Terry Coyne - Commercial/Industrial Real Estate Properties
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SOUTHEAST SUBMARKET AND BIG BOX ANALYSIS

May/June, 2017 - 

Southeast Submarket Analysis

  • Vacancy rate was 5.1% (second lowest of any market in 1Q17).
  • 289,411 SF of positive absorption (most absorption of all Cleveland submarkets in 1Q17).
  • The highest asking rent of all submarkets ($5.37/SF).
  • Since 1Q15, inventory has increased by 1,616,428 SF.
  • Availability continues to shrink (see Exhibit Two).
  • Only five properties in Twinsburg that are 250,000 SF or greater since 1992; 93,967 SF of this
  • inventory remains available (5.7%). Of that limited available space, none of it is currently
  • vacant.
  • Increased demand for properties with 24-foot ceilings and above.
  • Created a shortage of supply that has delivered increased revenue offered to sellers in the
  • market.
  • Extremely tight 1.4% vacancy rate for big box buildings.
  • Four Spec Projects Currently Under Construction
Four Spec Projects Currently Under Construction

Address


City


Submarket


Building Size


Available


14720 Foltz Pkwy. Building 2


Strongsville


Southwest


139,440 SF


23,200 SF


6001 Towpath Dr. Expansion


Valley View


Southcentral


80,000 SF


0 SF


6279 Hudson Crossing Pkwy.


Hudson


Southeast


125,000 SF


125,000 SF


530 Seasons Rd.


Stow


Southeast


114,188 SF


27,106 SF

Four Completed Spec Buildings Since 2014: Southeast

Address


City


Submarket


Building Size


Available


55 E Hines Hill Rd.

Hudson


Southeast


770,000 SF


0 SF


2 Corporate Pkwy.

Twinsburg

Southeast

207,360 SF

35,000 SF

2 Independence Pkwy.

Twinsburg


Southeast


380,000 SF


0 SF


8685 Independence Pkwy.

Twinsburg

Southeast

248,000 SF

0 SF

Big Box Analysis

Since 2000, there have been 124 big box projects completed (50,000 SF and above). Southeast submarket comprises 53% of the total Northeast Ohio big box inventory. Twinsburg comprises 8% of the total Northeast Ohio big box inventory.

In terms of big box properties, 18,339,606 SF of inventory exists in the total market with 124 total buildings. The average building size is 147,900 SF. Of that total inventory, there is 1,139,577 SF of availability (6.2%), comprised of 23 buildings, with an average building size of 9,190 SF. The numbers on vacancy are similar: 1,111,058 SF of vacancy (6.1%), comprised of 15 buildings with an average building size of 8,960 SF.

In the Southeast submarket, 9,681,369 SF of inventory exists with 55 total buildings, an average building size of 176,024 SF with 593,763 SF of availability (6.1%). Available inventory is comprised of eight buildings, with an average building size of 107,965 SF and 828,796 SF of vacancy (8.6%), comprised of eight buildings with an average building size of 15,069 SF.

In the Twinsburg submarket there is 1,491,212 SF of inventory for seven total buildings. The average building size is 213,030 SF with 128,967 SF of availability (8.6%), comprised of two buildings with an average building size of 18,423 SF. There is 100,000 SF of vacancy (6.7%), comprised of two buildings with an average building size of 14,285 SF.

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Terry Coyne (SIOR, CCIM) is a full-service commercial real estate broker in Cleveland. As part of Newmark Knight Frank, Terry has provided real estate solutions for Northeast Ohio since 1995. For assistance with your commercial real estate needs, please contact him via email at any time (tcoyne@ngkf.com).

NATIONAL INDUSTRIAL TENANTS LANDING IN SMALLER MARKETS, LIKE CLEVELAND

April, 2017 - Cleveland has made a comeback. Finally. 

We're seven years into our recovery and the hottest part of the Northeast Ohio industrial distribution market has been national corporate tenants leasing space, ranging in size from 45,000 to 80,000 SF. That larger size has always been the strongest segment of our market, with companies like Berlin Packaging, Dunkin' Donuts (National DCP) and Bridgestone Americas (Tire Wholesale Warehouse) all making significant investments.

