The Cleveland office market, like many others across the nation, is stagnant.
Companies have downsized, consolidated or moved to another city. The result is a slow market that works to the advantage of tenants looking to upgrade their space or cut a better deal.
“In general, there isn’t a lot of activity,” says Todd Gabriel, vice president of Grubb & Ellis. “People who have leases ending in the next 18 months to two years realize now is the time to do something. There are some businesses that are really struggling and others that have been through down cycles before and know how to survive.
“Those that have survived know to take advantage of the market to lower their costs and improve the quality of their space.”
Suburban spaces to the east and south of the city have the highest vacancy rates in 10 years. Landlords want tenants — but within reason.
“Landlords are very hungry for tenants that are capable of performing in this market,” says Gabriel. “If you are a creditworthy tenant, that’s the thing people are really looking for. The landlord wants to be paid on a timely basis, so if you are a tenant with good credit, you can leverage the best terms possible.”
Now is also a good time to get concessions from your existing landlord if you don’t want to move.
“Maybe your space works well and you like it,” says Gabriel. “You can use the softness in the market to renegotiate the renewal terms.”
Area businesses are avoiding the risks of moving by staying in their existing spaces. There are also cost issues other than rent when considering a move.
“In addition to rent and utilities, if you move, you might have to recable the space for your technology needs and make other modifications,” says Gabriel. “If you can stay put and lower your expenses, that might be a better option for you. On the other hand, there are companies that are saying now is the time to upgrade the quality of building we’re in without spending that much more money.”
Gabriel says one company he works with moved — from an older, energy inefficient building downtown that had too much space to a smaller space in the Rockside Road area — and is saving 20 percent off its annual rental costs as a result.
Moving to the suburbs from downtown is a trend that started decades ago and continues today.
“In the last year, quite a few companies have downsized downtown or considered moving to the suburbs,” says Gabriel. “Almost always, the thing they mention is parking. The rents downtown aren’t more expensive than the suburbs, but if the company pays for parking, it can add $2 to $3 a foot to the rental rate.
“I have a client where the bulk of the employees are paid in the $8 to $9 range. If you ask the employees to pay for parking, they’ll spend an hour each day working to pay to park their car. That company is looking at a suburban location, because they think they will be able to recruit much better.”
Vacancy rates and construction
Office spaces are classified as A, B or C.
A buildings are less than 25 years old, C buildings are turn-of-the-century spaces and B buildings are everything in between. An example of an A building is BP Tower, while the Tower at Erieview is a Class B building.
The downtown Class A vacancy rate is about 11 percent, while Class B is around 24 percent.
“Normally, a healthy market is in the 8- to 10-percent range,” says Gabriel. “You rarely get down to 5 percent.”
So while the Class A market is in decent shape, the high number of vacancies in Class B buildings is creating problems for Class A landlords.
“The downside for Class A is, even though the market doesn’t have a real high vacancy rate, the high vacancy rate in Class B spaces is dragging down the vacancy rate in the A’s. Rates are getting so low that class A tenants are considering B buildings because of the rates. Over time, that difference in vacancy rates forces the A’s to reduce their rates.”
The office construction market is also slow because of so many vacancies in existing spaces.
“It’s very tough for many developers to consider new construction,” says Gabriel. “The rental rates just don’t justify it. If the market for suburban space in the Rockside area is $22 per square foot and the new building will charge $26 per square foot, you are probably not going to have a whole lot of people interested. For many developers, new construction will most likely be in the Rockside Road area, and that market is very soft right now.
“When the economy starts growing again, it will probably be a hot area. If you look at a map, it is a bull’s-eye on the county. It’s 10 minutes to the airport, 10 to downtown and 20 to most any of the suburbs.”
Build-to-suit construction is very slow as well. There are so many vacancies that unless a company has very specific building requirements, there’s no reason to take on the expense of new construction. Even large chunks of office space aren’t a problem in today’s market.
“If someone needs 25,000 square feet of space, they have at least a dozen choices,” says Gabriel.
High vacancy rates in some areas do not necessarily mean the city is stagnant.
“Even though the activity is not significant within the market, there are still a lot of companies that are doing things,” says Gabriel. “Just because some people are shrinking doesn’t mean that others aren’t growing. It doesn’t mean activity has come to a complete halt. There are opportunities out there.
“There are still things happening. There are some winners and some losers. If you are a creditworthy tenant, right now is a good time to be in the market.” How to reach: Grubb & Ellis, (216) 861-3040