JLL Research

Cleveland | Q1 2017

Office Outlook

An in-depth look at the Cleveland office market. Analysis includes leasing, sales, construction and employment.

© 2017 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.

Q1 2017

Insight

Key Tower, Ohio’s tallest building and the centerpiece of the Cleveland Skyline, traded hands in the first quarter. Millennia Companies purchased the 1.3-million-square-foot office building along with a 400-room Marriott hotel and a 1,000-space parking garage for $267.5 million. Millennia will move its offices to Key Tower later this year followed by the headquarters of Forest City in the spring of 2018. The two companies will lease a combined 196,000 square feet, increasing occupancy in the tower to about 95.0 percent. Downtown Cleveland’s office market has improved significantly in recent years, thanks to the urban migration of office tenants and office-to-residential conversions. As it stands now, the three trophy office buildings in downtown Cleveland (Key Tower, 200 Public Square, and the Ernst & Young Tower) are more than 90.0 percent leased, a positive indicator on the market’s health.

Office demand is also strong in the suburbs, prompting the first speculative office developments in years. Developers are particularly bullish on the East submarket where three projects are under construction: Pinecrest (150,000 square feet) in Orange, Van Aken (66,000 square feet) in Shaker Heights, and Highlands Center (47,000 square feet) in Beachwood. All three of these properties have secured preleasing commitments, signaling a willingness by companies to pay a rent premium for well-located, modern office space.

OutlookCleveland’s strengthening economy will translate into increased office demand in 2017. Downtown Cleveland will remain a key beneficiary of this growth, with declining office vacancy and increased investor interest. The pace of preleasing will pick up at the speculative office developments in the East submarket. And finally, we will be watching the burgeoning Midtown submarket closely this year. This neighborhood is seeing increased interest from tenants and developers, and we think 2017 will be a breakout year.

Fundamentals Forecast

YTD net absorption 3,570 s.f. ▲Under construction 263,000 s.f. ▶Total vacancy 19.0% ▶Average asking rent (gross) $18.79 p.s.f. ▲Concessions Falling ▼

-250,000

250,000

750,000

2013 2014 2015 2016 YTD

2017

Supply and demand (s.f.) Net absorptionDeliveries

Increased demand from the business community prompts speculative office developments

20.6%

19.9% 20.0%

19.0% 19.0%

2013 2014 2015 2016 2017

Total vacancy

$10.00

$15.00

$20.00

$25.00

2013 2014 2015 2016 2017

Average asking rents ($/s.f.) Class AClass B

• Key Center sold for a blockbuster $267.5 million. Millennia and Forest City will move into the office tower, increasing occupancy to 95.0 percent.

• Three speculative office developments are under construction in the East submarket. Look for preleasing at these projects to accelerate in 2017.

• Tenant interest in the Midtown submarket is growing, prompting Hemingway to move forward with its Link 59 office development.

Cleveland Office Outlook

© 2017 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.

Q1 2017

Statistics

Cleveland Office Outlook

ClassInventory

(s.f.)

Total net

absorption

(s.f.)

YTD total net

absorption

(s.f.)

YTD total net

absorption

(% of stock)

Direct

vacancy (%)

Total

vacancy (%)

Average

direct asking

rent ($ p.s.f.)

YTD

completions

(s.f.)

Under

construction

(s.f.)CBD Totals 15,345,311 66,095 66,095 0.4% 20.0% 20.5% $19.56 0 0Northeast Totals 557,695 -35,005 -35,005 -6.3% 29.4% 30.1% $15.61 0 0East Totals 3,779,116 7,806 7,806 0.2% 12.9% 14.1% $20.28 0 263,000Southeast Totals 992,906 -23,661 -23,661 -2.4% 11.1% 12.8% $17.31 0 0South Totals 4,788,748 -35,021 -35,021 -0.7% 18.0% 18.2% $17.94 0 0Southwest Totals 1,096,322 -8,525 -8,525 -0.8% 30.0% 30.0% $16.88 0 0West Totals 1,939,302 31,881 31,881 1.6% 12.3% 12.3% $16.14 0 0Suburbs Totals 13,154,089 -62,525 -62,525 -0.5% 16.7% 17.2% $17.92 0 263,000Cleveland Totals 28,499,400 3,570 3,570 0.0% 18.5% 19.0% $18.79 0 263,000

CBD A 5,854,816 11,146 11,146 0.2% 13.4% 14.1% $24.15 0 0East A 1,787,285 5,434 5,434 0.3% 10.0% 11.2% $23.14 0 263,000Southeast A 241,105 0 0 0.0% 0.1% 7.2% $23.00 0 0South A 1,839,945 -22,459 -22,459 -1.2% 14.5% 15.0% $21.12 0 0Southwest A 88,000 0 0 0.0% 6.4% 6.4% $0.00 0 0West A 539,951 8,940 8,940 1.7% 4.5% 4.5% $19.99 0 0Suburbs A 4,496,286 -8,085 -8,085 -0.2% 10.6% 11.6% $21.81 0 263,000Cleveland A 10,351,102 3,061 3,061 0.0% 12.2% 13.0% $23.17 0 263,000

CBD B 9,490,495 54,949 54,949 0.6% 24.0% 24.4% $18.17 0 0Northeast B 557,695 -35,005 -35,005 -6.3% 29.4% 30.1% $15.61 0 0East B 1,991,831 2,372 2,372 0.1% 15.6% 16.7% $18.75 0 0Southeast B 751,801 -23,661 -23,661 -3.1% 14.6% 14.6% $17.29 0 0South B 2,948,803 -12,562 -12,562 -0.4% 20.2% 20.2% $17.09 0 0Southwest B 1,008,322 -8,525 -8,525 -0.8% 32.1% 32.1% $16.74 0 0West B 1,399,351 22,941 22,941 1.6% 15.4% 15.4% $15.70 0 0Suburbs B 8,657,803 -54,440 -54,440 -0.6% 19.9% 20.2% $17.05 0 0Cleveland B 18,148,298 509 509 0.0% 22.0% 22.4% $17.63 0 0

© 2017 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.

