While there is hope in new office market data that the worst of the office glut is over, real estate investors and lenders are cautious when considering supporting expansions, acquisitions or refinancings of office assets (Cresco). CLICK IMAGES TO ENLARGE THEM.
Latest Cleveland office market data offers hope
Although a variety of four-letter words have frequently been used to describe the office market since the pandemic, there’s a new one being uttered lately — “hope.” That word made its appearance in the latest Cleveland office market report by Newmark, one of the industry’s most respected collectors and analysts of real estate inventory market data.
NEOtrans reported at the start of this month that 2025 is the year that workers will start returning to the office. Newmark’s fourth quarter 2024 Cleveland Office Market Overview released todays suggests that the region’s return-to-office began a few months early.
The report’s most remarkable piece of data was that market absorption — the amount of office space leased — increased in Greater Cleveland in 2024 for the first time since 2019, the year before the pandemic arrived in the USA and pushed many Americans out of the office. That turnaround was due to a robust final three months of last year.
“The market accrued 160,328 square feet of positive absorption in the fourth quarter of 2024, propelling the market out of the negative for a yearly total of 138,705 square feet in net positive absorption,” according to the report. “The market finished the year in the positive for the first time since 2019. The quarterly positive absorption caused the vacancy rate to dip by 30 basis points to 27.8 percent. For the year 2024, the vacancy rate came in at 23.1 percent.”
“Despite a historically lackluster 2024 in terms of leasing activity, noticeably fuller parking garages and lots, improving economic conditions, and companies beginning to gravitate more towards heavier and consistent return-to-office mandates, bodes well for a better office leasing ecosystem in 2025,” Newmark staff reported in the quarterly release.
Over the past five years, this has been the fate of many office spaces in Downtown Cleveland and, even more so, in the suburbs. Some former offices buildings were converted to new uses such as apartments and hotels. That was the case here as the former Ohio Bell headquarters on East 9th Street downtown was converted to The Bell Apartments (KJP). CLICK IMAGES TO ENLARGE THEM.
“Direct space availability decreased significantly in the fourth quarter of 2024 by 160 basis points from the third quarter to 19.7 percent, representing 7.8 million square feet,” the report noted. “This is the lowest that direct space availability has been since the second quarter of 2022. Sublease space availability stayed at a flat 1.5 percent.”
Terry Coyne, vice chairman of Newmark’s Cleveland office, told NEOtrans that the regional and national office markets hit rock bottom two years ago.
“The numbers show a slow recovery,” Coyne said. “But it does seem to be a recovery. Higher unemployment helps the office market. When people are more worried about their jobs, they come into the office more. Studies show that people who are in the office get promoted more and laid off less. And the numbers reflect this trend also.”
Coyne said he is a big believer in updating office buildings with amenities so that workers will want to come to work rather than be forced back. It comes from his experience in overseeing the office and ground-floor retail leasing at downtown’s AECOM Building, 1300 E. 9th St., plus other properties. Despite it being 52 years old, the 21-story AECOM Building has a higher occupancy percentage than all but a few younger office buildings downtown.
But attracting investment to update buildings may still be difficult when the money side continues to lag. The Cleveland office market’s average asking rent decreased by $0.01 per square foot from the third quarter of 2024 to $19.96 square foot in the fourth quarter, Newmark said. As a result, the 2024 year-to-date average asking rent total held steady at $19.96 per square foot.
Although new office investments are still lagging, they are happening where properties are acquired for distressed-rate prices. The 45-story 200 Public Square was bought for a mere $54 million — low enough for the buyer to justify making on-site updates (Google).
“Office buildings were still low priorities for investors in 2024 due to continued risks and bleak refinancing prospects for that asset class both locally and nationally,” Newmark’s report continued. “However, some hope has emerged nationally for office assets going forward in 2025 as it is expected that investors and lenders will begin to reconsider office assets with some distress as the interest rate landscape becomes more favorable and accepted.”
That’s what happened last year when a partnership of Namdar Realty Group and Mason Asset Management acquired a distressed 200 Public Square for just $54 million. NEOtrans was first to report the Downtown Cleveland skyscraper’s pending sale as well as the transaction amount. The low sale price allowed the partnership to afford pursuing upgrades to the building.
Newmark reported that office building sales activity in the Cleveland market began to emerge from several quarters of uninspired action, though trade values and volume of deals continue to be below where they were prior to interest rates skyrocketing.
In November, a small, mixed-use office and retail building in the Cleveland State University-area of the central business district fetched the highest price per square foot for the quarter. The 12,686-square-foot property, located at 1938 Euclid Ave., was purchased by Pro Land Holdings LLC for $2 million, or $157.65 per square foot, well above what traditional office buildings have sold for in recent quarters.
The Rose Building, Medical Mutual’s former headquarters located at 2060 E. 9th St. in the CBD submarket, officially sold to Spark GHC and Cleveland Construction for just under $11 million, or $28.74 per square foot. The building is slated for a $120 million conversion to apartments and a boutique hotel.
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