Office outlook

If you are looking for a new office space for your business, you’d better get moving, particularly if you are interested in an East Side address.

There are still deals to be had, but the overall market is improving, which means fewer incentives for landlords to grant concessions.

“On the aggregate in looking at the office market, things are definitely improving,” says Todd Gabriel, senior vice president with the real estate firm Grubb & Ellis. “Absorption is picking up and vacancy rates are coming down. The most telling tale of that, looking at the downtown market as an example, is in each of the last three years, downtown had a negative absorption rate. From 2001 to 2003, there was a negative 1.3 million square feet of absorption downtown. In 2004, it was still negative, but it was only 154,000 square feet.

“In downtown, a number of companies have traded up to better-quality spaces. They are moving from Class B and Class C to Class A properties. What that’s doing — and while no one is proclaiming this a true rebound — is vacancy rates are starting to look better.”

The downtown market isn’t tight, but there have been a number of large transactions announced in recent months: Case Western Reserve University is taking 80,000 square feet in the Halle Building; LESCO moved its headquarters from Strongsville to the Tower at Erieview; Ulmer & Berne is taking 100,000 square feet at Skylight Office Tower; and National City Bank is taking 15,000 square feet at BP Tower.

While some companies have left downtown, shrunk or disappeared altogether from the Cleveland market, the positives outweigh the negatives.

“It’s getting harder to find space if you want to be in a Class A building,” says Gabriel. “If you look at Class A vacancy rates at the end of last year, they were 13.8 percent. Class B is still around 31 percent. If you are a Class A tenant and need 50,000 square feet, you’ll probably be forced to look at Class B buildings. There is not a lot of inventory in Class A if you need a big block of space.”

Because Class B buildings have been forced to compete with Class A buildings to get tenants, they are offering, in many cases, aggressive rent pricing. This, in turn, draws the Class A rates down.

“There hasn’t been a dramatic downturn, but the pricing has gotten very aggressive,” says Gabriel.

As for the suburbs, the eastern market is on the move.

“The hottest area is definitely the eastern market,” says Gabriel. “It has the lowest vacancy rate with 15.8 percent, while Rockside Road has about 24.5 percent.”

The encouraging thing for Cleveland’s economy is that much of the movement in that market has come from Cleveland companies.

“A lot of companies that are Cleveland-based are taking more space,” says Gabriel. “It’s not from 20 Fortune 500 companies taking more space. To the south, the Rockside and I-77 area is dominated by companies with a more national origin. They pick Rockside because it’s the bullseye of the county. That area has been fairly stagnant. What that tells us is there hasn’t been a wave of national companies opening up new offices in Cleveland like they have in the past.”

Landlords are still offering concessions, but the tighter east market means fewer incentives.

“They see the vacancy rates coming down and don’t see the need to give so much away,” says Gabriel.

The West Side still has a significant vacancy rate of 20.6 percent, but this is down from a peak in 2003 of 22 percent.

How to reach:Grubb & Ellis, (216) 861-3040