The Cleveland real estate market can be characterized by a variety of ‘good news/bad news’ stories. For example, American Greetings announced earlier this year that it would be building a new $100 million world headquarters in Cleveland’s suburb of Westlake, Ohio. And while retaining this Fortune 500 company in the region is good news to most, it certainly was bad news to Cleveland’s suburb of Brooklyn, the long-time home to the company and its 1,750 workers. But no where is the ‘good news/bad news’ story more compelling than in the central business district or CBD.
First, the good news. Cleveland is undergoing a massive construction boom, the largest since the late 1980s/early 1990s. Over $1 billion of new development is currently under way in the CBD alone, spearheaded by three primary projects. The first is the long-anticipated Medical Mart and associated convention center. This $465 million complex will include a four-story permanent showplace for medical equipment and technology, connected to a 230,000-square-foot convention center, which is anticipated to be completed in 2013.
The $465 million Medical Mart and adjacent convention center
is expected to be complete in 2013.
The second is the Horsehoe Casino, initially converting 300,000 square feet in a former downtown department store into a temporary casino. This is $400 million project expected to open in early 2012. And third is the first phase of the Flats East Bank development (pictured below). Representing the first new office construction in the CBD in more than 20 years, this $275 million project will include a 475,000-square-foot office building anchored by Ernst & Young and Tucker Ellis & West, a 150-room Aloft hotel and assorted retail, restaurants and green space. This initial phase is expected to be completed by mid-2013.
The Flats East Bank development is the first new office
construction in downtown Cleveland in more than 20 years.
Now, the bad news. While the overall CBD occupancy rate among all office buildings is around 85 percent, the view quickly changes as individual sectors are examined. For example, the occupancy rate amongst just Class B buildings is much lower, approximately 75 percent at mid-year. And occupancy could continue to slide as several large tenants complete moves out of Class B buildings over the next 12 to 18 months. Even more disconcerting are a small but growing number of distressed/value-added properties in the CBD that have recently sold at very low prices. 65 & 75 Erieview, a 190,000-square-foot office complex, sold for $2.5 million — it had been assessed at $6.2 million. The Huntington Building, a 1.3 million-square-foot office building, sold for $18.5 million after being assessed at $41.5 million. KeyBank Center, a 475,000-square-foot office building, is in the process of being sold at auction for approximately $7.5 million — it last sold in 2007 for $45 million. A 524-space parking garage at 515 Euclid Avenue sold at auction for $8.15 million — it was built in 2005 at a cost of more than $25 million. Although each of these sales is accompanied by its own set of circumstances, the general trend is troubling, particularly given the distressed/value-added status of several other high-profile assets in the CBD.
The next few years will be exciting yet critical not only for downtown Cleveland but for the entire region. These new projects, as well as several others, will be completed. And more importantly, their associated impact will become much more defined. But the true test will be how much of this good news spills out into the rest of the commercial real estate market.
— Alec Pacella is senior vice president, director of investment services for NAI Daus.