Residential development in downtown Cleveland is going gangbusters, attracting the working millennial crowd and empty nesters alike. And much of the action is playing out in the city’s historic buildings.
The growth has interesting side effects. According to Newmark Grubb Knight Frank
’s fourth quarter Cleveland Office Market
report, the conversions of vintage office and industrial buildings in the Central Business District (CBD) to apartments has effectively dropped the office vacancy rate in the fourth quarter of 2016 to 24 percent for class B office space and 22.4 percent for class C. Overall combined vacancy in the CBD is 19.9 percent.
However, Terry Coyne, vice chairman of commercial real estate for Newmark points out the vacancy is even lower when Newmark’s office space Zombie Report
is factored in. The report does not include vacant space that is currently being renovated and off the market. Omitting these offices brings the vacancy rate down to 18.2 percent for class B and 15.4 percent for class C space.
Eleven such buildings are omitted in the Zombie Report because they are being converted to apartments or are functionally obsolete, Coyne says, including the Tower at Erie View, the Halle Building, the former Cleveland Athletic Club and the Standard Building, among others.
Part of the reason the office vacancies are declining is attributable to unoccupied office buildings being converted to apartments, says Coyne. And while he admits that the downtown living trend is encouraging for Cleveland, he says landlords and developers should also be thinking about converting downtown office space.
A new generation of offices
A new generation of workers are living and working downtown with educated millennials drawn
to the city’s core. They are enamored by Cleveland’s history and its historic buildings, says Coyne. As residential living grows, he notes, so must attractive office space.
“It is not just millennials who like to live near their offices,” explains Coyne, adding that at one time residences and businesses were more centered in Cleveland suburbs. “People historically like to live near their offices. The difference is the offices are now moving downtown where the people live.”
The next generation of workers are driven to employers with what Coyne calls “cool loft office space,” which is often characterized by historic buildings with high ceilings, exposed brick and wood floors reminiscent of the structure’s original purpose.
“I believe there is great demand for loft office space and I think the numbers show it,” says Coyne, suggesting that as downtown buildings are converted to apartments, conversion into loft offices should not be forgotten.
“The overall health of the market is being driven by conversions,” explains Coyne, adding that the apartment conversions have stabilized. “The annual net absorption of office space in 2016," he also notes, "was approximately 254,000 square feet. However, the absorption for cool office space is currently keeping pace with supply.”
Leading the way
The successful developers downtown have noticed this change and are following suit with their developments. Coyne cites Tyler Village
, 3615 Superior Ave., as one perfect example.
spotted this trend when they decided to convert the former Tyler Elevator building at East 36th
Street and Superior Avenue, which they had owned since the 1970s, into loft office space,” says Coyne. “Without the use of tax credits, Graystone repurposed
this million-square-foot-plus property into a neighborhood of retail, office and warehouse.
“The development is performing so well they are now able to charge for indoor parking in an area of town where parking is free and abundant,” he adds.
Coyne also cites the 1903 Caxton Building
, 812 Huron Road, as another success story. “The leader in this trend—the Caxton Building—has seen an increase in rents over the past year for both parking and office that other landlords can only dream about,” he says. Quantifiably, the Caxton has seen a 90 percent occupancy rate over the past 10 years, according to commercial real estate broker Gardiner and Associates
Meanwhile, Quicken Loans
’ Cleveland offices garnered acclaim for its 2016 move into 81,000 square feet of space on the fourth and fifth floors of the Higbee Building at 100 Public Square. The company preserved much of the original architectural elements and historic nature of the building. Coyne says there is still 90,000 square feet of raw space available in the iconic 1931 art-deco building.
A fourth example is the renovation of the old Sammy’s Building in the Flats
. With its views of the river and a rooftop deck, the owners are getting some of the highest rents in the city, Coyne notes.
While he estimates the overall vacancy rate of trendy office space in the CBD to be around 12.6 percent—or 2.9 million square feet—Coyne suggests landlords consider renovating their older buildings for loft-style offices, which drives drown vacancy rates and drives up rental rates.
Coyne asserts that the days of cubicles, dropped ceilings and wall-to-wall carpeting are gone. “It’s a changing style of office,” says Coyne of the trend towards loft office space. Millennials, he notes, want more of a “SoHo look” in their workspaces. “The market changes and those people want a different style of office.”
It’s fairly easy to achieve this look and create a whole new office space, says Coyne, although some buildings are more conducive to it than others. “You can’t convert the KeyBank Tower into a loft building,” he says, “but you can expose the duct work and mimic an older, industrial type building.”
Coyne cites the 1921 925 Building
, formerly the Union Trust Building and later the Huntington Building, as being prime for redevelopment into loft space. He adds Hudson Holdings
would be wise to consider loft offices in its redevelopment of the 925 Building
“Overall, these changes in our market present opportunities for both tenants and landlords,” says Coyne. “And understanding these trends helps both sides make better decisions.”