Q1 2017

Construction

Cleveland Office Outlook

Address: 5900 E. 59 Street Square feet: 62,000Tenant: TBDOwner: Hemingway Development

Estimated completion: Q3 2017

Address: 3910 Orange PlaceSquare feet: 150,000Tenant: Alliance PrimeOwner: Fairmount Properties

Estimated completion: Q3 2018

Estimated completion: Q1 2018

Estimated completion: Q3 2017

Address: 20159 Van AkenSquare feet: 66,000Tenants: ABA, RMS, and othersOwner: RMS Investment

Address: 3900 Park East Square feet: 47,000Tenant: GlenmedeOwner: Palmieri Enterprises

© 2017 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.

Q1 2017

Leasing

Cleveland Office Outlook

This report analyzes leasing activity ≥ 5,000 square feet over a 12 month period, ending March 31, 2017.

Leasing activity by size

2,005,227

109

1,178,325

706,358

120,544

1,084,093

921,134

Growing Shrinking Stable

1,059,226

859,976

86,025

Notable leasing transactions

Submarket Size Footprint

CBD 148,000 Direct Stable

East 115,000 Direct Stable

CBD 107,000 Direct Growing

CBD 88,000 Direct Growing

CBD 79,000 Direct Stable

CBD 52,000 Direct Stable

CBD 48,000 Direct Growing

Southwest 46,000 Direct Stable

CBD 45,000 Direct Stable

Midtown 43,000 Direct Growing

CEOGC 1801 Superior Avenue

IBM 9500 Euclid Avenue

Hyatt Legal Plans 1111 Superior Avenue

Victory Capital 4900 Tiedeman Road

McDonald Hopkins 600 Superior Avenue

Taft 200 Public Square

New York Life Insurance 200 Public Square

PriceWaterhouseCoopers 200 Public Square

Forest City Enterprises 127 Public Square

Progressive Insurance 5920 Landerbrook Drive

Tenant Address Type

Leasing activity by transaction type

New Lease

Renewal

Expansion in building

Tenant footprint Leasing activity by industry Leasing activity by submarket

21 6 82

12 months at a glance

Class B leasing (s.f.)

Class C leasing (s.f.)

Leasing activity (s.f.)

Number of transactions

Class A leasing (s.f.)

Suburban leasing (s.f.)

CBD leasing (s.f.)

4

1

5

18

81

-

200,000

400,000

600,000

800,000

80,000+ 60,000-79,999 40,000-59,999 20,000-39,999 5,000-19,999

Total leased Number of leases

-

200,000

400,000

600,000

800,000

Q2 2016 Q3 2016 Q4 2016 Q1 2017

Historical leasing activity

#

Leasing activity by industry (s.f.) Leasing activity by submarket (s.f.)

54%

18%

13%

8%CBD

South

East

West

Midtown

Other

37%

34%

12%

8%7% Professional and business services

Finance

Public and private institutions

Construction and development

Commercial

Other

© 2017 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.

20%

18%

14%13%

12%

9%

6%

Educational & Health Services

Trade, Transportation & Utilities

Professional & Business Services

Government

Manufacturing

Leisure & Hospitality

Financial Activities

Other Services

Mining, Logging & Construction

Information

Q1 2017

Employment

Cleveland Office Outlook

4.7%U.S. unemployment

1.7%U.S. 12-month job growth

6.6%Cleveland unemployment

.4%Cleveland 12-month job growth

5.0%Ohio unemployment

0.6%Ohio 12-month job growth

0.0%

0.7%

1.4%

2.1%

2.8%

2013 2014 2015 2016 2017

Cleveland U.S.

-4,900

-600

-300

200

700

700

800

2,200

3,700

8,400

-10,000-8,000-6,000-4,000-2,000 0 2,000 4,000 6,000 8,000 10,000

Manufacturing

Professional & Business Services

Information

Mining, Logging & Construction

Trade, Transportation & Utilities

Other Services

Financial Activities

Government

Leisure & Hospitality

Educational & Health Services

-5.0

0.0

5.0

10.0

2013 2014 2015 2016 2017

Professional & Business Services Information

Government Financial Activities

0%

4%

8%

12%

900,000

1,000,000

1,100,000

2013 2014 2015 2016 2017

Employment Unemployment

Employment vs. unemployment rate

Employment by industry Office employment trends (12-month change, 000s)

Job growth by sector (12-month change)

Job growth (12-month change)

Job growth by sector (12-month change)

© 2017 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.

Andrew BatsonVice President, Director of Research+1 216 937 4374andrew.batson@am.jll.com

Noah BillResearch Analyst+1 216 937 4381noah.bill@am.jll.com

About JLL

JLL (NYSE: JLL) is a leading professional services firm that specializes in real estate and investment management. AFortune 500 company, JLL helps real estate owners, occupiers and investors achieve their business ambitions. In 2016, JLL had revenue of $6.8 billion and fee revenue of $5.8 billion and, on behalf of clients, managed 4.4 billion square feet, or 409 million square meters, and completed sales acquisitions and finance transactions of approximately $136 billion. At year-end 2016, JLL had nearly 300 corporate offices, operations in over 80 countries and a global workforce of more than 77,000. As of December 31, 2016, LaSalle Investment Management has $60.1 billion of real estate under asset management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit www.jll.com.

About JLL Research

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