2nd-tier office vacancies up sharply in '07 in Toledo area

WHEN law firm Spengler Nathanson decided to leave its longtime home in the former Fifth Third Center for nicer offices at Four SeaGate, it wasn t because of the river views that the new building affords.

It was to follow a steady client, Fifth Third Bank, which relocated its regional offices across the street to One SeaGate, now known as Fifth Third Center at One SeaGate.

It s a long-standing and valued client of ours, explained managing partner Tim Greenwood. We wanted to remain in close physical proximity to provide the best service.

In making the move, the law firm joined a parade of businesses that took advantage of competition among owners of office buildings to move up to top-notch locations from so-called second tier office space.

Overall office vacancies in Toledo and its suburbs rose to 17 percent at the end of 2007 from 15 percent at the same time last year, according to the local commercial realty CB Richard Ellis/Reichle Klein.

And that second-tier space, known as Class B, was hit especially hard.

In Toledo s downtown area, which has a huge concentration of such offices, one-third of Class B space was empty at year s end, compared with 17 percent in late 2006.

The development was, in large part, a result of the game of office musical chairs that began when glass-maker Owens-Illinois Inc. moved its world headquarters from One SeaGate to suburban Perrysburg and Fifth Third agreed to become lead tenant of the downtown building.

Despite the increase in office vacancies, real estate agents say that the area s commercial real estate sector held up fairly well last year.

Among stores, restaurants, and other retail sites, vacancy rates were essentially flat at 14 percent in metro Toledo, the CB Richard Ellis report found.

And although more space was vacated than was rented in area factories and warehouses, the overall vacancy rate in that sector rose to a modest 7 percent from 6 percent at the end of 2006.

It s a typical Toledo market, said Harlan Reichle, managing director at CB Richard Ellis/Reichle Klein. It s slow, steady. It s not on fire and it s not dead in the water.

In the office sector, vacancies rose in downtown Toledo to 22 percent from 20 percent, and in suburban areas to 13 percent from 11 percent. Even Arrowhead Park, a premier office site in Maumee, has space for lease.

Putting the best light on the situation, office expert Jeremy Miller, of CB Richard Ellis, pointed out that vacancies in the highest-quality buildings known as Class A fell to 19 percent from 22 percent downtown. Most renters came from lower-quality buildings.

It appears people are moving up, Mr. Miller said.

The report doesn t count long-vacant buildings and those deemed obsolete, including the former Fiberglas Tower in downtown Toledo.

In area retail, growth and potential growth continued, such as an expansion at Wal-Mart stores, construction of the area s first Bass Pro Shops outlet, and site searches by auto parts stores interested in opening in the area.

Overall, stores and restaurants occupied more space 682,000 square feet more than they left last year.

That doesn t include the new open-air mall in Maumee, Shops at Fallen Timbers, where the anchor tenants include Dillard s and J.C. Penney Co.

Not part of the survey are malls and mall-type centers, such as the nearly empty Southwyck Shopping Center.

Westgate Village Shopping Center in west Toledo underwent a massive renovation last year and opened with new buildings and tenants, including the area s first Costco Wholesale Corp. store.

But it isn t a perfect picture.

In signs of potential trouble, rents slipped last year in retail to $8.55 a square foot per year, which was 7 percent less than the $9.17 sought at the end of 2006, CB Richard Ellis found.

Experts are predicting a decline in construction of big-box stores because the national economy is slumping and expansion-minded chains like Menards home-improvement stores have already opened here.

Some of the lowest rents and highest vacancy rates are at older strip centers in less-traveled areas of Toledo, agents said.

But that isn t always the case.

Ramy Eidi, of Eidi Properties, owns an older strip center at Reynolds Road and Glendale Avenue that is fully leased with tenants including a Pizza Hut and a nail salon.

Down the street, across from Southwyck, a strip center finished more than a year ago has only two tenants: a small sandwich shop and an insurance office.

The reason, Mr. Eidi said, is that many prospective tenants are looking for lower rents available at older centers.

New centers must charge higher rents to pay for construction and generate profit for investors.

Mr. Eidi specializes in buying, renovating, and filling older strip centers. He said the 17 centers he owns have few vacancies.

Steve Serchuk, of the Toledo office of Signature Associates, said it speaks well for the retail real estate market locally that vacancies down to 13.6 percent as of Dec. 31 from 13.9 the previous year were essentially flat even as total non-mall space grew by 9 percent.

He said the closed Food Town grocery stores have been something of a drag on the market, but more action is likely in 2008 as property owners become more motivated with the expiration of lease agreements that have kept rental income flowing.

The Hemelgarn family-owned 21st Century Super Fitness chain is converting a former Food Town at Reynolds Road and Dorr Street to a large fitness club, he noted.

Mr. Serchuk also looks for redevelopment this year at the former Franklin Park Cinemas on Monroe Street.

Retail expert Germano Bressan, also of Signature, foresees a mixed year locally.

I think things will stay flat for a little bit, he said. Everybody is going to wait and see what happens with interest rates and what Congress does with incentives.

By far, the largest block of space in metro Toledo s commercial market is in factories and warehouses. At 87 million square feet, they occupy four times as much space as stores and restaurants and six times as much as offices.

Despite a tough year for the sector, average asking rents rose to $3.44 a square foot per year from $3.29 at the end of 2006, the CB Richard Ellis report found.

Still, more space a half-million square feet was emptied than was filled. That broke a 3 -year streak of rising occupancy.

Industrial experts at CB Richard Ellis expect an upturn in that market in the first half of this year. But that could change without a deal to restart Ford Motor Co. s huge Maumee Stamping Plant. The property isn t being marketed yet, agents said.

Bob Mack, an industrial expert at Signature Associates, said that although there is a perception that industry locally is dying a slow death, demand for such properties remains strong.

Large portions of the huge Doehler-Jarvis plant on Toledo s north side were occupied last year, nine years after the plant closed. The Toledo warehousing firm Willis Day snapped up 150,000 square feet, and a recycling firm rented a similar space.

Mr. Mack also pointed to FedEx s construction of an $87 million trucking hub in Perrysburg Township.

When auto-parts maker Lear Corp. left the area, its spot in a building in suburban Northwood had been vacant just one day when Parker Hannifin Corp., also an auto-parts producer, moved in.

But Ford wasn t the only plant to close. Newly empty is a pudding-packaging plant operated by ConAgra Foods Inc. in Perrysburg Township until mid-January.

Contact Gary Pakulski at:gpakulski@theblade.com or 419-724-6082.