Before the recession, the 25,000-square-foot tenant was typically as strong as the 65,000-square-foot tenant. However, during the recovery, the smaller tenant did not seem to bounce back as quickly. In my experience, when these leases do get done, they are often for much shorter periods of time. Usually they must accommodate national companies that have a wide range of requirements, including the necessity of a short-term deal. Often, they're just looking for somewhere to land before they transition to a larger space. 

While tenants seeking in the 25,000 SF range are still bouncing back, national corporations requiring large range space provided stellar results this quarter. Currently, we have a very tight 1.4% vacancy rate for big box properties that feature 24-foot clear ceilings and early suppression fast response (ESFR) systems. The overall industrial market is pretty tight as well, with our latest market report showing a 6.5% vacancy rate, the lowest it has been in the history of my company, NKF, tracking real estate stats under its current methodology. I predict that Class A industrial vacancies will likely be virtually gone by year end, especially with the overall tightening of the big box market.
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Terry Coyne (SIOR, CCIM) is a full-service commercial real estate broker in Cleveland. As part of Newmark Knight Frank, Terry has provided real estate solutions for Northeast Ohio since 1995. For assistance with your commercial real estate needs, please contact him via email at any time (tcoyne@ngkf.com).

STAG INDUSTRIAL BUYS LARGE BEDFORD HEIGHTS WAREHOUSE FACILITY

March, 2017 

In the first quarter of 2017, 26801 Fargo Road in Bedford Heights sold for $7,636,651, or $44.13/SF, to STAG Industrial Holdings, LLC. Our team represented the sellers, a group of local Cleveland investors.

Fully-leased to two tenants, this 173,052-square-foot building originally functioned as a Sears distribution center.

This space is evidence of a robust industrial investment climate, even in secondary markets such as Northeast Ohio. Recently, NKF Cleveland's 4Q16 Industrial Market Report indicated an industrial market vacancy of 6.8%, having dipped below 7% for the first time. So with vacancy now hovering around a generation low, this price is still far below the building's replacement value. In a rising market, this price may seem high today, but could prove to be a wise investment in the not-too-distant future.

About The Property
The single story, 173,052-square-foot masonry warehouse and office building at 26801 Fargo Road was originally built in the 1960s. It was renovated in 2004 and underwent a major office build-out in 2016. The property features approximately 160,000 SF of warehouse, 15,600 SF of office, a building technician office and two loading dock areas that consist of 30 canopy-covered bays. Located in the heart of Bedford Heights, the property is near restaurants, leading medical facilities and offers easy access to I-271.

__________________________________________________________________

Terry Coyne (SIOR, CCIM) is a full-service commercial real estate broker in Cleveland. As part of Newmark Knight Frank, Terry has provided real estate solutions for Northeast Ohio since 1995. For assistance with your commercial real estate needs, please contact him via email at any time (tcoyne@ngkf.com).


NORTHEAST OHIO SUBLEASE MARKET SHRINKING

March, 2017 - Contrary to national trends published by Newmark Knight Frank's corporate research department, the office sublease market in Northeast Ohio, normally a predictor of underlying momentum in most overall markets, continues to shrink.

NKF's national statistics indicate that sublease space has been rising gradually, from the recent low of 81.5 million SF available at mid-2014 to 97.1 million SF at year-end 2016. Furthermore, sublease totals in some markets, such as Houston, where tenants, primarily oil and gas businesses, drove the sublease availability rate to 5.6%, well above the U.S. average of 2.0%.

As you can see below, Cleveland's office market fundamentals seem to be moving in the opposite direction. In fact, Cleveland's sublease availability rate is 0.6%, much lower than the U.S. average.

Based on NKF's 4Q16 office market stats, sublease information is as follows:
Total Sublease SF Available: 226,662 SF (84,400 SF less than 3Q16).
Total Sublease Available %: 0.6% (down from 0.8% in 3Q16).
 
CBD Sublease SF Available: 70,285 (55,684 SF less than 3Q16).
East Sublease SF Available: 48,281 (5,769 SF less than 3Q16).
South Sublease SF Available: 71,011 (13,674 SF less than 3Q16).
Southwest Sublease SF Available: 25,547 (2,736 SF less than 3Q16).
West Sublease SF Available: 11,538 (6,537 SF less than 3Q16).
 
