Saturday, October 3, 2020

Could Cliffs' acquisitions bring another downtown tower?

Although Cleveland-Cliffs' name adorns the atrium of 200 Public
Square, its headquarters plays second fiddle to the building's lar-
gest tenant -- Huntington Bank. Cleveland-Cliffs may not remain
in this tower much longer as it continues to expand with a pair of
recent, significant corporate acquisitions (Google).

When you look at several critical aspects behind Cleveland-Cliffs Inc.'s recent acquisitions of AK Steel and ArcelorMittal USA, you can see how it's possible, if not probable, that Cliffs won't be a tenant of 200 Public Square for much longer.

The critical aspects behind the acquisitions include the post-assimilation staffing needs of the combined company measured against the office space vacancies in Cliffs' headquarters building. The data for populating this equation were gathered from online sources and by interviewing Cliffs staffpersons, real estate brokers and others familiar with Cliffs and its acquired companies.

Cleveland-Cliffs is an old company in an old line of work. It was founded by Samuel L. Mather in 1847 -- back when ironmaking and later, steelmaking, were high-tech industries. That was back when Cleveland, Youngstown, Pittsburgh, etc. were the places where raw materials like iron ore from the northern Great Lakes and coal from Appalachia collided to create metals, incredible population growth and economic wealth. 

As we all know, steel faded under the strain of aging mills, foreign competition, increased use of plastics and environmental protection. The Great Lakes-Northeast industrial belt, with some of the highest blue-collar wages in the world, soon decayed into the Rust Belt.

Cliffs is one of the survivors of that downsizing, focusing on mines and shipping that delivered raw materials to the mills. Its second-largest customer is AK Steel of West Chester, OH, near Cincinnati. Cliffs acquired AK Steel, completing the transaction in March. The firm has roughly 700 employees at its West Chester headquarters.

Earlier this year, Cleveland-Cliffs finalized the acquisition of AK
Steel, headquartered in this West Chester building in the northern
suburbs of Cincinnati. Most of the roughly 700 employees in this
 building have yet to move to Cleveland-Cliffs' HQ (Google).

By creating an integrated company, from mining to shipping to steel production to marketing, Cleveland-Cliffs has greater control over its market. AK Steel also was the only remaining U.S. manufacturer of electrical steels that form the cores of electric motors, transformers and generators. They are easy to magnetise and demagnetise, resulting in lower temperatures that reduce power loss.

Cleveland-Cliffs continued shopping last week, acquiring a majority of the U.S. operations and assets of its largest iron ore customer -- ArcelorMittal, based in Luxembourg. ArcelorMittal has its US headquarters in downtown Chicago plus a regional headquarters in Richfield, between Cleveland and Akron. In the two offices they have about 300 employees -- although the official numbers cited for the Richfield office may be low.

With this latest acquisition, Cleveland-Cliffs will become the largest manufacturer of flat-rolled steel in the USA. This steel is used primarily in automotive markets -- a similar area where AK Steel excelled, albeit for engine components.

And that's what these acquisitions are all about -- the automotive industry or, more specifically, the future of it. That future includes new government fuel economy standards that take effect in 2025, requiring the production of stronger, lighter steel in cars. It also means increased production of electric cars, and Cleveland-Cliffs is now the only U.S. maker of electrical steels.

Steel produced in blast furnaces is much higher quality than that which is produced in electric arc furnaces (typically remelts scrap metals). Blast furnaces, like those that Cleveland-Cliffs just bought, are ideal for producing steel for the cars of the future. And those blast furnaces will become cleaner and more efficient under Cleveland-Cliffs ownership.

ArcelorMittal USA's regional headquarters occupies a signifcant
part of an 82,217-square-foot building built on 8 acres of land in
1996 on Kinross Lakes Parkway in Richfield, OH (LoopNet).

Cleveland-Cliffs feeds blast furnaces from its iron mines and shipping. Its first hot-briquetted iron production plant, under construction in Toledo for $700 million, will position the firm as the dominant player and sole supplier of merchant iron units to blast furnaces in the Great Lakes.

Cleveland-Cliffs has done a lot more than just make itself the second-largest Fortune 500 company headquartered in Greater Cleveland (Cleveland-Cliffs' annual revenues of $2 billion; AK Steel's $6.3 billion, and ArcelorMittal USA's $10 billion = $18.3 billion), trailing Progressive Insurance's $39 billion. The integrated firm is now positioned for growth.

Despite its revenues, Cleveland-Cliffs doesn't have a huge staff in its downtown Cleveland corporate headquarters. By some estimates, it's just over 600 employees. The firm is spread out among three floors (6, 33 and 34) in 200 Public Square, the former BP America tower.

