Midwest Real Estate News — April 2011
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Busy Times In Cleveland
Dan Rafter, Editor

Believe it:

Cleveland’s starting to rock again

Its reputation is as shaky as ever. But the commercial real estate brokers who do business in Cleveland say that there are plenty of reasons to be optimistic about this Midwest industrial-anchored city.

And they don’t even care that LeBron James now slam-dunks in Miami.

Michael Glass, vice president and regional manager with the Cleveland office of Marcus & Millichap has never understood the negative press that his adopted city has received. He’s a transplant here, moving to The Ohio city from Chicago. And he has absolutely no regrets about making the move.

There’s a lot to love about Cleveland, he says. It’s affordable. It boasts plenty of cultural hotspots and fine restaurants. It’s blessed with a thriving medical district.

And, best of all for Glass, its commercial real estate market is again showing signs of life after the rough years of the Great Recession and its sluggish recovery.

Glass points to the recent job growth in Cleveland as evidence that the city’s economy is on themend. In 2011, Glass said, the city had as of the start of March added about 11,000 new jobs. Since the Great Recession Officially ended, Cleveland has added slightly more than 22,000 jobs.

And there’s hope for even more new jobs. Construction is now underway on a new casino — Horseshoe Casino Cleveland — in downtown. This project is expected to draw more than 5 million visitors a year to the city. For those keeping count, that’s more than all three of the city’s major sports teams – the football Browns, baseball Indians and basketball Cavaliers — combine to bring to the city in a given a year.

This new casino, which will be opening in 2012 in its temporary location before opening for business in its permanent building in 2013, should bring about 2,000 temporary and 1,600 permanent jobs, Glass said.

“I think the casino is a great thing,” Glass said. “It will bring a lot of life to downtown Cleveland. There have been a lot of companies over the years that have moved out to either the east or west suburbs. This project will help rejuvenate downtown Cleveland. It will bring new jobs downtown. Ultimately, it will be a good jobs creator for the metro and a positive development for downtown Cleveland.”

Market by market

It’d be incorrect, though, to say that Cleveland doesn’t still face its challenges. Certain commercialmarkets, for instance, remain mired in a deep slump.

Terry Coyne, executive vice president, of the city’s Grubb & Ellis office, though, said that 2011 has been a strong year so far for his city.

He also said that Cleveland doesn’t deserve the bad reputation that it has, mostly from people who’ve never lived in or visited the city.

Coyne calls Cleveland a great place to live. And he has plenty of reasons to back this up: The city boasts affordable housing. It has a thriving health-care and medical market, with some of the country’s best hospitals. It has an unexpectedly diverse arts and culture scene.

And, most importantly of all, the commercial real estate market here is on the upswing, Coyne said. And that’s especially true of the city’s industrial market.

In the last three months, Automated Packaging bought a 177,000-square-foot building from Playtex Manufacturing, Cleveland Steel Container moved to an 86,000-square-foot building andWinston Products moved to a 113,000-squarefoot building, all in the Cleveland area.

To make matters even better, American Greetings — the folks responsible for so many of those Valentine’s Day and anniversary cards lining the shelves at your local supermarket—announced in early March that it will keep its headquarters in Northeast Ohio, after having previously flirted with leaving the area.

“A lot of people don’t realize what a great place Cleveland is,” Coyne said.

“We have a lot going for us in Cleveland.” Coyne is especially bullish on the city’s industrial market. He says this commercial sector is definitely on the upswing as 2011 moves toward its second half.

Coyne points to several reasons for this: Cleveland boasts a workforce with a strong base of engineering and manufacturing skill sets. This market also didn’t see much spec development during the busiest days of the commercial real estate industry’s boom times.

Of course, there’s another, less pleasant reason, why Cleveland’s industrial market is recovering faster than are some others: It was hit particularly hard During the recession. In some ways, then, this market had nowhere to go but up.

“If you look at some markets, like Atlanta or Columbus at their peaks, you’ll see that they had tons of spec developments built,” Coyne said. “That didn’t happen here. We rarely get out over our skis here. You might see one or two spec buildings in a good market. But you’ll never see it to the extent that you see it in much larger markets.

Coyne said that the fact that Cleveland has relied so heavily on automotive manufacturing — it has long ranked as the second biggest U.S. auto city, behind only Detroit — hurt the city during the recession.

