Downtown Cleveland is in the midst of a redevelopment boom. During the last 12 months, the city has seen a new $350 million casino and a new $33 million aquarium open. And over the next 24 months, it will see a new $465 million convention center complex, a new $275 million multi-tenant office building and hotel and a $180 million redevelopment that will include a new 220,000-square-foot office tower as a part of consolidation efforts for the Cuyahoga County government.
However, one of the most impactful and long-lasting components is the development of more than 1,100 new residential housing units that have either been announced or are under construction. If all come to fruition, it will increase downtown’s residential inventory by over 20 percent.
Market Drivers
Although there are numerous factors contributing to this residential building boom, the following stand out as key components.
• Build it and they will come? They are already here. As of January 2012, the downtown area had just under 4,200 residential units. Of this, approximately 25 percent were developed in the past five years.
However, this delivery schedule was much lower as compared to the blossoming demand. The source of this demand has come from many places, but three companies can be highlighted as catalysts — Rosetta, Quicken Loans and AmTrust Financial. All three of these firms have recently moved into the CBD, collectively resulting in more than 1,200 new jobs.
More importantly, the majority of these jobs have been filled by young professionals, many of whom have a desire to live in close proximity to their workplace. This momentum has spilled over to other segments of the workforce, resulting in an incredibly low 3 percent vacancy rate and a growing waiting list at nearly all of the existing downtown housing complexes.
In addition to the influx of millennials, downtown living has also been popular for empty nesters, particularly given the very strong arts, theater and upscale dining alternatives that have thrived in the city. With demand rapidly outstripping supply, the market was clearly poised for additional development.
• What was old is new again — Downtown’s Class A office sector has performed well over the last few years, with much of this success coming at the expense of the Class B and C downtown office sectors.
However, the bifurcated office market has also provided an opportunity for the residential sector. Of the 10 largest complexes either planned or under construction, seven involve the conversion of former Class B or C office buildings.
This older class of property offers several advantages for redevelopment. The buildings are generally well located in the heart of the CBD. They usually have a favorable layout for a residential conversion, with smaller floor plates, good window lines and efficient lobbies and central cores.
And their “as-is value” as an office building is sufficiently low enough to make the overall economics viable as a conversation candidate.
As an added benefit, converting these former office properties will result in a smaller and healthier downtown office market overall, as all of the targeted conversion candidates have languished as office properties in recent years.
• The luster is back — Downtown Cleveland thrived throughout much of the 1950s and 1960s, but started a slow and steady slide in the 1970s. There were many factors that contributed to this downward spiral.
The population center began to move away from the center city and toward the suburbs, particularly to the southeast, southwest and west. Several primary downtown companies downsized, moved or simply disappeared as the region’s economic base shifted. And the overall population of the region shrunk.
Although there has been noteworthy development in the downtown area in the intervening years, most of the projects have been event-oriented, such as Cleveland Browns Stadium, Quicken Loans Arena and Progressive Field. The developments today are much different.
The current group of projects previously mentioned, including the Medical Mart and Horseshoe Casino, has provided a solid framework of permanent jobs and steady visitors.
But the new households that will be created with the residential boom illustrate that people not only want to come downtown to visit. They want to live there.
• The next chapter — The projected population influx will almost certainly mark a tipping point for ancillary development. The downtown area has excellent entertainment and dining alternatives, many of which have opened during the last several years.
However, there is a noticeable absence of several key retail categories. For example, there is no traditional, full-service grocery store. Ditto for an on-site dry cleaner, large-format office supply store, and electronics store. As new residential units continue to come on line, the growing consumer demand will result in some, if not all, of these categories being filled.
The downtown population in Cleveland will never approach the masses contained in cities such as New York or Chicago. But the recent surge in activity is very promising and could spread to other areas, including the currently underdeveloped lakefront and the campus area surrounding Cleveland State University.
It has been said that a region can only be as strong as its central core. If this is true, the future of Cleveland looks bright.
— Alec Pacella is a senior vice president specializing in investments with NAI Daus Commercial Real Estate Services in Cleveland.