“Office is dead.” How many times have we heard, read, or might have even said this statement in the past three years? Office demand isn’t “dead” it’s just hitting the reset button.
For example, in Cincinnati we have been seeing steady activity within the suburban markets along the I-71 corridor. Much of the activity is either subleases or users wanting smaller spaces, like flex-style or single-story properties with attractive rates and direct access to customers. We are seeing the same trend when it comes to medical office users, such as primary care practices, as they are moving away from larger healthcare systems and looking for their own space.
Unlike the suburban markets, the CBD area is adjusting to accommodate the conversion of office buildings into other uses, like multifamily and hotels. With several conversions being announced in 2022 it made many wonder what is going to happen to all the Class C office spaces. To be honest, those spaces are probably functionally obsolete anyway. If the office building isn’t being converted into another use, then it’s most likely going to undergo a major face lift. Office users are looking to either renovate their current spaces or find new spaces with attractive amenities to keep in-office employees. Did someone say nap pods?
As it comes to updating spaces for medical users the activity has slowed down and we have seen a trend of medical office buildings being sold before being fully built. This is due to the downgrading of credit thus making updates more expensive.
As interest rates continue to climb, pricing will likely fall as a means of investors targeting the same or higher levered return. Cap rates are up nearly 100 bps since the end of Q1 2022. This translates to a 10% to 15% decline in values through the balance of this year and will continue to deteriorate, at least until some stability can be realized in the capital markets. However, we’re continuing to see investors move forward.
Despite strong headwinds from the debt markets, Neyer Properties successfully completed the sale of 2 Crowne Point. Albeit at a reasonable discount, the deal underscores continued interest from buyers in office deals, especially when leased long-term to tenants with strong credit.
The sale of Atlantic Corporate Center at $157/SF proves that owner-users remain some of the strongest bidders for well-located, high-quality assets.
In the coming year we will see office demand sort itself out and predict that Cincinnati office space will stay in moderate demand.
