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Cleveland's retail market is continuing to slowly recover from the effects of the recent recession. This recovery is sparked by a number of factors. One of the brightest spots in the Cleveland retail market is the revival of downtown, which is bringing businesses, residents and retailers to the area, stabilizing the metro’s core.
The number of visitors to downtown Cleveland is expected to double from 3 million in 2012 to 6 million in 2013, largely drawn by the opening of the Horseshoe Casino Cleveland last year.
The completion of the highly anticipated Cleveland Medical Mart & Convention Center is also contributing to increased traffic. Several large conferences have already been booked and area retailers will benefit greatly from convention center traffic as visitors eat at local restaurants and shop at nearby stores.
In addition to tourism, the daytime population of downtown is increasing as several employers move or expand offices. This growth is encouraging many residents to locate in proximity to these jobs, and the rising housing demand has spurred apartment development throughout downtown neighborhoods. As retailers expand in the area to serve this residential population, retail operators will benefit from rising occupancies and rents.
Improving Vital Signs
Cleveland’s economy continues to be a bright spot in driving consumer demand and lifting the retail sector. On the employment front, the local job market is expected to grow 1.9 percent this year, with companies projected to add approximately 19,500 positions.
This news is helping to maintain property-level fundamentals, as vacancies and rents are seeing improvement. Retail vacancies are expected to fall 50 basis points to 11.9 percent by year’s end after remaining steady during the past two consecutive years. The forecast calls for asking rents to rise 1.3 percent to $15.03 per square foot and effective rents to climb 1.6 percent to $12.99 per square foot.
Improving operations has the natural effect of drawing more investors to Cleveland, and investment sales will advance through this year. In particular, institutional-grade and out-of-state private buyers are targeting grocery-anchored centers in established or growing neighborhoods such as Beachwood, Shaker Heights, Westlake and University Heights. However, limited supply of these properties is shifting investor attention to high-quality, unanchored assets in these areas of growth.
Investment Opportunities
While single-tenant, net-lease investors have generally been focused on major coastal markets, they are widening their gaze to source opportunities in more inland markets. This explains why many single-tenant retail investors are monitoring the Cleveland market. The expansion of O’Reilly Auto Parts, McDonald’s and discount retailers Dollar General and Family Dollar is expected to provide these buyers with additional investment opportunities this year.
Overall, construction of new retail space remains in check. Slowing construction of multi-tenant assets bodes well for operators, as retailers expand throughout Cleveland and fill vacant space. The expectation is that builders will complete only 300,000 square feet of space this year, up slightly from 2012, expanding inventory by 0.2 percent.
High-quality, net-leased assets are in high demand and cash-heavy buyers will continue to seek these properties for safety plays, especially in areas of new development and growth.
Given the lack of significant new construction, the continued pace of employment growth and the strong push by Positively Cleveland, the convention and visitors bureau for the greater Cleveland area, investors have more reason than ever to take a second look.
— Scott Wiles, vice president investments and director with Marcus & Millichap's National Retail Group, and Craig Fuller, also a director with Marcus & Millichap's National Retail Group