Class A Sublease SF Available: 91,144 (57,893 SF less than 3Q16).
Class B Sublease SF Available: 114,618 (15,273 SF less than 3Q16).
Class C Sublease SF Available: 20,900 (11,234 SF less than 3Q16).
 
Overall, all submarkets and classes saw a decrease in available sublease space from 3Q16 to 4Q16. So, the Cleveland market saw a healthy amount of positive absorption in the sublease arena in the second half of last year. Year-over-year from 4Q15 to 4Q16, sublease availability went from 320,308 SF to 226,662 SF (a decrease of 93,646 SF, or 0.2%). In the past five years (from 4Q11 to 4Q16), sublease availability went from 819,677 SF (2.1% availability) to 226,662 SF (a decrease of 593,015 SF, or 1.29%).

After giving back space in the third quarter, the overall Northeast Ohio office market made a comeback by the end of 2016 by posting 253,993 SF of positive net absorption. The positive absorption dropped the overall vacancy rate by 70 basis points from the previous quarter to 17.3% for all properties. Leading the way in the fourth quarter was the Central Business District (CBD), which recorded 193,213 SF in positive net absorption. This occupancy gain dropped the CBD's vacancy rate nine basis points to 19.9%. To read NKF Cleveland's overall 4Q16 office market report, click HERE.


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Terry Coyne (SIOR, CCIM) is a full-service commercial real estate broker in Cleveland. As part of Newmark Knight Frank, Terry has provided real estate solutions for Northeast Ohio since 1995. For assistance with your commercial real estate needs, please contact him via email at any time (tcoyne@ngkf.com).


HERE COME THE MARIJUANA GROWERS

March, 2017 - As if the Northeast Ohio industrial market was not tight enough, here come the marijuana growers! Last year, the Ohio General Assembly passed legislation for a medical marijuana program in Ohio and Governor Kasich signed the bill.

While the licenses have not been meted out, groups are attempting to secure space in anticipation of winning one. There will only be a small number of licenses awarded statewide. Rule proposals were filed in February, with a public hearing scheduled for March 20.

Interestingly, the requirements growers outlined are the opposite of what most industrial users value.

The marijuana growers want approximately 60,000 to 75,000 square feet of space, with heavy amounts of power, low ceilings and air conditioning. Low ceilings keep utility bills down and the lights closer to the product. Facilities, however, cannot be closer than 500 feet to any residential dwelling, school or church.

Right now, the big unknown is location. Most cities will not issue permits for marijuana retailers, but we speculate that older, more-established cities (Elyria, South Euclid and Richmond Heights) will likely agree to their presence. In fact, some of these towns are already moving towards this position.

Opinion leaders on both sides of the medical marijuana business can agree on one thing: their occupation of industrial space will clearly tighten the market even further.
__________________________________________________________________

Terry Coyne (SIOR, CCIM) is a full-service commercial real estate broker in Cleveland. As part of Newmark Knight Frank, Terry has provided real estate solutions for Northeast Ohio since 1995. For assistance with your commercial real estate needs, please contact him via email at any time (tcoyne@ngkf.com).

MIDWEST INVESTMENT OPPORTUNITIES STILL HOT AS EVER

March, 2017 - New York, Chicago, Los Angeles and other big cities get far more attention than Northeast Ohio when discussion turns to investment property sales.

However, as Newmark Knight Frank's 4Q16 Midwest Capital Markets investment report reveals, the market for office and industrial property sales in Cleveland, Columbus, Cincinnati, Detroit and Pittsburgh remain as hot as ever. Sales volume, prices and activity are at all-time highs. Additionally, rates have hit all-time lows and the buyer profile for these markets is more national in scope this time than during the prior cycle.

Thinking about this changing landscape provoked a powerful question for me: if your debt costs the same in New York City as it does in Cleveland, why wouldn't more investors reallocate their capital to strategic second-tier or tertiary markets such as ours (Cleveland) and the others outlined in the aforementioned report?

Given the profile of the most recent buyers in the Midwest, it seems others have come to the same conclusion.

Institutional investors typically buy based on an IRR, which assumes an exit cap. Also, the biggest objection is usually a lack of rent growth or appreciation in the legacy Rust Belt cities.