Those are large floors however. The sixth floor is about 50,000 square feet which Cleveland-Cliffs uses for training and conferences. The floor plates in the main part of the tower offer about 29,300 square feet of usable space. Cleveland-Cliffs had more space in the tower until it downsized by half in the early 2010s, and subleased the 31st and 32nd floors to the Gottlieb Group, Northern Trust and AML RightSource.

A breakdown of available spaces in 200 Public Square
as reported in a brochure about the property (Colliers).

Parts of the 32nd floor remain open. So while Cleveland-Cliffs hasn't moved AK Steel's staff up to Cleveland yet, it is replacing departing AK Steel administrative employees in West Chester with new hires in Cleveland. Part of that delay in assimilation is due to the coronavirus pandemic. But is also due to the fact that 200 Public Square has only three open floors (10, 13 and 41), a large fourth floor that is mostly available, a few half-empty floors (12, 26 and 38) and a smattering of vacancies elsewhere.

In a big building, companies want contiguous office spaces, not offices scattered all over the place. So while Cleveland-Cliffs could move employees from its acquired companies into 200 Public Square today, it wouldn't be in a very efficient or orderly way.

How many employees might it add? When a company acquires or merges with another, it typically reduces total employment by 10-30 percent. So when Cleveland-Cliffs acquired AK Steel, the total office employment exceeded 1,300. Considering these were dissimilar companies, the reduction in office staff was probably closer to 10 percent, dropping the combined office staff to about 1,200 people.

But when Cleveland-Cliffs acquired most of ArcelorMittal USA, its 300 office workers in Chicago and Richfield will probably get reduced to about 200 people. That makes the reduction closer to 30 percent given the redundancies with AK Steel and given the fact that Cleveland-Cliffs didn't acquire ArcelorMittal's tubular plants, its Calvert, AL mill and its research center in East Chicago, IN. 

ArcelorMittal USA's HQ is located in One South
Dearborn, a 39-story, 828,538-square-foot tower
 built in 2005 in The Loop (IP Design Group).

In total, Cleveland-Cliffs headquarters staff may amount to roughly 1,400 people by the time everything shakes out. And that doesn't take into account the business growth that Cleveland-Cliffs is counting on as a result of these acquisitions.

"We don’t acquire to cut, we acquire to grow," said Cleveland-Cliffs CEO Lourenco Goncalves.

Considering that Cleveland-Cliffs is taking a long view on its business, it may not be unreasonable to assume a 20 percent growth factor in its office employment going forward. A headquarters staffing count of perhaps 1,700 people in the next 5-10 years is possible. At 150 to 200 square feet per employee, that's 255,000 to 340,000 square feet total. There is only about 207,000 square feet available at 200 Public Square -- again, scattered throughout its 46 floors.

And that's why Cleveland-Cliffs probably can't stay where it is.

Where could it go? Potentially, anywhere. But if anything, the company has been committed to Cleveland for its entire 173 years, supporting local civic and charitable initiatives. And of course, it would be blasphemous for a company with Cleveland in its name to be headquartered anywhere but in Cleveland.

The Steamship William G. Mather, now a floating museum, is named
after the son of Cleveland-Cliffs founder Samuel L. Mather. William
was Cleveland-Cliffs' president and chairman from 1890-1947 (KJP).

Practically, however, its corporate executives aren't as dependent on international air service as other local companies such as Sherwin-Williams, a global company that chose to build its new HQ in Cleveland. Most of Cleveland-Cliffs' customers and operations are within a day's drive or at most a couple hours flight from Cleveland.

On the other hand, it's less clear as to whether a consolidated, growing Cleveland-Cliffs could warrant the construction of a new office tower in downtown Cleveland. Consider these numbers...

Downtown Cleveland office towers built in the last 30 years have average floor plates of 20,000 to 25,000 square feet. If Cleveland-Cliffs needs 255,000 to 340,000 square feet of office space in the coming years, that could require an office building measuring anywhere from 10 to 17 stories high -- not exactly a skyscraper.

There aren't any existing Class A office buildings downtown that could easily accommodate Cleveland-Cliffs' office needs in contiguous spaces. One that could -- The Ellipse, the completely empty, 496,000-square-foot, 16-story former Ameritech Building constructed in 1983 at 45 Erieview Plaza -- had its lease listing deactivated from some Web sites last month. It has been the subject of auctions and could be subjected to another. If so, it could be a suitable building for Cleveland-Cliffs including an unobstructed view of Lake Erie which its ships plied since the 19th century.

But if we want to dream, perhaps Cleveland-Cliffs could be the anchor tenant someday in a trophy-class tower it shares with other, smaller tenants and reach 20 to 30 stories high. It wouldn't stand up to the possibly Key Tower-rivaling height of the new Sherwin-Williams headquarters. But it might add to the city's skyline and get rid of another windswept, life-sucking surface parking lot in the process.


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