Commercial Real Estate & Construction

On an Upswing

The office space market is improving, with some lower vacancy rates and higher rents. But the industry isn’t out of the woods yet.

By
From the July 2013 issue of Columbus CEO
  • Photo by Ryan M.L. Young
    Randy Best, founder of Best Corporate Real Estate

When JPMorgan Chase & Co. announced in May it would lease almost 165,000 square feet of office space in Dublin, it wasn’t hard to imagine a sigh of relief exhaled among city leaders.

The financial services giant plans to move 500 employees into 5900 Parkwood Place, a building that was home to Nationwide before it packed up 1,000 workers and moved them to a new site near its home base in downtown Columbus’ Arena District.

A two-part tax incentive deal with Dublin was expected to be approved June 10; without one, the city would have a six-story, Class A office building sitting empty. That would be in addition to a February announcement by Verizon Wireless that it is leaving 240,000 square feet of space along Emerald Parkway in 2014 for new digs in Hilliard—taking with it 1,500 people who work in two office buildings.

Despite thostwo first-quarter developments, industry professionals say Dublin is a resilient market and location desired by tenants. “In Dublin, you are seeing a lot of choice because a lot of space has been made available,” says Wayne Asmus, vice president at RJ Boll Realty.

Along with Westerville and downtown Columbus, Dublin recorded seven of the biggest office deals based on square ooage leased last year, according to the local office of CBRE, one of the country’s largest commercial real estate services firms. The Easton and Worthington submarkets were right behind with five each.

Despite the blip in Dublin, the local office market is doing better than in recent times bolstered by an improving economy and lower unemployment rate. Vacancy rates in some spots are tightening, rents are increasing and concessions from landlords are decreasing. Still, it is tepid growth stymied by worries about the long-term viability of the economy.

“I would say it’s lukewarm,” says Randy Best, founder of Best Corporate Real Estate, a brokerage firm that focuses solely on Central Ohio properties. “For B- and C-class office space, there’s been a 0.05 percent increase nationally. It’s not the increase we want to see, but anything with an arrow pointing upward is something we like to see.”

Best says he’s getting inquiries about buildings that have sat vacant for four to five years, and that activity has been robust for the last 18 months.

Driving Factors

Improving economic conditions have much to do with a bump in office tenancy, say Rich Schuen, CEO of Colliers International’s local office, and Andrew Madison, president of RS Garek Associates.

“The economy and job creation are driving the demand,” Schuen says.

Lower unemployment, which stood at 5.7 percent in April Franklin County, and increased confidence since the financial collapse of the latter 2000s are fueling the demandSchuen says “is not red hot, it’s not on fire; it’s stable.”

Using his office as a barometer, Schuen says 39 people have been hired in the last year, increasing the total staff to about 100. “We are desperately looking for two more senior property people.”

Madison says there is a lot of pent-up demand from businesses that remained flat during the leaner times. RS Garek markets Downtown properties, and although Madison says rents there are not rising yet—available space is not at a premium—he believes it’s only a matter of time.

“Business is very, very good right now and that’s the first time in five years I can say that,” Madison says. “The rental rates haven’t changed too much, and I think it’s more a question of just getting bodies down there.”

The company’s portfolio includes 100,000 square feet in the Market Exchange district, including the East Main Street building where Garek’s office is located. Madison says the building is 80 percent occupiedcompared with 55 percent a year earlier.

Rob Click, senior managing director in CBRE’s Columbus office says the market is definitely rebounding from the dot.com bust of the early 2000s, the 2001 terrorist attacks and the 2008 recession“That created a lot of surplus space and businesses really started taking advantage of technology that forced them to become more efficient,” says.

Access to lending is still an issue, although even that is starting to loosen.

“Right when we start to return to a good and healthy market, you’ll see developers jumping in to build specs. I suspect by the end of 2013 we’ll see a couple,” says Schuen, who also is a board member of Insight Bank and sits on its loan committee.

What Tenants Get

There are still concessions tenants can wring from landlords, but they are fewer and farther between.

“The bigger [the company], the less selection you get,” says RJ Boll’s Asmus. “The smaller you are, the more selection you have.”

He says landlords are sweetening the pot a little with months of free rent over the length of a long-term lease and by paying for improvements. His client Clark Schaefer & Hackett Co., for instance, agreed last year to a longer lease term at its new Easton Way address in exchange for the landlord paying for and installing a new ceiling.

But higher operating expenses for property owners and a stronger demand for space are weeding down the need to offer such deals. “There is only so much in the concession pot,” Asmus says.

Best says a building he manages at Morse Road and Indianola Avenue was 30 percent occupied when his company began marketing it in 2010. The brokerage convinced the landlord to adjust rates and make improvements to strengthen its position in a competitive atmosphere. Without divulging the specific cost, Best says the investment was significant; today the building is 80 percent occupiedwell on the way to recouping expenses tied to the improvements.

When Residential Finance Corp. leased a 60,000-square-foot space at 1 Easton Oval last year, it pulled the company away from its pricier Arena District home. Thereit was paying a little less rent but for a lot less space: about 23,000 square feet. Duke Realty provided improvements and other incentives to lure to Easton.

“There were a host of economic incentives,” says David Stein, senior vice president and co-owner of the mortgage lending company, although he declined to elaborate.

Stein says other factors included contiguous and cohesive office space, less traffic and parking.“Ample and free parking for our [300-person] staff was like giving everyone a raise,” he says. “It’s just an easier commute, and the headache of Downtown traffic is avoided for the most part.”

Prime Locations

What areas of Central Ohio are hot?

CRE professionals say Dublin is a great place to look because of the space that has or will become available, coupled with the fact it’s been the premier suburban market for many years.

Easton continues to thrive because of its location and amenities such as walkability, restaurants and parking—though some other areaof Central Ohio enjoy those perks as well.

The Arena District continues to be a strong player. Columbia Gas of Ohio will anchor an office building under construction at Neil Avenue and Nationwide Boulevard that is scheduled to open next year, and the FBI has leased 44,000 square feet at 425 W. Nationwide Blvd., a Nationwide Realty Investors , where the bureau is consolidating its local operations.

New Albany and the Polaris areas are breaking out and becoming more prominent players. Daimler Group built single spec buildings at Waters Edge in New Albany four years ago and Westar in the Polaris area of Westerville; both have been huge successes. Also in New Albany, Bob Evans Farms’ new corporate headquarters is risingworkers could move in later this year.

“That whole area [New Albany] has gone from nothing to … wow,” says broker Greg Schenk, whose Schenk Co. represents tenants only.

Craig Lovelace is a freelance writer.