KNOWLEDGE REPORT

The Office Market Takes a Pause

MARKET STATS AT A GLANCE

Office Research & Forecast Report Q3 2020Colliers International | Greater Cincinnati

The Cincinnati office market recorded its second consecutive quarter of occupancy loss in excess of 100,000 square feet, as net absorption during the third quarter of 2020 totaled negative 114,897 square feet. This brings the year-to-date total net absorption to negative 283,023 square feet, compared to positive 176,182 square feet through the same time period last year.

Overall market vacancy increased by an additional 20 basis points (bps) during the quarter to 14.4%. While certainly on the rise, vacancy has remained fairly stable over the past five years as properties converted to new uses were removed from the inventory and little new speculative product was added to the market.

While leasing remained active during the quarter, the average transaction size decreased by 56%. As has been the case since the onset of COVID-19 and subsequent, government-mandated lockdowns, large corporations have put their requirements on hold in order to re-assess their long-term real estate strategies.

In contrast to other major office markets, Cincinnati has yet to see a barrage of sublease space come to the market. Sublease availability was on the decline until recently, when Fifth Third Bank announced that they would be vacating 195,000 square feet in the AT580 property downtown and offering this space for sublease. It is anticipated that others will be making similar announcements. Total sublease availability of 684,924 square feet currently represents 1.1% of total inventory.

Most of the region’s submarkets suffered losses or, at the least, recorded negligible activity during the quarter. Exceptions included the Tri-County submarket, which posted a gain of 42,189 square feet and Kenwood with positive net absorption of 33,306 square feet.

Of the eight office projects under construction, totaling 918,500 square feet, only two will deliver vacant space to the market upon completion. The 180,000-square-foot Uptown Gateway Bldg 2 in the Uptown Innovation Corridor and the renovation of the 12,500-square-foot Brunswick Commerce Lofts downtown are the only two projects in the pipeline that are speculative.

Overall market asking rental rates, currently averaging $18.50 per square foot (full service/gross), have increased by nearly 2.0% year-over-year. Overall market Class A asking rents average $22.97 per square foot, an increase of 1.4% year-over-year. Class A asking rents in the Central Business District have increased over the past 12 months by 1.6% to $23.78 per square foot, while suburban Class A recorded a 1.7% gain to $22.64 per square foot.

MARKET ASKING RENT$18.50

(Psf/Yr, FSG)VACANCY RATE14.4%

-283,023YTD

ABSORPTION (SF)

918,500UNDER

CONSTRUCTION (SF)

Market IndicatorsRelative to prior period

Q3 2020

Q4 2020*

VACANCY

NET ABSORPTION

CONSTRUCTION

RENTAL RATE**

* Projected, relative to prior period** Class A rents

2 Cincinnati Research & Forecast Report | Q3 2020 | Office Market Outlook | Colliers International

Summary Statistics Q3 2020 Cincinnati Office Market Market CBD Suburban

Vacancy Rate 14.4% 11.0% 15.7%

Change From Q2 2020 (basis points) 20 50 40

Net Absorption (Thousand Square Feet) -114.9 -72.1 -42.8

New Supply (Thousand Square Feet) 0 0 0

Under Construction (Thousand Square Feet) 915.5 12.5 906.5

Asking Rents Per Square Foot Per Year FSG

Market $18.50

Market Class A $22.97

Downtown Class A $23.78

Suburban Class A $22.64

Office Leasing History

Leasing activity increased during the quarter, but remains on a pace that equals only half the volume recorded in 2019.

After growing above the national average, office employment took a major hit during the pandemic induced economic shutdown.

Office Employment

Rental rates continue to post steady growth over the past three years.

Office Average Asking Rates (FSG)

$16.00

$17.00

$18.00

$19.00

$20.00

$21.00

$22.00

$23.00

$24.00

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020YTD

$ PS

F (F

ull S

ervi

ce G

ross

)

Class A Rental Rate Overall Rental Rate

Through 3 quarters, occupancy losses total over 280,000 SF, the largest drop since the Great Recession.

