Do KeyBank tower problems spell trouble for Downtown offices?

Columbus real-estate experts were surprised by problems with a Downtown office tower but said it doesn't reflect Downtown's office market, which is showing signs of recovery.

The 21-story KeyBank building, at East Broad and 3rd streets, has started hemorrhaging tenants after months of complaints about the building's maintenance, suggesting that the owners, who acquired the building two years ago, are walking away from the property.

"I think this is a one-off," said Matt Gregory, executive managing director with the Columbus commercial real-estate firm NAI Ohio Equities. "I don’t think it's a pervasive issue. It’s on a building-by-building basis. It depends on what someone paid for the building and what they’re getting in leases. This isn't something that pertains to multiple buildings."

Downtown offices stabilizing

Despite the KeyBank building's problems, Gregory and others say Downtown's office market is stabilizing from COVID's work-from-home aftershocks.

"A few years ago companies wondered, should they move out? Will they consolidate? Grow? Will they stick where they’re at?" said Collin Wheeler, first vice president with the Columbus office of the commercial real-estate firm CBRE. "Now we’re starting to get into normalization, instead of these past three years that have been all over the board."

According to CBRE, about 21% of Downtown's offices are vacant, higher than the national rate of 19% but far lower than some cities such as Dallas (30%), Denver (31.5%), Los Angeles (31.6%), San Francisco (35.6%) and Washington, D.C. (34%).

Most experts agree Downtown has more office space now than it needs, which is why some weren't alarmed by the possibility of the KeyBank building being vacated. While an empty building is a Downtown liability, a building repurposed for housing is a plus because it adds people Downtown and gets rid of empty office space, what Gregory calls "addition by subtraction."

Getting residents in buildings remains key to Downtown's health, including the health of its offices, say experts.

"One thing we’ve lacked Downtown is density," said Wheeler. "Getting people there will trigger restaurants, nightlife, that’s a huge benefit. That's going to be the leading catalyst for companies wanting to reimagine their offices."

Converting offices to residences

Several steps have already been taken to repurpose unused office space for residences. About half of the PNC tower (now called Preston Centre), at 155 E. Broad St., has been converted from offices to apartments while work is well underway converting converting the 26-story Continental Centre building at East Gay and North 4th streets into 409 apartments.

Developers also submitted plans a year ago to convert the 25-story Chase Tower at 3rd and E. Broad streets into 253 apartments, though owners are reportedly looking for another developer to take on the project. Developers are also looking to build 100 apartments in the upper floors of a former state office building at 145 S. Front St.

In addition, Huntington Bank announced that it plans to sell three Downtown buildings to developers who would revamp the buildings, which would likely include at least some residences.

"I think we will continue to see more conversions," said Dan Dunsmoor, the managing partner with Allied Real Estate Advisors in Columbus. "Many of the buildings you just can’t convert Downtown, it’s just too cost-prohibitive. Those that can be converted will be converted and that’s one of the best things that can happen to Downtown Columbus because it will bring bodies down here."

Another Downtown office conversion in the works

Dunsmoor said plans are in the works for potentially another major Downtown conversion: transforming floors 17 through 23 of the Fifth Third building on the corner of State and South High streets into residences.

"We're about to launch a marketing campaign that will provide clarity for that building," he said. "The owners invested about $16 million in past 24 months in that property, with major exterior renovations, back-of-house improvements, a beautiful entrance and a lounge on top of the building, and a new fitness facility. Now they're looking at bigger plans in terms of where in the building is correct for multifamily conversion."

Dunsmoor cited the building as an example of solid landlords investing in Downtown buildings, confident they will find tenants. He noted that since the pandemic, owners have spent tens of millions renovating Downtown office buildings including Preston Centre, the Fifth Third Building, 65 E. State St. and the Encova Insurance building.

"We have rock-solid landlords who continue to double down on properties," Dunsmoor noted. "Landlords who are willing to invest in their properties and raise the bar and create an attractive amenity set and a first-class place to do business Downtown, they will have success."

As an example, Dunsmoor said he has received "a ton of interest" in space he is leasing at 80 on the Commons, one of Downtown's newer office buildings.

What the future holds

While the KeyBank problems are seen as isolated, they aren't the first and aren't likely to be last. Other Downtown buildings, including the Continental Plaza tower at 180 E. Broad St,, have been foreclosed upon, and the commercial real-estate firm Colliers, in its most recent report on the Columbus market, concluded that across central Ohio "several buildings may transition into receivership as many loans come due this year, particularly affecting class B and some lower-class A buildings with poor occupancy rates."

Given the continued weakness in office demand in Columbus and elsewhere, agents welcome a slowdown in new office construction in the area. While new offices are underway in TruePointe in Hilliard, Bridge Park in Dublin, Jeffrey Place in Italian Village, Astor Park in the Arena District and the Merchant Building next to the North Market, construction is significantly down from prior years.

"There’s just not a lot of shovels in the ground right now," Wheeler said. "We could be out of new high-end office space in 24 months."

Most of the biggest new office leases in the past year or so have been in the suburbs, such as Wells Fargo in Easton, Advanced Drainage Systems in Hilliard, and Central Insurance in Dublin. But agents say they are seeing more interest in space across the board.

"We're seeing more office transaction activity we’ve seen than over the past couple years, so we’re cautiously optimistic about where things are trending," said Wheeler.

jweiker@dispatch.com

@JimWeiker

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This article originally appeared on The Columbus Dispatch: Downtown offices stabilizing, despite KeyBank building's problems.