As Excess Space Gets Absorbed, Cleveland Experiences Growing Pains

Due to a frenzy of leasing activity and positive net absorption in the second quarter, Cleveland’s industrial vacancy rate fell to 8.2 percent, with sub-7 percent vacancy rates in the Class A, high-bay warehouse submarkets.

The turnaround has been dramatic. Saturated with more than 1 million square feet of vacant speculative space three years ago, the Cleveland industrial real estate market today is unable to support the continued growth of companies without some new construction.

Space commitments from Newell Rubbermaid (650,000 square feet), ShurTech Brands (182,000 square feet) and National Business Furniture (100,000 square feet) indicate that although Columbus continues to supply the demand for e-commerce, Cleveland will once again be home to value-add manufacturing, assembly and local distribution companies.

GOJO Industries (205,000 square feet) and Glazer’s (200,000 square feet) not only expanded, but also absorbed the last available big-box space in Cuyahoga County.

Summit County will be the new focus of companies looking to expand or shift into more efficient space following the recent vacancies left behind by Suarez Corp. (350,000 square feet) and Mid-America Packaging (300,000 square feet), both located in the southeast/Akron submarket of Cleveland.

For companies that can commit on a longer-term basis, developers such as Geis Cos. and Premier Development have allocated funds to provide greenfield, shovel-ready sites throughout northeast Ohio.

We Built This City

The Cleveland industrial market was primarily built to meet the needs of manufacturing companies focused on value-add product assembly (taking multiple finished goods and assembling a finished product for an end user). This characteristic of the local market has always kept the velocity of relocations and speculative development low based on the initial infrastructure capital required to build, maintain and operate these types of facilities.

Companies will stretch, strangle and inch their way toward combustion before incurring relocation costs that could, in some cases, reach the tens of millions of dollars. Such prudence on the part of Corporate America has kept local and regional construction companies busy for decades with expansion and new construction projects.

Geis Cos., a Cleveland-based national developer and builder, has undertaken several projects this year, including additions or new construction for Applied Medical Technology (90,000 square feet), Curtis Wright (65,000 square feet) and Rochling Automotive (88,000 square feet).

This trend is expected to continue as a growing number of companies look to incorporate more efficient space plans and the latest technology and manufacturing equipment into their long-term business strategies. Couple this with the aggressive incentives from local and state municipalities, and you have companies motivated to grow and expand in Northeast Ohio.

Outsiders Make Their Mark

Historically, Cleveland has been a market made up of local developers and investors providing new space for companies. Duke Realty Corp. and Geis Cos. had a stranglehold on the development sector in the early to mid 2000s. During the past few years, however, there has been a changing of the guard.

Since the portfolio sales of Duke and Geis, national players such as First Industrial, Harbor Group and most recently Hackman Capital control Cleveland’s Class A, big-box industrial real estate.

Since 2010, industrial vacancy rates have steadily dropped, making Cleveland and Northeast Ohio more attractive to REITs and other outside investors, especially those looking to balance their investments on the east and west coasts with Midwest industrial real estate product that generates higher returns.

For example, Los Angeles-based Hackman Capital acquired more than 2.5 million square feet of big-box industrial space in Cleveland, Columbus and Cincinnati. Nearly 1.6 million square feet of that space can be found in Cleveland’s southwest and southeast submarkets.

Other notable investors — including New York-based American Realty Capital and Pinchal & Co of Houston — also have jumped into the Cleveland market, acquiring industrial properties at capitalization rates ranging from 7.5 to 8 percent.

This is a clear statement that investors who previously looked beyond Cleveland have noticed this is a market with safe, consistent returns that adds necessary balance to a national portfolio.

During the last few decades, Cleveland has consistently created opportunities for space users and developers alike. Through its strong work ethic and labor force, the local industrial market has helped The Goodyear Tire & Rubber Co., The Timken Co., Eaton Corp. and Sherwin-Williams continue to grow and call Cleveland home.

The need for new industrial real estate product in Cleveland to accommodate the needs of today’s space users is clear. It’s no longer a question of “If you build it, will they come?” Rather, the axiom today is “They will come, when you build it.”

— Joseph Messina, senior vice president, corporate services with Jones Lang LaSalle Americas