Cleveland Office Market Sees Lowest Vacancy Rate in 17 Years

CLEVELAND, OH—The Greater Cleveland office market ended 2018 on solid footing, according to the Quarter 4 report from Newmark Knight Frank. Vacancy dropped to its lowest rate in 17 years, while 2018 saw the largest amount of absorption in five years.

In Q4 2018, Cleveland saw 121,117-square-feet of positive absorption, bringing the overall vacancy to 15.8%. It hasn’t been this low since Q3 2001 when the vacancy rate was 15.6%. Total for the year, the market absorbed 340,510 square feet. Still, rental rates have remained right around $18 per square foot for the last two years.

“We see the Cleveland office market remaining fairly flat this year,” Matthew Orgovan, research and marketing manager at NKF, told GlobeSt.com. “We don’t have any reason to assume that it has peaked, but with some news of consolidation by larger entities there could be a few bumps in the road.

The East and Central Business District markets were, and will remain, the most robust areas of Cleveland. In the CBD, asking rental rate was $21.85 per square foot in Q4, which is the highest it has been since Q2 2010. The market also saw 54,796 sure feet of positive net absorption. The East market is no different. There, the asking rental rate for Class A space was $25 per square foot, a slight increase from last quarter.

“The CBD and East markets look poised to continue being robust as office hubs that companies want to be a part of,” Orgovan said.

For the year ahead, NKF is closely watching the CBD and its changing landscape. There are a few things industry experts are watching closely as 2019 gets underway – the redevelopment of Class B office space, new development, and the interest of large corporations.

“With the advent of continued Class B office redevelopment into mixed-use and residential conversions in the CBD, that will inevitably lead to that submarket becoming tighter,” Orgovan said. “Since 2013, over 6 million square feet of office product in the CBD has been converted or plans have been proposed for re-purposing.”

Beyond the re-purposing of Class B space there are several large new or redevelopment office projects on the horizon, likely to launch this year. Specifically, those in the market are watching 925 Euclid Ave. and Market Square with a lot of interest.

The 1.4 million-square-foot 925 Euclid Ave. was purchased in May 2018 by The Millennia Cos. for nearly $40 million. After years of being vacant and several attempts at redevelopment project, the new owners have announced a $270 million renovation project dubbed The Centennial. While Orgovan says specific details of the project have yet to be revealed, market speculation includes a mix of office, residential, retail, restaurants and possibly a hotel.

Additionally, The Market Square mixed-use project in Ohio City, is slated to break ground later this year. Chicago-area developer Harbor Bay Real Estate Advisors plans to build a 137,000-square-foot office building and a companion apartment building, as well as retail.

“There is currently a lack of large, contiguous blocks of Class A space downtown, so some projects (like The Market Square and The Centennial) could inject some new vitality if they come to fruition, thereby enticing some potential large companies, both locally and nationally to consider Cleveland’s CBD as a HQ or regional HQ destination,” Orgovan said.

Large businesses, that have traditionally been suburb-based, have begun to look more actively at the CBD.

“We’re seeing some of Cleveland’s large corporate employers that have headquarters in the suburbs test the CBD waters by leasing small R&D/strategy office space,” Orgovan said. “One such project is Progressive Insurance, which leased around 9,000 square feet in Downtown Cleveland’s Warehouse District, which will move around 40 of their employees to the CBD.”