This relationship with auto manufacturing might also account for some of the negative press that Cleveland has received, Coyne said. Those unfamiliar with the city and its commercial real estate market, might not understand that Cleveland today is also a hub of medical and health-related technology development.

For instance, the massive, and definitely high-tech, Medical Mart project is now underway. And the city is already home to the esteemed University Hospitals and Cleveland Clinic. The Medical Mart project includes a new convention center and a sprawling marketplace; it’s a bit like Chicago’s famed Merchandise Mart, only focusing on medical and health-related innovations.

Confidence has returned

Joseph Barna, principal with CRESCO Real Estate in Cleveland, said that since September of 2010, commercial real estate activity in the city has picked up tremendously.

Barna said that the city’s industrial market, especially, is growing again.

“The owners are confident in where the economy is going,” Barna said. “Decisions that were put on hold in terms of expansion are now moving forward.”

Manufacturing and industry have historically been important to Cleveland. The city has long been a hub for automotive manufacturing, aerospace, hydraulics, metal forming and steel.

These industries are still important for the city. But Barna is seeing something else, too: an increase in new businesses that work with clean energy and biotechnology.

“It’s been a bit of a well-kept secret,” Barna said. “But we already have that base of medical knowledge here, with Cleveland Clinic, University Hospitals and Case Western Reserve University and its medical school. There’s also a cost-of-living here that is well below the national average. You can come here with any kind of skill and make a good living.”

Barna says that the city’s recent activity May help slow a longstanding trend of companies moving from downtown Cleveland to the suburbs. This is symbolized by the construction, ongoing now, of the first new office building in the city in the last 20 years.

“The more progressive companies, the companies that are focused more on technology, want to be in an urban environment today,” Barna said. “They have younger workforces that would rather live in the city than in the suburbs.”

A busy city

Cleveland actually ranks as quite the busy city these days. Now that the national economy is finally thawing—at least slightly — the construction cranes are hitting Cleveland in force.

Linda Striefsky, partner in the real estate practice group of Cleveland’s Thompson Hine law firm and current president of the American College of Real Estate Lawyers, said that Cleveland is fortunate in this: Many markets Cleveland’s size aren’t yet seeing as much construction activity.

“Across the country, the rebound is happening first and strongest in the primary markets,” Striefsky said. “The secondary and tertiary markets are catching up. Cleveland is not a primary market. But there are definitely some interesting projects that are off the ground. There is a lot of new construction going on in downtown Cleveland. And there are interesting stories behind every one of these projects.”

Striefsky points to the new downtown casino, Medical Mart and a major mixed-use project for the city’s Flats neighborhood.

Striefsky, though, still sees problems for the city’s downtown office market, which is plagued by vacancies.

The economy may be improving, but it’s certainly not booming. And that means that office vacancies will be around for some time, Striefsky said.

“Over the last year or so, as new office leases are being closed, it’s not a sign that new jobs are being created. It’s a sign of companies leaving building A to go to building B, often for less space because they have downsized their workforces,” Striefsky said. “I don’t see that trend going away. If anything, employers are looking harder at their space needs. They are examining very closely their real space usage. They are taking into account people who travel a lot, who don’t need an office five days a week. They want to use as little space as possible.”

What does the future hold for Cleveland? Much of this depends on the vision of city leaders.

As Glass, from Marcus & Millichap, puts it, it’s time for Cleveland to take advantage of its greatest asset, its location along the shores of Lake Erie.

Again, thanks to his time in Chicago, Glass knows just how important a lakeside location can be to a city. Chicago has famously taken advantage of its location along Lake Michigan to bring in tourists from around the globe.

“There is no reason that Cleveland can’t be similar to Chicago,” Glass said. “One of the challenges the city faces is attracting and maintaining its young people once they graduate from college. I think that to start developing around the city’s greatest asset, the lakefront, would be a step in a very positive direction in repositioning what downtown Cleveland is all about.”

If you’re looking for more good news in Cleveland, you can find it in the city’s multi-family sector.

This isn’t a surprise, of course. The multi-family sector is outperforming others in just about every city across the Midwest.

According to the latest research from Marcus & Millichap, the vacancy rate in Cleveland will improve 40 basis points in 2011 to 5.6 percent. At the same time, asking rents in 2011 are expected to increase 1.7 percent to $733 per month, while effective rents will jump 2.2 percent to $699 a month.