Office Vacancy/Absorption

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

(400,000)

(200,000)

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020YTD

Vaca

ncy

Rate

(%)

Net

Abs

orpt

ion

(SF)

Net Absorption Vacancy Rate

0

20

40

60

80

100

120

140

160

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

1,000,000

# of

Lea

ses

Squa

re F

eet

5.0%

7.0%

9.0%

11.0%

13.0%

15.0%

17.0%

19.0%

21.0%

23.0%

160.0

170.0

180.0

190.0

200.0

210.0

220.0

230.0

240.0

250.0

260.0

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Vaca

ncy

Rate

(%)

Empl

oym

ent (

1,00

0's)

Office Employment Overall Market Vacancy

3 Cincinnati Research & Forecast Report | Q3 2020 | Office Market Outlook | Colliers International

Notable Office Leases | Q3 2020PROPERTY NAME/ADDRESS LEASE DATE LEASE SF TENANT NAME BUILDING CLASS SUBMARKET

136 N 3rd St Aug-20 85,875 Miami University B Tri-County

Wright's Summit II Sep-20 9,949 Rudler & Associates A Northern Kentucky

Governor's Pointe - 4705 Duke Dr Jul-20 9,352 Vanderlande Industries A I-71 North

Eastgate Professional Office Park IV Aug-20 8,571 Wellington Specialty Surgery Ctr B East

1600 Central Pky Sep-20 8,414 Samuel Adams Brewing Co B CBD

Fountain Pointe II Jul-20 5,939 NewVista B Blue Ash

6159 1st Financial Dr Aug-20 5,506 Boone County Transportation Cabinet B Northern Kentucky

Kenwood Crossing II Jul-20 5,394 OrthoCincy Medical Kenwood

*Renewal **Sublease

Notable Office Sales | Q3 2020

PROPERTY NAME/ADDRESS SALE DATE SALE PRICE BLDG SF BUYER SELLER CLASS SUBMARKET

7794 & 7810 Five Mile Rd Jun-20 $21,095,000 75,075 Bethesda Hospital Inc Hemmer Management Group Medical East

5300 Kings Island Dr Jul-20 $9,344,388 143,330 HJH Investments Lone Star Funds B I-71 North

2765 Chapel Pl Jul-20 $6,831,000 41,047 Cincinnati Children's Hospital Medical Ctr Hemmer Management Group Medical NKY

1171 State Route 28 Jul-20 $5,050,000 15,000 IRA Capital LLC Schuermann Properties Medical East

360 Knollcrest Dr Jul-20 $1,290,000 14,500 DOV Limited Alexander & Associates Co B Midtown

4565 E Galbraith Rd Sep-20 $1,260,000 5,956 O'Brien Family Real Estate LLC Camden Homes B Kenwood

4 Cincinnati Research & Forecast Report | Q3 2020 | Office Market Outlook | Colliers International

As the COVID-19 pandemic continues to impact the normal operation of American businesses and the U.S. economy, the office market remains in limbo. Predictions authored one day, are contradicted on the next as new information surfaces; ie, tech giant, Facebook, starts planning for permanent remote workers. Facebook signs 730,000-square-foot lease in Midtown Manhattan. Facebook buys REI’s elaborate new headquarters in Seattle.

With so much uncertainty, it is difficult to identify the trends that will impact the U.S. office market in the coming years. In general, smaller companies remain active in the office leasing market, while large corporate occupiers have mostly gone quiet, waiting to see when the availability of vaccines and effective treatments will allow them to return large numbers of employees safely back to the workplace.

The great work-from-home (WFH) experiment continues across the country, and throughout the world. In Colliers’ initial workplace survey, conducted in May, 2020, the responses were overwhelmingly positive with regard to productivity, effectiveness and engagement. One finding indicated that 83% wished to continue working from home at least one day a week permanently, post-COVID. Respondents desiring to work permanently from home two or three days per week were surprisingly high as well.

This, and other studies, prompted many C-suite executives to immediately state that they would certainly be reducing the overall footprint of their office space portfolios in the near future according to a report by PricewaterhouseCoopers.

A follow up workplace survey is currently being analyzed by Colliers workplace solutions group and will be released soon, but evidence is emerging that the initial reports may have been a bit overly optimistic. As the pandemic drags on, work-from-home fatigue appears to be setting in. Companies are reporting decreases in productivity, while employees are having difficulty separating their work and home lives, increasing stress levels. Companies also worry about a decline in the collaboration that spurs ideation and innovation, as well as a loss of culture and employee engagement.

In an interview with CNBC, Boston Properties CEO, Owen Thomas said, “Remote work is not an acceptable replacement for the in-person interactions that happen in the office space.” Occupiers and their employees appear to agree. Attendees of a webinar conducted by CrowdComfort, HqO and Openpath responded that “they still look

to their workplace for not only a sense of community (67%), but collaboration (83%) with others.”

