Postmortem on Medical Mutual’s HQ decision

Medical Mutual of Ohio’s headquarters since 1947 has been in the Rose Building in downtown Cleveland. Located at East 9th Street and Prospect Avenue, the building will be vacated starting next month (KJP). CLICK IMAGES TO ENLARGE THEM.

Move is ‘warning’ for downtown

The decision for Medical Mutual of Ohio to abandon its downtown Cleveland headquarters for suburban Brooklyn was apparently less of a strategic move and more of a matter of which city’s public incentives got used first. And according to a local real estate insider, it was a short-term decision that could end up biting the Fortune 1000 company and downtown in their hind ends in the long term.

A Medical Mutual source spoke off the record to NEOtrans, revealing that the health insurance provider has “no hard feelings” towards Cleveland or to downtown. Instead, the source said the company had already tapped into a job creation incentive from the city of Brooklyn to renovate the former American Greetings headquarters and add more jobs to the site at 100 American Rd., off Tiedeman Road. It became the insurer’s operations center, consolidating activities from Strongsville, Copley and Beachwood.

After agreeing to a Community Reinvestment Act (CRA) deal with Brooklyn, Medical Mutual and landlord Industrial Commercial Properties (ICP) made $23 million worth of improvements to a 324,000-square-foot portion of the 1-million-square-foot building. The CRA, agreed to in 2018, reduces ICP’s property tax bill for the building’s physical improvements to half what they otherwise would be for 10 years. In exchange, ICP and Medical Mutual have to pay an annual fee and other concessions to the city, according to the agreement.

But the job creation incentive is based on Medical Mutual bringing to and keeping in Brooklyn 750 jobs and a payroll of $57 million. Beginning with the 2020 occupancy of Medical Mutual’s new operations center, the CRA pays $1.3 million to $5 million over six years, depending on how many workers are actually located in the city. Details on how many workers would generate how much in compensation was not immediately available. But the more people that are based at Medical Mutual in Brooklyn, the more the insurer and its landlord are compensated.

Medical Mutual of Ohio’s operations center in the Cleveland suburb of Brooklyn will become the insurer’s new headquarters starting next month (jljiinc.com).

Coming into 2020, Brooklyn would have 750 jobs while the downtown headquarters had 1,000 jobs. Then the pandemic and remote working arrived, changing the headcount calculus for Medical Mutual. After the pandemic eased, the source said more workers, especially call-center-type jobs, were remotely based. Even with increasing numbers of downtown headquarters jobs moving out to Brooklyn, Medical Mutual was unable to count more than 650 jobs based at the suburban operations center. So, the source said the remaining 250 jobs based downtown were moved, too.

In the days leading up to the pandemic, the insurance company also was preparing to seal a deal with the city of Cleveland to incentivize renovations to its 120-year-old Rose Building headquarters it owned downtown. It was prepared to make $12 million worth of renovations to the 10-story, 381,000-square-foot building at East 9th Street and Prospect Avenue. In exchange, the renovations would be supported by a $1 million, 20-year loan from the city to be deferred for 10 years when some or all of the loan may be forgiven based on the company’s job creation within the city.

But when the pandemic hit, Medical Mutual never exercised its deal with Cleveland like it had with Brooklyn. Sue Walton, manager of corporate communications at Medical Mutual, opened an email from NEOtrans seeking comment on the source’s contention that headcount-based public incentives already agreed to with Brooklyn prompted the HQ relocation to that suburb. However she did not respond to the allegation prior to publication of this article.

“Like many other companies, we now have the majority of our staff on a hybrid schedule or working from home,” Walton said in making the HQ relocation announcement last month. “We have very few full-time employees currently working in the Rose Building. As a mutual company, we have to weigh the economic feasibility of maintaining multiple underutilized sites in Northeast Ohio with the responsibility we have toward our members, who are a top priority.”

Interior of Medical Mutual’s operations center in Brooklyn which was renovated in 2019 for their use for $23 million (Bialosky).

Nathan Kelly, president and managing director of Cushman & Wakefield-CRESCO Real Estate in Cleveland, said he understood Medical Mutual of Ohio’s decision in one respect but not in others.

“I don’t want to make an enemy of MMO, but the (Rose) Building turns its back on downtown,” he said. “I’ve never seen a human enter or exit that building in my entire career. From a macro perspective, (the move) is a validation of two signs about the downtown Cleveland market. The first is flight to quality. The Rose Building has no first-floor activity, no retail, no engagement. Users — tenants or even employees — are in a high leverage position with high expectations. Highly amenitized, high-quality buildings are landing and retaining top employers and employees. MMO doesn’t have engaging space. They don’t expect their FTEs (full-time employees) to be on site. Might as well decant the space for Brooklyn, and build a critical mass of their team to restore culture and command and control.”

Cleveland city officials, including Councilman Kerry McCormack whose Ward 3 includes downtown, have tried to make the case to Medical Mutual that leaving downtown would hurt the company’s ability to recruit young talent who want to work in a walkable, urban setting. That, he said, is reason enough for it to retain a significant presence downtown.

“Not only is it the right thing to do, it’s critical for competitive recruitment for their company,” McCormack said in a text message to NEOtrans last month. “Decisions like this also increase sprawl and contribute to the regional problem of connecting workers to work places.”

The fate of Medical Mutual’s 10-story, 120-year-old Rose Building in downtown Cleveland is uncertain. A likely outcome is a full or partial conversion to residential, which has also happened to 7 million square feet of older commercial structures downtown in the past decade (Google).

Kelly concurred with McCormack and said more has to be done to make downtown a place employers want to be rather than to flee. It’s a matter that the Downtown Cleveland Alliance is also grappling with in the post-pandemic era.

“Downtown has to matter,” Kelly said. “Brooklyn is punching above its weight. When American Greetings announced (in 2011) its departure (to Westlake), there were a lot of people that thought Brooklyn should turn out the lights. In contrast, their daytime worker population has probably doubled because of ICP’s development efforts and employers like MMO, Key and others. Location matters. But there should never be a situation where downtown Cleveland gets bested by a well-located interchange. The value proposition of downtown is quality of life, 18-hour-city with nightlife, housing and top talent in a 15-minute walk. We all have to be part of that authentic product, otherwise MMO is going to be the first of others to give up on downtown. I think and hope MMO is making the wrong decision here.”

As for the future of the Rose Building, both Walton and McCormack said it was too soon to discuss the fate of the historic structure which Medical Mutual will vacate in a phased approach throughout 2023, starting next month. However, a real estate source said he has clients both in Greater Cleveland and out of town who are interested in acquiring the Rose Building for a full or partial conversion to residential with ground-floor retail or other commercial uses.

“Conversion seems like the obvious future for that building, but it might be a long while before that gets eaten up,” Kelly said, noting high interest rates.

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