Alec Pacella, NAI Daus
To say that 2014 has been filled with great excitement for Cleveland would be an understatement. In early July, the Republican National Committee selected Cleveland as the host city for its 2016 convention. That same month, NBA star LeBron James announced his intent to return to his hometown Cavaliers. Beyond those splashy headlines, during the first half of the year several real estate projects were announced. The planned projects combined with those already under construction or completed since 2010 represent $5.5 billion in public and private investment in downtown Cleveland.
Apartment Building Boom
One of the most significant stories in Cleveland is that the residential boom downtown continues to gain momentum. The overall occupancy rate in the apartment sector within the CBD rose from 94.5 percent in the first quarter of 2014 to just over 98 percent at mid-year, according to a recent study released by the Downtown Cleveland Alliance. As a result, new projects continue to pile up in an effort to meet the ever-increasing demand.
In addition to the 1,000-plus rental units currently under construction, there are now more than 1,100 units in various planning stages. Projects announced since the first of the year include The Standard Building (243 units) and the Leader Building (230 units). Both of these projects underscore the trend of converting office buildings from the “classic era” (built in the 1920s and 1930s) and “mid era” (built in the 1960s and 1970s) into residential properties.
And this may still not be enough new supply to satisfy demand. According to the study by the Downtown Cleveland Alliance, the primary growth stems from two demographic segments — the Millennials (ages 25-34) and the Boomers (ages 55-64). Most existing projects have waiting lists as long as six months, so there appears to be no end in sight on the demand side.
Another significant story is the influence of Cleveland’s new convention center and adjacent Global Center for Health Innovation. In addition to drawing the 2016 Republican National Convention, this $465 million interconnected facility that opened late last year has successfully attracted nearly 350 events stretching into 2017.
The development has also spurred a host of activity within the downtown hospitality sector. A new Westin Hotel opened in early 2014, adding 484 rooms. But this is just the beginning. Five new hotels are currently under construction, which will collectively add more than 1,200 rooms to the market by mid-2016. The largest of these projects is a 600-room Hilton Convention Hotel, which will be adjacent to the convention center. Other projects include The Metropolitan, Kimpton, Drury Plaza and Le Meridien.
The renewed momentum downtown has also led to several other large-scale developments. The most influential of these is a project located at East 9th Street and Euclid Avenue anchored by a new Cuyahoga County Administration building.
The 220,000-square-foot facility opened in June and will be joined by The 9, a mixed-use project that will include offices, the new 150-room Metropolitan hotel, a new 33,000-square-foot Heinen’s grocery store and 194 upscale apartments. Parts of the $170 million project opened this fall with still other parts expected to open through mid-2015.
Another substantial project well underway is the second phase of the Flats East Bank. The first phase included a 487,000-square-foot office building and adjacent 150-room Aloft Hotel and has been a resounding success since opening in mid-2013. The $149 million second phase will add a 243-unit apartment complex plus street-level retail and several freestanding restaurants. The second phase will be completed by mid-2015.
Two new prospective projects were also recently announced. One is located on 28 acres of downtown lakefront property, adjacent to FirstEnergy Stadium, the Rock and Roll Hall of Fame and Museum, and the Great Lakes Science Center. The other is approximately three acres, currently mostly parking lots, located adjacent to Quicken Loans Arena and the East 4th Street District. Both projects feature well-known developers and promise a mix of housing, retail and office space.
Office Sector Stands to Gain
All of this positive momentum has begun to influence the office market in the central business district. Although the overall vacancy rate in the CBD was relatively unchanged at 23 percent at mid-year, the Class A market is significantly healthier, checking in at 15.4 percent, according to NAI Daus.
While Class B and Class C properties posted vacancy rates of 27.4 percent and 25.6 percent respectively, this is a somewhat distorted view. Several of the properties targeted for residential conversions are currently included within the overall office statistics for Class B and Class C buildings.
So, the vital signs of the Class B and C office sectors should improve during the next several quarters as several largely vacant buildings are removed from the office inventory by virtue of conversions. Net absorption has been improving, but is expected to accelerate as many of these ancillary downtown projects come on line over the next 24 months.
This Rebound is Different
Cleveland’s downtown underwent a significant renaissance in the early 1990s and the residual impact stretched well into the next decade. But the depth and breadth of those projects pale in comparison to what is currently unfolding.
Many longtime observers say this critical mass of development not only marks a turning point for downtown, but also the entire region. Only time will tell how long lasting the impact will be, but the next few years certainly promise to be a great ride.
— By Alec Pacella, managing partner, senior vice president, NAI Daus. This article originally appeared in the October 2014 issue of Heartland Real Estate Business.