What this suggests is the emergence of a hybrid model that includes physical office space and remote work options. According to Kate North, Colliers Vice President, Workplace Advisory, “flexibility and choice” are the #1 non-cash benefit across all generations. However, there is not a one-size fits all strategy for a hybrid workplace model. The workplace strategy will vary by industry, company culture and other factors and should be developed using data and test scenarios to determine the best plan for each individual organization.

Ms. North also suggests, “Getting employees involved in the co-creation of the office space will make your solution better, plus their engagement and ideas will add new insights. And of course, make sure to integrate a robust change communication and management strategy.” Being pro-active during this time, before the return to the office, will create a competitive advantage in productivity, attraction/retention of talent and possible cost reductions.

As the world emerges from the current pandemic-induced crisis, demand for office space will return. Its purpose will change and continue to evolve, but it will remain central to the functioning of modern corporations. As was the case in 1897 with Mark Twain, today’s reports of the death of the office are greatly exaggerated.

Does Work-From-Home Spell the End for the Office Market?

5 Cincinnati Research & Forecast Report | Q3 2020 | Office Market Outlook | Colliers International

Cincinnati | Q3 2020 Office Submarket Data

MARKET # OF BLDGS

INVENTORY(SF)

TOTALAVAILABLE

(SF)

TOTAL VACANT

(SF)

TOTAL VACANCY RATE

(%)

SUBLEASE AVAILABLE (SF)

QTRLY NET ABSORPTION

(SF)

YTD TOTAL NET ABSORPTION

AVG WTD ASKING RATE

(FSG)

CBD 115 16,689,522 2,124,039 1,835,163 11.0% 290,195 -72,067 3,510 $20.89A 20 8,272,745 994,338 945,654 11.4% 92,245 -48,289 -6,978 $23.78

B 71 7,549,848 1,080,495 850,153 11.3% 195,650 -31,664 -16,688 $18.13

C 24 866,929 49,206 39,356 4.5% 2,300 7,886 27,176 $15.18

CBD PERIPHERY 74 3,537,667 938,872 888,095 25.1% 0 -15,020 -6,030 $17.06A 7 1,052,300 472,474 469,851 44.6% 0 0 13,915 $21.59

B 44 1,645,482 336,800 300,746 18.3% 0 -13,863 10,860 $16.41

C 23 839,885 129,598 117,498 14.0% 0 -1,157 -30,805 $12.47

BLUE ASH 112 5,566,782 1,465,950 1,029,979 18.5% 95,119 -83,110 -46,759 $20.54A 25 2,580,315 693,208 475,330 18.4% 47,023 -39,582 31,190 $23.85

B 78 2,822,106 737,950 519,857 18.4% 48,096 -48,259 -73,939 $17.78

C 9 164,361 34,792 34,792 21.2% 0 4,731 -4,010 $11.53

EAST 82 3,073,572 669,979 655,222 21.3% 9,725 -17,498 -37,181 $15.61A 9 822,078 33,801 33,801 4.1% 0 -5,347 6,426 $24.01

B 43 1,313,385 334,200 330,700 25.2% 4,643 -5,763 -28,839 $18.98

C 30 938,109 301,978 290,721 31.0% 5,082 -6,388 -14,768 $10.91

I-71 CORRIDOR NORTH 68 5,256,097 1,132,028 906,470 17.2% 155,295 13,452 -253,489 $20.54A 22 2,921,620 802,223 605,590 20.7% 150,297 -12,454 -319,768 $21.93

B 43 1,942,324 236,009 207,084 10.7% 4,998 -4,108 36,265 $18.01

C 3 392,153 93,796 93,796 23.9% 0 30,014 30,014 $17.52

I-75 CORRIDOR NORTH 59 2,464,048 250,711 242,008 9.8% 9,054 -6,093 17,232 $21.01A 19 1,660,162 141,236 133,469 8.0% 7,767 -2,071 26,694 $24.04

B 35 721,142 105,988 105,052 14.6% 0 -4,935 -10,375 $17.37

C 5 82,744 3,487 3,487 4.2% 1,287 913 913 $13.00

KENWOOD/MONTGOMERY 52 2,357,689 247,129 209,231 8.9% 27,523 33,306 18,772 $20.54A 10 1,325,474 65,963 43,134 3.3% 26,439 37,563 25,738 $29.11

