Yesterday’s post on the 20-story office tower at 1 E. Fourth St. followed the building from a value of $24,240,000 in August of 2010 to a board decision of $19,250,000, followed by a further unexplained reduction to $16,000,000 just three months later.
But that’s not the shocker.
Because in the end, the disappearing $3,000,000 doesn’t even matter. Less than two years later, the owner files yet another complaint, this time asking for a reduction from $16,000,000 to $7,400,000. And guess what? The owner’s not crazy. Nobody laughs them out of the hearing room or suggests they are filing frivolous complaints. Because they aren’t. The market for commercial office space in Cincinnati’s central business district has gone into a tail spin totally unanticipated just 20 months earlier. The upscale building on the corner of Fourth & Vine that was 100% occupied with above average rents and profitability, now has a 50% vacancy rate, been forced to renegotiate the lease with their biggest remaining tenant to lower the rent, has to invest millions in upgrades, and is struggling just to cover costs, much less make any money at all, even if they do find new tenants. And it has absolutely nothing to do with mortgage-backed securities or the recession.
Queen City Square, the Great American Tower That’s what happened. Over a million square feet of pristine, Class A office space opened for business in January of 2011, shuffling tenants from 6 other buildings in the Central Business District and spiking the vacancy rate on Class A space to over 20% – where it stubbornly remains to this day, including 10% of their own building and all the still-unoccupied street-level retail where John Barrett waxes poetic about attracting a fancy French restaurant someday.
Queen City Square, the Great American Tower, the same building the Port Authority, an agency of the City of Cincinnati issued $54,000,000 of bonds to pay for the parking garage, lobby and front plaza. Money that we will never get back – but will continue to pay back for 28 1/2 more years, long after the building has been sold and Western & Southern has pocketed any profits.
Queen City Square, the same building we awarded a 30-year tax abatement on 100% of the improved value, almost $200,000,000 if the building remains at the same value for that period. (Real wonks who are interested in a complete list of estimated financial benefits to Western & Southern on this development can check out A Grand Slam for Western & Southern.)
The shocker is that during hearing number 2 on Parcel #083-0001-0097-00 on June 26, 2012, we not only hear about the new financial reality for 1 E. Fourth Street. This new giant office tower has negatively impacted all the commercial office space in the central business district.
Over and over again throughout the second hearing – which this time lasted over an hour and a half as board members tried to get their heads around the new reality of commercial real estate in Cincinnati – witnesses made reference to all the other buildings experiencing the same challenges. Everybody seemed particularly worried about the 580 Building, wiped out and desperate with a 100% vacancy rate, the same building that is now being converted into 176 residential units.
Which is great. Residents are much more reliable than commercial tenants who can be lured away with tax credits and abatement, the kind of consumers who eat in all our new restaurants at night, go to plays, ride our streetcar and get annual passes for the Red Bike program.
But remember, we had to give the 580 Building a 12 year tax credit in order to make the transition. Yep. We lost the property taxes we had been collecting on the property and then had to make a deal to give up everything for the next twelve. It’s a ripple effect, with negative consequences that impact local governments for at least a decade in a very big way. The value of all the commercial buildings has plunged since Queen City Square opened for business, reflecting the reality of higher vacancy rates and resulting in property tax reductions that hurt our schools, parks and basic services. When we give huge financial incentives to build commercial office space based on vague hopes of attracting new corporations, the short term financial impact on the citizens of this community who are paying taxes is disastrous.
It sounds so easy in theory doesn’t it? New office towers result in lease upgrades which result in residential conversion of Class B and Class C space. Density. Hooray! Which is all true from a perspective of decades. But the short-term consequences of subsidizing more office space than the market can absorb for one favored developer is painful and very, very expensive. Before we make any more 30-year bets on big speculations, let’s ask ourselves long and hard if it’s really worth what it costs. At least with the GE deal we had 2,000 new jobs in hand before we signed off on our future.