tenants tend not to want to believe the numbers when they get quotes,” says Eliot Kijewski, senior vice president at Cushman & Wakefield|CRESCO Real Estate. “Market prices have been steadily on the low side for a long time. Today’s pricing can cause some sticker shock.”

Smart Business spoke with Kijewski about the effect higher commercial real estate prices are having on buyers and tenants in the Northeast Ohio market.

How is the cost of construction affecting the local commercial real estate market?

Northeast Ohio prices haven’t caught up to the rest of the Midwest for flex space or office space; the region is still a value compared to Columbus, Pittsburgh, Detroit, Indianapolis and Cincinnati, and is well below Chicago. Area owners are being crunched by the investments expected by tenants. When times were tough a few years ago, landlords were doing anything they could to attract and retain tenants. Today, incentives such as free rent are gone, and landlords are contributing less, dollar-wise, to keep rents low.

One new trend is that landlords are more transparent; they’re more likely to rent space at an as-is number, and another number with tenant improvements. There are instances where landlords will become lenders and investors with tenants, too. 

Prices on existing buildings are rising, so much so that they’re nearing the price-per-square-foot of new construction. However, the time, cost and financing of new construction is a challenge to most tenants, who have an urgency in their space needs. Buyers in this market can feel as if they’re paying a lot up front to not have a building immediately. The advantage of building, though, is the owners get what they want — a brand new roof, building shapes and heights that meet their exacting business needs, modern sprinkler systems, etc. There is a narrowing of the lease-versus-buy gap happening in the market. 

How would you characterize tenant perception today, and how is it a factor in the market? 

Many prospective tenants are surprised at the cost of rent and renovations. That’s pushing prospects to keep searching for a property that’s priced closer to their expectations, or to take properties on a more as-is basis. In some cases, they’re willing to not get exactly what they want for either a better price or to save money on renovations. Location, however, is still a critical factor in the buying decision. 

The Greater Cleveland area currently has an incredibly low vacancy rate. If a property is not moving, it’s likely because the condition is very poor and the landlord hasn’t made the necessary improvements to make the property appealing. All properties have a chance to move in this market. Experienced commercial real estate brokers can help landlords find the best ways to move a property, which range from significant investment to decluttering and patching up an old roof. 

How should buyers and tenants approach today’s commercial real estate market? 

Buyers and prospective tenants need to know what they want, so that they’re ready when an opportunity exists. The market is so tight that the windows for great opportunities are very narrow. If they’re priced appropriately and are in a condition that’s saleable, a commercial property will go faster than a house in a hot neighborhood. Have financing and a down payment ready so when a deal opportunity arises a transaction can be executed quickly. Having a broker helps to source off-market opportunities and to evaluate opportunities to make sure you’re getting the best value for your business.

Insights Real Estate is brought to you by Cushman & Wakefield/CRESCO Real Estate