Four Factors Driving Cleveland’s Office Market Transformation
By Rob Roe and Jessica Urbin, JLL
What does the future of the Cleveland office look like? Although there is no simple answer, there is no doubt that today’s office is very different from what it was five years ago.
Although some companies still retain traditional office space, the onset of hybrid working has unquestionably changed the way many companies use – and choose – their real estate. This adoption of hybrid working has led to the obvious transformation of the market.
As businesses adopt hybrid work models, the need for larger office spaces is diminishing. This does not mean, however, that companies are eliminating their office buildings. In fact, 60% of office workers want to work in a hybrid style today, and 55% already do.
These smaller spaces support this working model by creating shared spaces, such as cubicles or lockers, as well as incorporating more conference rooms and small team rooms for hosting private video calls. They also encourage something employees can’t get at home: in-person collaboration. New spaces are outfitted with intentional spaces to meet, such as lounges, open-plan offices, cafes, and more.
Also, having small spaces doesn’t necessarily translate to dull spaces. Instead, many businesses are downsizing and investing the money saved in their new spaces, upgrading them to incorporate high-value amenities for their employees.
A flight to quality
Since employers want to attract and retain the best talent in their market, it’s no surprise that they invest in high-quality serviced spaces. On the other side, landlords are also investing in their buildings, especially as tenants reduce their footprint and vacate their previously leased office space.
According to JLL’s latest research, demand continues to favor Class A spaces over Class B spaces by a factor of three to one, with Class A absorption year to date at 124,843 square feet and a Class B absorption at 45,042 square feet.
This demand has also driven up the rent for Class A spaces relative to the rent for Class B spaces, with Class A spaces averaging $24.21 per square foot and Class B spaces at $18.58 per square foot. $ per square foot. Simply put, this means that spaces with the amenities they want are more valuable to tenants, even if they cost more.
Many of these amenities, in particular, focus on health and wellness, as well as diversity and inclusion. While some of these attractions are more obvious — like fitness centers, on-site restaurants, and upgraded lobbies — other unique amenities include community gardens, emphasis on natural light, rooftop terraces, cozy living rooms, walking paths, prayer rooms, mothers’ rooms and more.
Examples of Cleveland businesses and owners implementing these features include Equity Trust’s Convergent Office Complex in Westlake and Bendix Commercial Vehicle Systems’ new headquarters in Avon. Additionally, Benesch, Friedlander, Coplan & Aronoff LLP signed a lease for eight floors in the Class A Key Tower, marking the largest central business district contract in more than 10 years.
Each of these buildings boasts high-value attractions: Convergent is Northern Ohio’s first Fitwel project, providing a safe, sustainable and comfortable environment for tenants, while Bendix’s LEED-certified corporate headquarters offers floor-to-ceiling windows ceiling-mounted, a state-of-the-art fitness center and private meeting rooms. Bendix has also incorporated a wellness clinic for employees and their families, an employee garden, and composting and recycling options throughout the facility and on the surrounding walking path.
Alongside these buildings, Key Tower features an outdoor pavilion, upscale dining options, and a fitness and spa center offering wellness programs, personal trainers, classes, and more. Moreover.
The growing flight to quality has also led to increased construction in the Cleveland office market.
While supply chain issues, labor shortages and rising material costs have contributed to rising construction costs, companies continue to invest in their office space to attract and retain top talent. While tenant improvement dollars may not cover the cost of fully renovated office spaces, businesses are paying out of pocket to make their spaces more attractive and attractive.
Of the 2.1 million square feet of space currently under construction in the Cleveland market, several projects have recently been completed or are currently under development in the suburbs, including CBIZ’s 57,000 square foot national headquarters. in Independence and ICP’s nearly 100,000 square foot office, restaurant and residential complex in Seven Hills.
Office construction is expected to maintain momentum at nearly 2.1 million square feet, with several corporate headquarters projects slated for delivery in 2023 and 2024. Deliveries include the highly anticipated new Sherwin-Williams headquarters in the square. downtown public utility and its suburban R&D facility.
Declining vacancy rates
As vacancy rates continue to rise in the US office market, the Cleveland office market has seen some relief recently, dropping from 15.5% to 14.5% year-to-date . This results from the conversion of office buildings into apartments, as well as the signing of new leases by companies.
Comparing the second quarter of 2022 to the first quarter of 2022, Cleveland’s urban area total vacancy fell 3.7% and Cleveland’s suburban total vacancy fell 7.4%. Additionally, sublease vacancy as a whole declined for the third consecutive quarter – a key indication that companies are keen to retain their office footprint and are beginning to implement their return-to-office strategies.
here to stay
While there’s no doubt that hybrid working is here to stay, the office still plays a huge role in attracting and retaining employees. This rings especially true for companies that incorporate high-value equipment into their real estate – ones that their employees cannot obtain from the comfort of their homes.
Rob Roe is Managing Director and Jessica Urbin is Vice President of JLL. This article originally appeared in the August 2022 issue of Heartland Real Estate Business magazine.