Lately, it has been quite challenging to pick up a newspaper, watch television or even view an online news source and not be inundated by sour economic events occurring throughout the world, as well as in the Greater Cleveland area. As we navigate our way through these uncertain times in the economy, and more specifically in the commercial real estate industry, owners and users of real estate will be faced with challenges as well as opportunities.
The Cleveland industrial real estate market, which ranks as the ninth largest industrial market in the United States, remains healthy largely due to its conservative growth during the last decade. The Cleveland economy is comprised of a diverse range of businesses from many different sectors, making it less prone to volatile cycles common in other industrial-based regions. Our local industrial market, which consists of numerous submarkets, had a vacancy rate ranging from 8 to 10 percent throughout 2009. The average lease rate for industrial space was approximately $3.90 per square foot. Both of these indicators compare favorably to the U.S. average, which has slightly higher vacancy and lease rates.
A major obstacle weighing on today’s real estate consumer in the Cleveland area is the recent distress in the financial markets — primarily the deterioration of equity holdings and the unwillingness of lenders to provide credit. With the widespread devaluation of investor portfolios, there is less potential cash available for down payments on properties. And to compound matters, most lenders are increasing the amount required for a down payment, and many appraisers are being extremely conservative with property valuations, further tightening the credit crunch. Despite these conditions, solid credit-worthy companies are still able to obtain reasonable amounts of credit at very attractive rates. As interest rates hover at historic lows, real estate investment is made more affordable, with 15-year, fixed-rate mortgages currently being offered for as low as 5 percent.
There is a perception around the Cleveland area that there is an abundant supply of industrial properties available for sale or lease, although this is not the reality. The vacancy rate for industrial properties in Northeast Ohio ranges from 7 to 9 percent; however, there is a disparity between the available properties for lease and those for sale. Industrial properties available for lease outnumber properties available for sale, thus it is challenging for buyers to locate and secure desirable facilities, whereas tenants looking to lease have many facility options and are able to negotiate favorable terms and conditions with landlords.
One of the challenges facing the Cleveland market is the floundering automotive industry. Northeast Ohio’s economy is directly impacted by the success or failure of the car industry. There are major automotive manufacturing plants throughout Northeast Ohio, along with numerous companies that provide parts and services that occupy warehouses and manufacturing buildings in the region. This will be an industry that will be closely monitored in the coming months because its fate will directly impact the region’s commercial real estate industry.
There are pessimistic forecasts for the commercial real estate market for 2010, although the new year brings hope, optimism and change. Already there are economic indicators that may suggest the worst of the recession has passed, as even unemployment claims posted a surprising decline in recent months, and the stock market has been rallying for months. The new year brings optimism; however, the Cleveland industrial market tends to lag behind the overall national real estate market, which has yet to rebound, so some challenges will be present throughout 2010.
— David R. Stover is a vice president at Chartwell Group/TCN Worldwide in Cleveland.