However, those investors who were brave enough to invest in this Midwestern area during the economic downturn are now reaping the rewards. In fact, many investors could have purchased properties in these markets for prices equal to their current rent. In particular, Detroit has seen spectacular returns, with the resurrection of vehicle production over the past few years.

Our markets have been through a good bit of up-and-down over the past ten years but at least for now, despite the price increases, investors can still find opportunities.


__________________________________________________________________

Terry Coyne (SIOR, CCIM) is a full-service commercial real estate broker in Cleveland. As part of Newmark Knight Frank, Terry has provided real estate solutions for Northeast Ohio since 1995. For assistance with your commercial real estate needs, please contact him via email at any time (tcoyne@ngkf.com).

MIDTOWN CLEVELAND'S SUCCESS CONTINUES

February, 2017 - As Downtown Cleveland captures the majority of recent commercial real estate news for its development projects, the city's Midtown area has quietly become a successful office submarket - specifically from East 57th Street to East 70th Street along Euclid Avenue.

Dick Pace pioneered the progression of this area's resurgence with his redevelopment of the former Baker Electric Building, 7100 Euclid Avenue, nearly ten years ago. Public interest and prices have both elevated to new heights as a result.

Since then, Hemingway Development has developed over $40 million in three office and laboratory buildings in their MidTown Tech Park. Encouragingly, these buildings, all built on speculation, are 93% occupied. Furthermore, Hemingway hasn't stopped. The company has announced its next 62,000-square-foot speculative office building will rise from the company's 11-acre campus known as Link59.

Family and locally owned automotive retail giant Dealer Tire's new corporate headquarters is well underway at 7012 Euclid Avenue. In fact, it's believed that the company is ahead of schedule on the 166,000-square-foot Victory Innovation Center renovation and will occupy its new facility from late February to early March of this year. This former Refrigeration Sales building will house 400 employees. An investment of over $25 million represents rhe enormous endorsement of the Health Tech Corridor and brings justification to the RTA's $200 million HealthLine investment to the street in 2007-2008.

Additionally, next to Dunham Square, a group of investors is planning a new hotel that will service this office submarket, as well as the families of Cleveland Clinic patients and visitors to the area.

What's remarkable is that in the year 2000, land in this area could have been acquired for under $10,000 per acre. Now if you can find any land at all, it will most likely be above $500,000 per acre, with most land parcels near the Cleveland Clinic hover around one million dollars per acre. Few markets in the United States have seen such appreciation...and the market continues to grow!


__________________________________________________________________

Terry Coyne (SIOR, CCIM) is a full-service commercial real estate broker in Cleveland. As part of Newmark Knight Frank, Terry has provided real estate solutions for Northeast Ohio since 1995. For assistance with your commercial real estate needs, please contact him via email at any time (tcoyne@ngkf.com).

DOWNTOWN OFFICE 
CONVERSIONS IMPACT MARKET

January, 2017 - Question: if vacancy rates seem so high, why is the office space game still so vibrant and healthy in Cleveland?

Answer: Conversions.
Over the past two years, the vacancy rates for Class B and Class C office properties in Cleveland's Central Business District (CBD) declined primarily due to conversions of office space into residential apartments. The current market vacancy rates for Class B and C offices in the CBD are 24% and 22.4%, respectively. However, we've developed a "Zombie Office Vacancy Report" which eliminates all buildings that are currently being converted into apartments - or soon will be. The deeper and more accurate analysis reveals forecasted vacancy rates of approximately 18.2% for Class B offices and 15.4% for Class C offices.

While these rates are still high, they do paint a different picture of the trends for rates and concessions for CBD office. Drilling down further into our "cool" office space (high ceilings, older buildings, exposed brick, wood floors) vacancy rate, we estimate approximate vacancy of only 12.6% based on a sampling of downtown properties that amount to approximately 2.9 million SF.

The overall health of the market is being driven by conversions. The annual net absorption of office space in 2016 was approximately 254,000 SF. However, the absorption for "cool" office space is currently keeping pace with supply. Rates in these older buildings also rival newer Class B buildings at $16 to $17 per SF gross, (and are oftentimes higher). Even better, these spaces have lower tenant improvement dollars, netting the landlords a higher overall return. This trend has been spotted by a few perspicacious developers. The leader in this submarket - the Caxton Building - has seen an increase in rents over the past year for both parking and office that other landlords to the psychiatrists (who are also renting space in a "cool" office building).

