Office market trending toward smaller, high-quality spaces as challenges remain

Mac Biggar, president of Hanna Commercial, said there are two camps at work in the office market. On the one hand, there are companies that know how they want their offices to operate in the future and will go for longer-term deals.

“They know if they want to go to permanent hybrid offices (which mix in office and work-from-home requirements) and their businesses will survive,” Biggar said. “There is another group that will do short-term leases or sublease space while they make up their mind and want something to go to. Most everyone is looking to reduce how much space they have.”

For years, newer, better-designed and -located offices have continued to gain occupancy while woes worsen for buildings more than 30 years old.

“Consistently across all U.S. markets, mainly as companies try to figure out how to attract their employees back to the office, we are seeing more companies leaning toward Class A (prime) properties and mixed-use environments,” said Michael Cantor, managing director of Allegro Real Estate Brokers & Advisors of Cleveland.

While that bodes well for the top of the market, it’s likely to aggravate conditions among older buildings, particularly downtown.

Another sign of increasing stability is found in tenants committing to space for more time.

“At the beginning of the pandemic, there was a pretty big pull-back on lease terms and commitments. Now we’re back to what we were seeing in 2019,” said J.R. Fairman, a JLL senior vice president, as businesses reevaluate how they work and how much time they want staffers to be in the office. He said he’s seen tenants ranging in size from 2,500 to 160,000 square feet align their offices to in-office work weeks of less than five days.

Russell Rogers, a senior vice president at the Cleveland office of Colliers, said he has been pleased with the volume of leasing action so far this year among downtown Cleveland’s trophy buildings such as Key Tower and 200 Public Square. He said the market is more active than it has been since 2019.

However, Pietro predicts that, “unless something happens that I’m missing, it’s Armageddon for class B office space downtown, and it’s not just in Cleveland.”

Multiple experts say that it’s good that downtown Cleveland has had so much experience converting old buildings to new apartments, particularly when real estate developers can use historic tax credits to help raise capital for renovations.

Meantime, another factor is surfacing that may roil the office market.

“The cost of building materials and getting them in is just astronomical,” Davison said, so outfitting new offices will be significantly more expensive. That promises to boost the push for smaller offices as a way to control rent costs that was gaining in popularity before the pandemic.

Gino Faciana, co-CEO of corporate services provider Pleasant Valley Corp. of Medina, said at the beginning of the pandemic many thought the private offices of the 1980s might return.

“I don’t think that’s obtainable,” he said, given climbing cost concerns.

Michelle Jarboe contributed to this report.