Larger companies have downsized their work forces, and many smaller firms have gone out of business. The result is an office market with high vacancy rates, which is bad news for landlords but good news for tenants.
"Cleveland right now is in a downturn in terms of the state of the office market," says Bryan Kagel, first vice president for brokerage services for CB Richard Ellis. "Just a few years ago, the market in both the suburbs and downtown was healthy and tight."
The suburbs had a vacancy rate of around 8 percent, while downtown was around 9 percent. The space crunch led to an increase in new construction as rental rates continued to rise. Within two years of the construction boom, however, the market turned soft, leaving the area in the state it's in today.
"Right now we have high vacancy rates," says Kagel. "It's close to 19.5 percent in the suburbs and 15 percent in the downtown market."
Despite this, there is some movement in the market.
"Tenant activity isn't bad," says Kagel. "There are certain sectors that are growing and certain industries are taking space, but it's not a market to be a landlord in. There are a lot of concessions being offered, and the net effective rent has dropped 15 to 20 percent over the last two years. It's good to be a tenant right now."
In fact, larger tenants who may only be a few years into a long-term lease are going back to landlords demanding concessions. And competing landlords are offering incentives, including helping to pay off remaining obligations in return for a long-term commitment.
"Landlords don't want that to happen, so they are cutting their bottom lines and doing deals that don't put them under water, but they're not making their rent growth projections, just to keep larger tenants," says Kagel.
Even with deals, tenants can be hesitant to take on new obligations.
"I see tenants that are dragging out the deal-making process as they look at their space and evaluate their alternatives," says Kagel. "Because of economic considerations, they are reluctant to sign on the bottom line, but on the other hand, they have grown and need more space. For those tenants ready to make a deal, they can take advantage of market conditions." How to reach: CB Richard Ellis, (216) 687-1800