B 33 842,801 181,166 166,097 19.7% 1,084 -4,257 -6,966 $18.37

C 9 189,414 0 0 0.0% 0 0 0 - -

MIDTOWN 90 5,179,602 337,616 286,305 5.5% 58,124 8,877 -154 $18.74A 25 2,528,440 117,483 82,291 3.3% 41,124 0 -11,397 $28.27

B 43 1,812,402 91,205 79,205 4.4% 17,000 -3,947 -3,735 $17.40

C 22 838,760 128,928 124,809 14.9% 0 12,824 14,978 $13.84

NORTHERN KY 144 5,968,826 728,546 708,587 11.9% 18,676 1,527 12,504 $18.71A 40 2,397,671 476,465 437,623 18.3% 18,676 -18,915 -20,482 $19.95

B 91 3,312,958 222,377 241,260 7.3% 0 20,442 26,638 $16.94

C 13 258,197 29,704 29,704 11.5% 0 0 6,348 $16.50

NORTHERN KY RIVERFRONT 37 2,292,026 244,704 178,427 7.8% 17,399 -25,748 -6,218 $18.95A 5 1,469,768 116,622 107,670 7.3% 17,399 -25,144 11,774 $23.01

B 24 568,742 78,580 21,255 3.7% 0 0 -2,455 $16.74

C 8 253,516 49,502 49,502 19.5% 0 -604 -15,537 $14.00

TRI-COUNTY 129 7,270,478 1,762,725 1,651,748 22.7% 2,214 42,189 8,542 $14.58A 8 1,012,416 142,535 142,535 14.1% 0 -2,432 -34,993 $21.04

B 89 5,354,023 1,372,749 1,272,538 23.8% 2,214 34,182 16,458 $14.44

C 32 904,039 247,441 236,675 26.2% 0 10,439 27,077 $11.21

WEST 39 934,366 151,999 142,999 15.3% 1,600 5,288 6,248 $14.60A 3 116,646 0 0 0.0% 0 0 0 - -

B 29 636,072 104,206 95,206 15.0% 1,600 2,032 8,642 $15.94

C 7 181,648 47,793 47,793 26.3% 0 3,256 -2,394 $11.77

Grand Total 1,001 60,590,675 10,054,298 8,734,234 14.4% 684,924 -114,897 -283,023 $18.50

6 Cincinnati Research & Forecast Report | Q3 2020 | Office Market Outlook | Colliers International

Cincinnati | Office Submarket Map

*The statistics reported herein are calculated based on a standardized set of properties including office properties 10,000 square feet and greater, single and multi-tenant and competitive owner-occupied buildings. Office buildings occupied by medical and governmental are not included as well as properties designed for a specialized end user.

438 offices in 68 countries on 6 continentsUnited States: 155 Canada: 48 Latin America: 20 Asia Pacific: 94 EMEA: 119

OFFICE BROKERAGE SERVICES | contactShenan P. Murphy, CCIM

CEO/Principal | Cincinnati & Dayton

Fred A. Macke, Jr.Brokerage Senior Vice President

Richard P. MederBrokerage Senior Vice President

John P. Schenk CCIM, SIOR Brokerage Senior Vice President

Matthew H. SmythBrokerage Senior Associate

Greg GillottBrokerage Associate

Thomas J. Drought, IIIBrokerage Associate

FOR MORE INFORMATIONLoren M. DeFilippo, CCIM

Director of Research | Ohioloren.defilippo@colliers.com

Catherine Williams Director of Marketing & Public Relations

catherine.williams@colliers.com

Alex Cate Research Analyst

alex.cate@colliers.com

+1 513 721 4200

Accelerating success.

Copyright © 2020 Colliers International.The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.

Colliers International | Greater Cincinnati425 Walnut Street, Suite 1200Cincinnati, OH 45202+1 513 721 4200colliers.com/cincinnati

Colliers International is a global full service commercial real estate firm. For additional information on Project Management, Corporate Solutions, and Real Estate Management Services, contact us today:

Paul Plattner, CPM SVP Real Estate Management Servicespaul.plattner@colliers.com

Shenan P. Murphy, CCIM CEO, Principal shenan.murphy@colliers.com

Joe Wiles Managing Directorjoe.wiles@colliers.com