By Donald Lydon, Avison Young
Cleveland offers a mix of hurdles and opportunities across its industrial, office and multifamily sectors. With limited speculative construction, landlords are poised to leverage rental increases. Meanwhile, developers eyeing Cleveland should anticipate longer lead times for new projects, navigating through municipal regulations and land availability challenges.
This nuanced landscape presents openings for savvy investors, developers and occupiers looking to capitalize on Cleveland’s evolving real estate dynamics.
Resilient and mature, yet relatively untapped industrial market presents opportunities to national developers.
Cleveland’s industrial sector is in a strong position relative to similar Midwest markets. With vacancy rates comfortably low at around 4 percent, rents are edging upward as developers struggle to find capital outlay nationally and spec development has all but stopped in most markets. The current landscape features a mix of large distribution hubs and older, yet prime, manufacturing facilities in key locations across Cleveland and Akron.
Many facilities leased to third-party logistics companies seem to be stockpiling goods where others sit nearly empty, reflecting evolving needs in logistics and storage amid ongoing supply chain adjustments. This dynamic is leading to diverse demands: from small to mid-sized multi-tenant flex spaces (10,000 to 30,000 square feet) to larger high-bay warehouses (50,000 to 150,000 square feet).
The slowdown of new speculative construction and shrinking inventory of available product creates substantial opportunities for landlords to push rental rate increases on tenant renewals. We’re advising our occupier clients to extend their facility planning out on a farther horizon to assure their current space can accommodate future growth and should prepare for rental rate increases in the 10 to 20 percent range.
Now is also time for users to consider seeking out possible new construction alternatives with developers looking for the impetus to construct a new single- or multi-user facilities; however, a 24 to 36-month lead time is almost minimal to track for new project.
While national developers have historically bypassed Northeast Ohio as local developer/owners controlled most of both existing product and new product, there’s now a window for long-term players. Joint ventures with landowners, particularly within prime infill locations capable of supporting mid- to large-scale distribution centers and light manufacturing facilities, are ripe opportunities for those eyeing entry into Cleveland’s resilient industrial market.
Ahead of the national curve in office-to-apartment conversions, Cleveland’s office market is right-sizing.
Downtown Cleveland’s office market is experiencing a stabilizing phase, marked by modest new developments in recent years — highlighted by Sherwin-Williams’ new headquarters. Class A office availability has fallen considerably to 12.6 percent in the second quarter of 2024 from 17 percent in the previous year, underlining positive momentum within the sector.
Recent property trades — a good sign in their own right — have also created shifting dynamics. Sales include: the former BP building at 200 Public Square, which traded at approximately $35 per square foot with notable vacancy at approximately 30 percent; Erieview Tower; and the Galleria, another landmark, Class A property that traded in 2018 and is undergoing renovation and conversion to apartments and hotel rooms.
Many of the Class B and C properties that comprise the remaining central business district market are also slowly being converted into multifamily. Cleveland’s office-to-apartment pipeline is currently sixth in the country, with more than 2,000 units planned.
When combined with Cleveland’s historic office conversions, including the Terminal Tower, The Standard and The May, this transformation is significantly reducing office vacancy. As the market stabilizes, opportunities for office repositioning projects and ground-up development should reemerge.
Despite headwinds, multifamily market is gaining ground on regional peers.
Since the beginning of 2021, over 60 multifamily projects have been delivered within the Cleveland market, netting nearly 6,600 units. Some notable projects include the 202-unit Residences at 55 along Public Square, the 304-unit City Club Apartments downtown, and the nearly 300-unit tower, Artisan in University Circle. As of the second quarter of 2024, over 3,360 units are under construction and are expected to deliver within the next few years.
While new construction is proceeding cautiously, sometimes hindered by a combination of the overall shortage of vacant land and municipal resistance to multifamily zoning, market fundamentals are strong compared with other Midwest markets. While the Cleveland market’s average asking rent is 7 percent below other peer markets such as Pittsburgh, Columbus and Cincinnati, maintaining affordability, the annual rent growth is nearly 60 basis points higher than these peer market averages.
Donald Lydon is a senior vice president with Avison Young. This article originally appeared in the August 2024 issue of Heartland Real Estate Business magazine.