Reichle Klein Group's 2023 Midyear Office Overview
The Toledo, Ohio office space market overall is in a tough place based on the results of Reichle Klein Group’s 2023 mid-year survey of the market. Our year end 2022 report suggested that bad news was on the horizon, and it has arrived in the market metrics that we follow. It’s not the only reason behind the dramatically weaker numbers, but clearly the pandemic has left its mark on the Toledo office market as it has on office markets everywhere. Unfortunately, we foresee that the market will get worse over at least the next six to twelve months. At this point it is impossible to say that it will never be the same or that it will not bounce back, only that there will clearly be some generalized pain for landlords in the next year or two.
Having stated this, the picture is not entirely bleak. There are some bright spots. The numbers convey a tale of two markets – CBD versus suburbs, corporate users versus small businesses. The big problems are largely focused in the central business district and among larger buildings that primarily serve corporate users, many of which have closed offices, are attempting to lease or sublease their space or are taking the first opportunity that their leases provide to shrink their footprints. Two of the leases listed among the top transactions later in this report, USI and New York Life, are examples of companies relocating into smaller space than they left.
The suburban submarkets are actually fairing pretty well by comparison, at least so far. Here, where the buildings are smaller and attractive to small and local businesses, demand for space barely wavered in the face of the pandemic. The companies that own or lease spaces in the suburban buildings are generally not struggling to get employees back to the office largely because they never left. The owners of these businesses seemed to see the pandemic disruption as a buying opportunity or an opportunity to improve their space or lease terms. Consequently, the market remained active throughout the pandemic and has into the first half of 2023. Building sale transactions have been plentiful and there have been a surprising number of lease transactions completed or currently being negotiated.
To frame the disparities, where the CBD suffered 291,236 square feet of negative net absorption in the first half of 2023, the South/Southwest submarket absorbed 86,445 square feet and the West Toledo submarket absorbed 35,420 square feet. Vacancies are down from year end 2022 in both of these suburban submarkets and the average asking rental rate in the South/Southwest submarket is up modestly from year end. The positive absorption that occurred in these submarkets helped blunt the impact of ProMedica’s earlier relocation of suburban operations to their CBD buildings and provided some breathing space to these landlords.
This is not to suggest that there are no suburban buildings struggling with high vacancies because there are. Further the suburban buildings face the same generalized issues as downtown office buildings do like lower effective rental rates, sharply increased operating expenses and construction costs and higher interest rates, all of which make tenant improvements or needed capital projects a challenge and serve to make deals harder to pencil out.
As our mid-year survey was wrapping up, news of the implosion of Bitwise Industries emerged. Bitwise is/was a tech company with a quasi-altruistic mission to train the underserved for roles in computer programing and operator of tech focused co-working space for which the 110,000 square foot Jefferson Center in the Uptown neighborhood downtown was to be extensively renovated. The building was to have been delivered for their occupancy in late June or early July 2023 when the news broke. The future of the building is uncertain at the time this report is being written, though it seems certain that Bitwise will never occupy it and that it will be placed on the market. For the purposes of this report, we chose to continue to carry the building in the status of under construction. Had we moved it to delivered status, obviously vacancy in the CBD and overall would have been higher yet.