With tenant demand increasing and retailers looking to expand in Cleveland, positive net absorption and limited development have created a balanced retail market that will lead to improvement and growth in 2012, according to Marcus & Millichap.
The construction levels are relatively low with only 260,000 square feet of shopping center space scheduled to be completed this year, more than doubling last year’s 121,000 square feet. By comparison, 2008 saw 1 million square feet in retail completions.
“When you look at it and put it in perspective versus construction levels seen during the last 10 years, it’s significantly below the levels we saw at the height of the market,” says Scott Wiles, a director and vice president within Marcus and Millichap’s National Retail Group.
“It was an expected trend that last year was the low point for construction levels in the submarket, and that stems from 2009 and 2010 being very inactive leasing markets,” Wiles says.
This year’s limited construction will aid Cleveland’s retail growth, however, in light of an uptick in leasing. “The positive thing about Cleveland is that we never see the construction levels that some of the sexier markets see, so it doesn’t throw our supply and demand, for tenant purposes, out of whack the way it does in some other markets,” Wiles says.
The 260,000 square feet of new inventory expands retail stock by only 0.2 percent amid rising demand. This combination will help to increase asking rents and to decrease the vacancy rate to 12.2 percent by year’s end, according to Marcus & Millichap.
Expanding retailers within the Cleveland market generally fall into two categories. First are what Wiles calls the “usual suspects,” retailers with highly successful business models who are expanding nationally such as dollar stores, auto parts stores and banks. Next are businesses that have specifically targeted Cleveland as an opportunistic market, including Piada, Menchie’s, Potbelly Sandwich Works, Menard’s, Earth Fare and Five Below. Additionally, discount retailers such as Rose’s Department Store and Ollie’s Bargain Outlet have begun filling vacant big-box space.
Property Sales Heat Up
Investor demand for multi-tenant properties has nearly doubled over the last year, according to Marcus & Millichap, which points out that
single-tenant sales are on the rise.
“At the height of the market in 2006 and 2007, investors were more prone to take on speculative investments in hopes of a higher yield on their investment,” Wiles says, “whereas now a lot of those same investors have realized that with the downturn in the economy, they’re being more challenged.”
As a safe play, many investors have turned to single-tenant investments with long-term leases. Single-tenant transaction velocity has increased 12 percent during the last year, with many investors of retirement age looking to invest in easy-to-manage properties.
Consumer sentiment overall has improved in Cleveland, serving to further bolster the city’s recovery. “Some of the doings in the downtown area have certainly built optimism in the way that the Cleveland market is viewed as a whole,” says Wiles.
The newly completed Horseshoe Casino Cleveland, which features 96,000 square feet of gaming, is expected to attract 5 million visitors annually. Other downtown developments include the 555,000-square-foot Cleveland Medical Mart & Convention Center, which will be completed in 2013, and the Flats East Bank, a $500 million, mixed-use waterfront property also set to open in 2013.
— David Cox