Vacant office space in the Toledo-area market is growing, but while the selection is getting bigger, many companies seeking new digs are discovering what they want costs way more than imagined or are prepared to spend.
The new Tower on the Maumee is located at 200 North St. Claire St. in downtown Toledo. The 28-story building was originally built in 1969 to house the headquarters of Owens Corning. After laying vacant for two decades, it's been renovated by the Douglas Company.
That’s the conclusion of a midyear 2018 MarketView Toledo Office report prepared by local commercial real estate company the Reichle Klein Group.
The office vacancy rate as of July 1 was 18 percent, up from 17.4 percent at the end of 2017. The report said that rise was due mainly to the re-opening downtown of the former Fiberglas tower, mothballed for 20 years and then redeveloped and renamed the Tower on the Maumee, which added more than 200,000 square feet of office space to the mix.
Reichle Klein said despite opening with a new tenant, Directions Credit Union, most of the space in the tower “was vacant upon delivery.”
In the Central Business District alone, the vacancy rate for top-rated Class A space rose from 15.4 percent to 23.5 percent. The overall downtown vacancy rate rose from 19.9 percent at year end to 23.3 percent in the first half of the year.
Of other submarkets, the North/East had an increase of 1.2 percent, while vacancy rates dropped from 0.1 to 2.4 percent in the Perrysburg/Northwood, South/Southwest, and W. Toledo/Sylvania submarkets.
Though the overall market vacancy rate increased with the opening of Tower on the Maumee, overall the office market was deemed stable by Reichle Klein with leasing rates rising from $16.35 a square foot at the end of 2017 to $17.66 a square foot at the start of July.
The report said surveys indicate the leasing market remained “fairly active” in the first half of 2018.
However, it noted an emerging trend affecting the market in general — rising demand to renegotiate existing leases in order to radically update the look and functionality of existing office space.
“The result is accelerated obsolescence of buildings and space, and that many businesses feel the need to relocate to procure the type of space that they feel they need,” the report said.
Jason Westendorf, an office market specialist with Reichle Klein, said one out-of-town client seeking office space in Toledo said the issue is the result of a “war for talent.”
Many companies pursuing Millennial job applicants are finding the location and quality of their existing office space often is frowned upon by such applicants, giving employers with better workspaces a recruiting advantage, Mr. Westendorf said.
“Largely, (Millennials) are influencing the decision-makers,” he said.
In the Toledo market, that has meant required building renovations not only among downtown properties but also in the suburbs, where office space was built largely in the 1980s and 1990s with interior design trends reflecting those eras.
“Millennials are needing places to walk to entertainment, living space to walk to work. The changes are about creating a work environment that is more aesthetically pleasing. But it’s also about a more functional work environment,” Mr. Westendorf said.
That translates to a more open concept, with a center gathering area and perimeter offices that offer ambient light and access to views.
“It can get more costly when moving lighting and HVAC,” Mr. Westendorf said.
In years past on a per square foot basis, a traditional renovation featuring new carpeting, some wall movement, lighting, and power changes might cost $20 to $25 per square foot, he said.
The type of changes tenants now seek could range between $65 and $110 a square foot.
“Even now in suburban renovations, if we’re just opening up a ceiling you could see an increased cost $15 to $30 a square foot just for that renovation,” Mr. Westendorf said.
“What it’s done is it’s forced landlords to offer more tenant improvements as part of the lease terms. That’s partially why lease rates are going up,” he added.
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