Partly Cloudy or Partly Sunny?

Alex J. Pacella, CCIM

I’ve always been a fan of watching the weather forecast. I love seeing maps that show weather fronts, high- and low-pressure areas, storm systems and don’t even get me started on long-term forecasts. But one thing that I always felt is a “free pass” is the famous “partly cloudy / partly sunny” forecast. This seems to be a catch-all, as the optimistic interpretation is just a few wispy clouds, the pessimistic interpretation is an intermittent drizzle, and the actual result can be anywhere in between.

If there ever was a textbook example of “partly cloudy,” it would be the commercial real estate market in 2023. While everyone will agree that the market was not as strong as the past few years, few will share the exact same perception of the cloudiness. This month, I’m going to discuss some of the highlights from last year, including my armchair opinion, as well as a quick forecast for 2024.

Interesting times

Nothing can drag down a party faster than rising interest rates. After a long stretch of historically low rates, the Federal Reserve started an unprecedented run of 11 consecutive rate hikes. The primary intent was to damper inflation by gradually cooling the U.S. economy, but it came with a side effect of spiking mortgage rates. In an 18-month period, rates went from the low- to mid-3% range to the mid-to high-7% range. The impact has been widespread and particularly acute with regards to drastically curtailed sales volume and construction activity in the commercial real estate market. But the forecast is partly sunny. Last December, Fed Chairman Powell not only announced that rates would be unchanged for a third consecutive time but also intimated that rates could be cut up to three times this year.

Some were winners

While the office sector has been surrounded with uncertainty in the years following the pandemic, several area companies either made or announced significant moves last year. CBIZ moved to 58,000 square feet in the southern suburb of Independence and Ernst & Young relocated to 44,000 square feet in downtown Cleveland. Meanwhile, Oswald Companies announced plans to relocate to 100,000 square feet in downtown Cleveland and Park Place Technologies announced plans to acquire several buildings totaling 230,000 square feet in the eastern suburb of Mayfield Village. Finally, work continues on the one-million-square-foot headquarters for Sherwin-Williams in downtown Cleveland, with the project expected to be completed later this year.

The forecast for this year is partly cloudy, as there will be more moves announced, with most involving existing companies taking the opportunity to right-size – i.e., reduce their occupancy.

Some were losers

The broader office sector saw a steady number of properties fall victim to financial distress last year, with the downtown areas of Cleveland and Akron being particularly hard hit. The year started with Oswald Centre (625,000 square feet) being taken over by a special servicer and Fifth Third Center (570,000 square feet) met the same fate later in the year. Several other buildings either wrestled with ownership issues or were openly put on the market for sale. The story was even bleaker in downtown Akron, where five buildings totaling just over one million square feet all face uncertain futures. Huntington National Bank Tower (240,000 square feet) and the First Energy Building (335,000 square feet) are both owned by their respective namesakes, but each physically occupies only a fraction of the square footage. 1 Cascade Plaza (195,000 square feet) fell into receivership last fall while Akron Centre Plaza (195,000 square feet) is on the market for sale. Finally, the former Akron Beacon Journal building (230,000 square feet) has been vacant since the newspaper publisher moved out in 2019. The forecast for this year is decidedly partly cloudy, as there are no easy or obvious answers for stumbling office towers.

Loosen up

While the increasing vacancy rate has spelled big trouble for the office sector, it has been a boon to the industrial sector. Thanks to solid gross domestic product statistics through- out the year, manufacturing remained strong, resulting in continued demand for industrial space. But unlike past years, when virtually no space was available, the loosening of inventory created more opportunities for expanding companies to consider. Rental rates remained solid and most of the recently completed projects have been successful in finding new occupants. Great examples of this include the 434,000-square-foot lease completed at Gateway Commerce Center in Streetsboro with FNS and the 220,000-square-foot lease completed at Forward Innovation Center West with Victory Packaging.

The forecast for this year is partly sunny, as demand is expected to again be strong and new construction will continue to wind down.

Shopping and dropping

The retail sector continued to be a paradox. It’s been a couple decades since the rise of online shopping was predicted to spell the doom of traditional “bricks and mortar” retail. And for some companies, that proved to be true last year. Rite Aid finally filed for bankruptcy and was joined by Bed Bath & Beyond, Party City, David’s Bridal and Tuesday Morning. Meanwhile, other companies have not only survived but continued to thrive. Most have been in the fast-food category, such as Chic-Fil-A, Chipotle, Starbucks and Raising Cane’s. But several other categories flexed their muscles, including grocery, such as Aldi; value retail, such as Dollar General; and car washes, such as Sgt. Clean.

The forecast for this year is partly sunny; inflation is expected to remain in check, allowing for consumers to spend more of their dollars on retail goods and services.

People always like to say that if you don’t like the weather in Northeast Ohio, simply wait a day or two and it will change. Overall, 2023 had a similar theme; not many of us liked how things were going in a particular sector and during a specific stretch of time but if we were a little patient, things often changed. We should keep that in mind as we head into 2024 – there will be times when we think things are partly cloudy but if we can just be a little patient, things will certainly change.

Alec J. Pacella for Properties Magazine