By Ken Alltucker
The Cincinnati Enquirer

Buildings such as the 312 Walnut Street Building at Walnut and Third streets downtown helped Duke Realty Corp. earn it the reputation as a "500-pound gorilla" of the area's commercial real estate market. (Ernest Coleman photo) | ZOOM |

As most Greater Cincinnati developers struggle to fill empty office buildings, Duke Realty Corp. has carved a lucrative path through the economic downturn.

That's because two years ago, the commercial developer and landlord adopted a guiding principle that has shaped every major lease negotiation since: No significant deal can be lost to a competitor.

At the time, the theory among Indianapolis-based Duke's top brass was that the slumping economy could turn ugly for developers with corporate downsizing, bankruptcies and lease defaults leaving dozens of empty floors across the Tristate.

"From that point on, we decided we we're going to make the deals because you don't know when the next one would come through the door," said Bob Fessler, senior vice president overseeing Duke's Greater Cincinnati operation.

The strategy paid off. Duke's Cincinnati office over the past two years signed more than 500 leases for office and industrial properties totaling about 5.5 million square feet of space.

Duke signed 172 deals of almost 2 million square feet in Greater Cincinnati's ultra-competitive office market during 2002. The performance came during a stagnant year when office space was vacated as often as it was filled.

Overall, Duke's collection of 47 office buildings in Greater Cincinnati had an average vacancy rate of 10.2 percent in the suburbs and 8.5 percent downtown. That was much better than the market average with some real estate firms estimating that the region's average suburban vacancy rate nearly 20 percent and downtown about 10 percent.

To be sure, Greater Cincinnati's largest commercial landlord with about 14.3 million square feet of office, warehouse and retail space has taken aggressive steps that it would never think of during the heady days of the dot-com bubble. It's offered generous concessions such as free rent and office upgrades to entice business.

For instance, Duke tossed in $2 million in free improvements at its One Ashview Place building in Blue Ash to land surgical tool maker Ethicon Endo-Surgery. At more than 80,000 square feet, it was one of the largest office deals of 2002.

"That was one of those deals we decided we were going to get done," Fessler said. "There clearly were concessions, but the key for us is we get a grade A tenant that will be there for the next 10 years."

Fessler's staff also inked a seven-year deal with General Electric for a 33,000-square-foot space at Executive Plaza II in Tri-County. It was a "dogfight," Fessler said, with Duke adding $1 million worth of freebies such as a renovated lobby and restrooms.

Duke even raised the eyebrows of competitors when if offered 16 months of free rent on a decade-long lease for Advantage Sales & Marketing at the new Pfeiffer Place. The 158,000-square-foot building in Blue Ash was planned at peak of the market but became available just as the economy softened. Nevertheless, Duke's aggressive deal making has left just 5,300 square feet of vacant space.

Ultimately, no matter how generous the deal, Fessler said his staff only offers the best deals to blue-chip tenants who sign long-term deals.

The cost of providing free rent or tenant improvements is usually absorbed within a year or less, Fessler said, so that leaves steady profit and rental payments from quality companies as other developers face defaulting leases and bankruptcies.

Some developers that were quick to sign deals with the darlings of the New Economy - Internet and telecommunications companies - are now feeling the bite of recession.

For instance, Al Neyer Inc. in recent years built corporate campuses for high-tech flameouts such as Digineer in Mason and Cintech Solutions in Blue Ash. Digineer has vacated its space. Cintech, which moved from a modest Norwood office to a new $4 million building in Blue Ash, filed Chapter 11 bankruptcy this month. It's uncertain what will become of its space, and even though Al Neyer Inc. sold a majority interest in the building to an undisclosed private investor, it declined to discuss the filing.

Fessler hopes that Duke is able to side-step the commercial real estate industry's troubles by building a portfolio of dependable, credit-worthy businesses. But even seemingly can't-miss companies have had trouble paying bills or pared space. Duke reached a buyout agreement with the high-flying mutual fund and financial services firm Fidelity Investments, which vacated almost 35,000 square feet of space at Westlake Center in Blue Ash.

Cincinnati Commercial Realtors' Wayne Hach said consistency is a Duke hallmark.

"They realize they're in the business whether it's a good market or whether it's a bad market," Hach said. "When they are in a down market, they want to meet the market and do what they need to do."

And Duke's display of financial might in the past year shows that it's the "500-pound gorilla" of Greater Cincinnati's commercial real estate market, said Arthur Calamari, leasing agent and part owner of the new two-building Summit Woods office complex in Sharonville.

He admits that Duke has been a tough competitor, but his building has been able to win some battles.

"Summit Woods has won its share of the deals in which we were competing with Duke head-on," said Calamari, who added that older, less-attractive Class B buildings are having the toughest time finding and keeping tenants.

Part of Duke's strength is that it's one of the largest, publicly-traded real estate investment trusts in the nation with significant holdings in the Midwest and Southeast.

A key part of its strategy is to tap new sources of capital by selling older properties that earn less money and reinvesting the proceeds in properties with higher returns. This "recycling" program has effectively trimmed the size of Duke's Greater Cincinnati portfolio.

In 2000, the firm sold half its stake in more than 6 million square feet of warehouse and industrial space in Greater Cincinnati, and it also sold a significant part of its local retail holdings.

Nevertheless, Cincinnati remains a money-maker for Duke, generating $74 million in overall rents. Out of 13 major metropolitan markets where Duke operates, only Atlanta generated more rental income, according to the firm's filings with the Securities and Exchange Commission.

The Indianapolis-based firm honored Duke's Cincinnati office brokers, including Jerry Royce, Jay Morey and Dan Ruh, as the top-performing team company wide in 2002.

Fessler credits his team's performance to its buckle-down approach.

"When it gets ugly, it tends to get ugly fast," he said. "Everybody wants to reduce it to price, but it's also terms and flexibility. It's solving the tenant's real estate needs better than the next guy."

E-mail kalltucker@enquirer.com