CINCINNATI — One of downtown’s largest office properties is seeking $45 million in tax breaks to help it convert part of its space into 205 apartments. Owners of the Atrium One and Atrium Two buildings say they’re hoping to avoid “a catastrophic loss of office tenancy in the coming years.”
Acabay Inc., a Vermont-based real estate company that bought the Atrium properties in 2018 and 2019, shared details of its proposed $80 million renovation in an application for financial assistance with the city of Cincinnati. The WCPO 9 I-Team got the application in a public record request.
“Demand for new office space can’t be manufactured,” Acabay told the city. “In fact, virtually every existing tenant of Atrium One and Two is asking for less space in the future and lower rents. Of course, these dynamics are very bad for the city’s earnings tax receipts.”
The Atrium proposal is a sign that downtown office buildings have entered a dangerous new phase in their recovery from the pandemic. Tenants are seeking smaller spaces with more amenities to help them coax their hybrid work force back to the office, while lenders are seeking reassurances that their pre-pandemic loans won’t fall into delinquency.
“We’re going through a period of transition,” said Scott Yards, senior vice president at the commercial real estate firm, CBRE. “Does the building offer the right parking for their employees? Does it have the conference facilities, the tenant lounge, fitness center? And there’s a handful of those buildings. Not every building has the ability to go in and make that investment.”
Problem properties?
The WCPO 9 I-Team has been tracking downtown’s office market since October 2022, when it became apparent that workers who left office buildings during the pandemic weren’t returning. In March, an I-Team analysis estimated nearly 49,000 downtown workers were spending at least part of their week at home, causing $54 million to be spent elsewhere on “meals, entertainment and shopping near work.”
Downtown’s office vacancy was 18% at the end of September, but that doesn't include empty space that existing tenants are trying to sublease. Factor in that available space and the number jumps to 23.8%, according to CBRE.
Atrium I is among six downtown buildings with availability rates of at least 32%, according to the I-Team’s analysis of industry reports and regulatory filings for real estate investors.
Combined, the six buildings have 1.1 million square feet of empty space. That’s roughly the size of Cincinnati’s tallest office building, Great American Tower at Queen City Square.
Two companies that track mortgage-backed securities say Greater Cincinnati’s delinquency rate for office loans is approaching 20%. The New York-based data analytics firm, Trepp, said Cincinnati’s delinquency rate rose sharply between August and October. The Kroll Bond Rating Agency says its “loans of concern” list is bigger here than in 20 of the nation’s biggest office markets. The list includes three downtown buildings: 312 Elm, 312 Plum and the Center at 600 Vine.
The Elm and Plum properties are owned by Philadelphia-based Rubenstein Partners, which confirmed its loans are in “special servicing.” That means they’re being monitored by lenders in a process that could lead to debt restructuring, an infusion of new capital from owners or foreclosure.
“Rubenstein Partners remains focused on pursuing a positive path forward for both 312 Elm Street and 312 Plum Street in Cincinnati, and recently completed significant capital improvements at 312 Elm, including renovations to the common areas and the addition of high-end amenities such as its newly opened 14th floor Sky Lounge,” said Brian Simel, Vice President with Rubenstein Partners.
Pittsburgh-based Hertz Investment Group LLC owns the Center at 600 Vine, which has a $34 million loan that turned delinquent in August, according to Kroll. In November, a special servicer alerted investors: “Lender has engaged counsel and will dual track foreclosure with workout discussions.”
Executive Vice President Tim McCarthy said: “Hertz Group is working with the lender at 600 Vine to restructure the debt to provide us with an opportunity to continue to invest in the asset and in the City of Cincinnati. We remain committed to the property and are planning on unveiling some new amenities very soon in conjunction with some leasing we’re currently working on.”
At Columbia Plaza on Fifth Street, the end of a lease by the Nielsen company brought the vacancy rate to 38% in August. But the building’s manager said owners invested millions of dollars to upgrade the building’s elevator system and has a good relationship with its lender. So, it has adequate capital to attract new tenants.
“My impression is that over the short term it’s definitely going to be a little painful,” said Michael Rosenbaum, general manager for Diversified Management. “People who don’t have the reserves … will be defaulting. That will be a positive to the people who are well positioned. They will be able to capture those tenants from the buildings that are not succeeding.”
Owners of the Huntington Center at 525 Vine Street could not be reached for comment. CBRE's web site shows the building has 125,381 square feet available, which is 32% of its total space.
Commercial real estate veteran Steven Timmel believes downtown office buildings will weather the storm. Timmel, a senior vice president at CBRE, has negotiated more than $3 billion in office sales in the last 24 years.
“What happened to the office market in 2020 none of us had ever seen,” Timmel said. “So, this isn’t a situation where there’s a bunch of bad owners … doing things wrong. This was a global pandemic. It affected everyone in the world.”
Thinning the herd
Timmel said developers have reduced downtown office vacancies by converting older buildings into residential or hotel properties.
“We’re taking by and large buildings that are antiquated,” and upgrading them in ways that will build the city’s tax base long term, Timmel said. “It’s efficient equipment. Its efficient power sources. And it’s catering to a young, vibrant crowd or an empty nester crowd that wants to be downtown.”
CBRE released a study in October that ranked Cincinnati second among 40 U.S. cities in the percentage of office space planned for conversion to housing and hotels. CBRE counted 2.4 million square feet of conversions in downtown Cincinnati. That’s 6.9% of its total office space in the central business district. Cleveland ranked first in the analysis, with 3.4 million square feet of conversations that amounted to 11% of its downtown space.
“Instead of having people leave and go back out to their suburban homes or suburban apartments, you’ve got people that are downtown,” Timmel said. “And they’re participating in activities, going to restaurants or going to bars. They’re shopping in downtown.”
Examples of residential conversions under construction include the City Club Apartments on Fourth Street and the Mercantile Library and Formica buildings at Fifth and Walnut. Among those waiting to start is the Carew Tower conversion at 441 Vine.
The Atrium project would break new ground by attempting a partial conversion of a newer office building. Built in the 1980s, the 1.2 million-square-foot Atrium complex has served as a corporate headquarters for Omnicare Inc., Convergys Corp. and Cincinnati Bell Inc.
Acabay wants to spend $47 million to convert about a third of the Atrium One to apartments, while it invests $35 million more to attract and retain office tenants. But it’s seeking a complicated rebate of tax- increment-financing revenue that would require approvals by city council and the state of Ohio to reset the property’s taxable value to 1982 levels.
“Without city assistance, the project is unlikely to be pursued,” Acabay wrote.
At Skyline Chili on Fourth Street, General Manager Susan Williams applauds the idea of replacing lost office workers with new downtown residents.
“Not only would we generate crowds for lunch, but we could extend our hours longer for evening crowds and dinner,” Williams said. “So, we would benefit from that.”
Williams said her restaurant has recovered about 75% of its pre-pandemic sales volume, but remote working arrangements have reshaped the business.
“Our biggest days used to be Friday,” Williams said. “And now people work from home on Friday. Our biggest days are Tuesday, Wednesday, Thursday now.”