Rick and Ari Maron spotted this trend a few years ago when they leased approximately 80,000 SF to our client, Rosetta Marketing, in the former PNC building on Euclid Avenue and East 6th Street. They converted old 1960s-type office space into something one might see in SoHo. The space was never marketed and the tenant moved from the suburbs to downtown to be closer to urban amenities; paying a rent at the high end of the B market.

Graystone Properties took advantage of this emerging aesthetic 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. Without the use of tax credits, Graystone repurposed this million-square-foot-plus property into a neighborhood of retail, office and warehouse uses called Tyler Village. The development is performing so well they now charge for indoor parking in an area of town where parking is free and abundant.

Jim Doyle and Fred Geis developed a campus of buildings in Midtown at 6500, 6700 and 7000 Euclid Avenue called MidTown Tech Park. The entire campus is near-full and a majority of the tenants are either from the suburbs or are spinoffs from the Cleveland Clinic. Rents range from $10.00 to $15.50 per SF net, equal to or higher than CBD or suburban rents. Two of the three properties were warehouse conversions.

Recent examples of this conversion trend can be seen in Quicken Loans' new space in the Higbee Building. This conversion of the former department store into "cool" office space now houses 450-plus employees who moved here from the old Post Office building behind Tower City. In fact, our office is handling the leasing of the remaining vacant office units in this building, offering a similar work environment as the Quicken space. Suburban companies are beginning to take notice.

Similar examples are Joel Scheer's redevelopment of the former Sammy's building in the Flats. This building has one of the highest asking lease rates of any space in our market at $21.00 per SF NNN, or $32.00 per SF gross. It offers views of the river and a rooftop deck. Fred Geis recently announced he was partnering with the Samsel family and redeveloping several mostly-empty buildings on Old River Road on the East Bank of the Flats into predominantly loft offices. These properties are on the Cuyahoga River and will have porches overlooking the water.

A three-story building in a rapidly changing area at 2401 W. Superior Viaduct is under contract to a client of ours, and a start-up company is expected to move its operations there. The company was attracted to the "loft" feel of the building and the addition of new amenities in the area, such as a brew pub being built across the street. 

These developments were, on some level, predicted by Richey Piipparinen, Director of the Center for Population Dynamics at Cleveland State University, in his research regarding the growth of well-educated millennials attracted to the authentic city of Cleveland. This new population sees Cleveland's history as an asset. One manifestation of their embracing of the cultural heritage is the desire to lease space in buildings with unique features. Assuming his track record for issuing excellent real estate predictions remains intact, landlords would be wise to consider how they can accommodate this generation on the rise.

Some
articles have bemoaned when the next new office building will be constructed. All the while, when most people were focused on the apartment market conversions, a few developers with foresight were already building Cleveland's next office buildings through conversions rather than new construction.

So the question really should be: which office building is ripe for the next conversion? Two big properties stand out - the Rose Building, which currently houses Medical Mutual, and the former Huntington Building at 925 Euclid Avenue.

The Rose Building is currently an office building, but ripe for redevelopment. Medical Mutual is rumored to be relocating, opening up an opportunity for the Rose Building's owner to reposition the property, embracing its magnificent architecture, ample window line and location in the heart of the city. Like the former Huntington Building across the street, this property would likely fetch rates above $20 per SF and compete at the high end of the B market if properly repositioned.

The former Huntington building being redeveloped by Hudson Holdings will be a neighborhood unto itself and will earn office rents equal to or exceeding the Class A market. The company is planning a mixed-use redevelopment that encompasses retail, office, hotel and an apartment/condominium product.

Overall, these changes in our market present opportunities for both tenants and landlords, and understanding these trends helps both sides make better decisions.

__________________________________________________________________

Terry Coyne (SIOR, CCIM) is a full-service commercial real estate broker in Cleveland. As part of Newmark Knight Frank, Terry has provided real estate solutions for Northeast Ohio since 1995. For assistance with your commercial real estate needs, please contact him via email at any time (tcoyne@ngkf.com).