6 Thoughts on Cleveland’s Lakefront Plan
Late last week, it was announced that the Geis Companies has proposed a one-year option to explore development of an office park on Cleveland’s north shore. To see the original story, click here. Here are six things to consider about this plan.
1. High overall vacancy but not among the newest space. As a whole, the downtown office market has languished for the last several years, with an overall vacancy rate consistently around 20 percent. Numerous buildings less than half full and looming large-scale holes associated with relocations by Eaton Corporation, Ernst & Young and Tucker Ellis will make a tough situation even tougher. However, the vacancy rate amongst the newest properties (often referred to as Class A buildings) is actually very low, standing at 9.6 percent at the end of the 2nd quarter. Moreover, for tenants looking for larger blocks of contiguous space in these newer buildings, say greater than 20,000 square feet, the alternatives are surprisingly slim. Considering that there has been no new multi-tenant office construction in over 20 years, the market may well be prime for a good dose of new construction.
2. Expensive. Spiraling labor and raw material costs have resulted in a steady increase in the cost of new construction. Ultimately, this increases the rental rate required to ‘make the numbers work’. During the last great construction boom of the late 1980s/early 1990s, the ‘magic rent number’ CBD office properties was in the mid $20s psf. Fast forward two decades later and this number is now at least $10 psf higher. And while the economy is certainly brightening, it may be difficult for tenants to justify this kind of occupancy cost, particularly when there is a glut of second-generation office space available at half the cost.
3. Track record. Geis has long been associated with industrial buildings, having developed much of the industrial product in Twinsburg and Streetsboro over the last 40 years. The preliminary drawings for the lakefront development show low-rise buildings that are more typical in suburban settings. The company is clearly capable of this type of construction as well, having recently completed similar projects in Richmond Heights and Mid-Town Cleveland, but it is a continued departure away from their core business.
4. Right match for area? The particular location for this development has certainly been questioned. The north coast harbor area currently includes Browns stadium, the Great Lakes Science Center, the Rock and Roll Hall of Fame and Burke Lakefront Airport, among other uses. The office buildings would be constructed in an area that is now a parking field for the airport. Although a previous study did target office properties as a part of the overall Lakefront development plan and the Arras Group is in the process of converting a former restaurant adjacent to the airport into office space, questions remain on the viability of this particular location for office properties.
5. Proximity to amenities. Although the core of the central business district is less than half a mile away, this area is isolated from associated amenities such as restaurants, hotels and other services. Cleveland Memorial Shoreway, an interstate by-way, forms a boundary that separates this area from the rest of the downtown. Parking will also be a challenge, as most of the surface lots and garages are located on the other side of the Shoreway.
6. Site configuration. The area being optioned totals around 20 acres but it is oddly configured with irregular borders and abuts a marginal road to the south and the airport terminal to the north. As a result, the area that can be developed looks to be significantly less that the total acreage. This isn’t uncommon in a fully developed market such as Cleveland. But trying to balance aesthetically appealing building layouts within the site constraints is even more challenging in this instance, given the high cost of construction for office properties.
And what do I think? Geis wouldn’t be going down this path just to grab some headlines. The timing for a new building may be right, especially if its a build-to-suit project for a single tenant – a deal type that has been a Geis hallmark. If they do have an interested tenant and can contain construction costs, we could very well see a new building going up soon. But I don’t anticipate any type of large-scale office park development and certainly would be shocked to see any type of building started on a speculative basis, without any tenants lined up.