Redevelopment initiatives in Cleveland’s urban core will attract rental households to the area, while healthy job growth and a lackluster single-family housing market will uphold modest demand in the suburbs.
Among ongoing projects in the urban core, the $2 billion redevelopment of University Circle, which includes the expansion of the VA Medical Center, Cleveland Clinic and University Hospitals, has created more than 4,000 jobs since construction started in 2005. The renovations are expected to be complete by 2015 and will support over 36,000 jobs in the area.
Surrounding neighborhoods such as Beachwood, Shaker Heights and Cleveland Heights will benefit most as roughly 30 percent of the employees live in these areas. Many of these young professionals occupy apartments and will delay purchasing single-family homes, a trend that will sustain demand throughout the metro area. As a result, most submarkets will post vacancy decreases this year, providing many owners with enough leverage to ease concessions and lift rents.
Construction pipeline
Development slowed significantly during the last year, as only one apartment complex came on line. The 38-unit University Lofts was delivered in the Cleveland Heights/Shaker Heights area in the first half of 2011.
The first phase of the Uptown project will deliver 102 apartments in University Circle during the fourth quarter of this year. The completion will expand rental stock in the Cleveland Heights/Shaker Heights neighborhood by 0.8 percent.
Approximately 720 apartments are in the pipeline, although no start dates have been set. The largest project on the drawing board is the 330-unit Flats East Bank, which has been stalled due to the economic downturn. After builders completed an average of 350 units annually over the past five years, developers will deliver a mere 140 units in 2011.
Weak demand for single-family homes has kept residents in the rental community this year, which in turn has helped buoy apartment operations overall. As a result, vacancy dropped 80 basis points so far this year to 4.8 percent. Vacancy at Class A apartments has decreased 60 basis points year to date to 4.3 percent. In the corresponding period last year, upper-tier vacancy contracted 130 basis points.
An uptick in blue-collar job growth supported solid demand for Class B/C units in the past three quarters, driving down vacancy 100 basis points to 4.8 percent, the lowest level since mid-2008. In 2011, solid demand will underpin an improvement of 90 basis points in vacancy, reducing the rate to 4.7 percent. In 2010, vacancy tumbled 130 basis points, the largest annual decline on record.
Operators increased asking rents 1.5 percent in the first three quarters to $733 per month because vacancy continued to decline. Effective rents grew 1.9 percent in that time to $700 per month, tightening concessions to 16 days of free rent. Class A asking rents ticked up 1.1 percent year to date to a three-year high of $914 per month. In the Class B/C sector, asking rents rose 1.9 percent to $660 per month over the same period.
Owners in the Cleveland Heights/Shaker Heights submarket capitalized on the release of pent-up demand and lifted asking rents 2.4 percent this year to a record high of $680 per month, while compressing concessions to eight days of free rent. In 2011, asking rents will post the largest gain since 2008, surging 2.2 percent to $738 per month, while effective rents climb 2.8 percent increase to $706 per month.
Investment appetite
As lenders compete vigorously for market share in the multifamily sector, private, in-state investors will increasingly target performing lower-tier assets. The buyer/seller gap will modestly narrow in the coming months as overleveraged owners come to terms with market realities and act to dispose properties.
Local and regional investors who sat on the sidelines and balked at high prices before the recession will capitalize on discounted lower-tier assets that produce solid income streams in areas where rent growth will outpace inflation.
High-vacancy properties will also garner attention as opportunistic buyers with relatively high-risk appetites offer to pay cash for troubled properties selling at attractive prices to execute strategies to add value.
Densely populated pockets of the Lakewood/Linndale/Brooklyn and Euclid/West Lake County submarkets could see the most activity as favorable demographics will support investors’ efforts to re-tenant buildings within a two-year period.
Stabilized Class C properties will produce yields of approximately 9 percent, while distressed product will trade between $10,000 per unit and $15,000 per unit.
— Michael Glass is vice president and regional manager of the Cleveland office of Marcus & Millichap Real Estate Investment Services.