While the multifamily and office markets in Cleveland have been challenged through 2003, the retail market is doing well with new lifestyle center development and the industrial market is closing on its best year since 1999. Local experts expect 2004 to bring improvement in every commercial real estate segment.

Retail

Lifestyle centers are dominating the Cleveland retail market. They continue to thrive due to the ease of highway access and the desire by the public to walk in an open-air environment. Entertainment, food and retail are highlighting the future of the Cleveland retail industry.

On the affluent east side of Cleveland, located on Chagrin Boulevard in Woodmere, Robert L. Stark Enterprises has re-developed Eton Collection, an upscale center that now has nearly 225,000 square feet of prime retail and office space. This center has added new restaurants including Bravo Cucina Italiana, Flemings Steakhouse, Cameron’s Fish Market, Cold Stone Creamery, Pancho Villa, Tuscany and Stone Oven, and new retailers Barnes & Noble, Organized Living, Sur La Table and Trader Joe’s.

Another prominent retail development on the east side is Legacy Village. The new upscale lifestyle center, located on the corner of Cedar and Richmond roads in Lyndhurst, was completed by Beachwood-based First Interstate Properties in mid-October. It consists of approximately 610,000 square feet of space, including 25,000 square feet of third-story office space. Legacy Village is bringing a number of new retailers to the market including EXPO Design Center, Crate & Barrel, Galyan’s Trading Company, Talbots, Anthropologie, Z Gallerie, Restoration Hardware, The Cheesecake Factory, Stir Crazy, Brio Tuscan Grill and California Pizza Kitchen. Other retailers include Starbuck’s and Giant Eagle.

Also on the east side, Heritage Development is proposing a shopping center in Garfield Heights at Transportation Boulevard and Interstate 480. If developed, this 645,151-square-foot center will include Wal-Mart and Giant Eagle.

On the west side of Cleveland in Westlake, Robert L. Stark Enterprises is developing Crocker Park, a $450 million project located on nearly 80 acres. The project, which will total 1.7 million square feet, will consist of 900,000 square feet of multifamily space, 550,000 square feet of retail space and about 250,000 square feet of office space.

Some of the restaurants that have signed leases at Crocker Park include Brio Tuscan Grille, Pancho Villa, Cold Stone Creamery, Champps, Blake’s Seafood Grille and Hyde Park Grille. Retailers include Barnes & Noble, Z Gallerie, Talbots, Dick’s Clothing & Sporting Goods, Regal Cinemas, Sur La Table, Arhaus, Abercrombie & Fitch, J. Jill, Coach, Victoria’s Secret and Express. The project, which started in March, is scheduled for completion in October 2004.

CenterPoint Properties and Jeffrey R. Anderson Real Estate have proposed The Shops at the West End, a retail and entertainment center also to be located on the west side of Cleveland. This center is pending approval by the city of Lakewood.

Other restaurants have entered Cleveland including Bahama Breeze, Smokey Bones, Hoggy’s and Eat ‘N Park. Family restaurant chains, such as Cracker Barrel and IHOP, continue to expand in this market.

Other major retail developments include the addition of Home Depot and Giant Eagle to Brunswick and Target, Lowe’s Home Improvement Warehouse and Giant Eagle to Macedonia. The big-box centers also continue to do well with retailers such as Wal-Mart, Target and Lowe’s Home Improvement Warehouse continuing to expand.

— Hal Reisenfeld, president; and Scott Smith, vice president of Beenchwood, Ohio-based Reisenfeld & Company

Multifamily

While continuing to be a challenging market segment, multifamily property owners and investors are cautiously optimistic about the Cleveland market. Today’s low interest rates are either “friend or foe” for owners and investors. While low interest rates on mortgages have made owning a home more financially feasible for some renters, it has also increased the turnover rate in most properties. However, low interest rates have also allowed buyers to bid aggressively to acquire properties, and they have enabled owners to make significant capital improvements to upgrade existing properties and add amenities to remain competitive. Multifamily developers are quick to adapt. Where possible, they are adding as many “home-like” features to their developments so that the pool of existing or potential tenants does not have to make a lifestyle decision when considering a property.

Rather than focusing strictly on multifamily rental units, many developers are adding a for-sale component to their projects or shifting to for-sale units, especially in the central business district (CBD). Notably, the former WKYC Building (a 48-unit condominium at East 6th Street and Rockwell Avenue in the heart of the CBD) and the new construction condominium phase of Stonebridge Waterfront, along the Cuyahoga River, will test the for-sale appetite downtown while offering dramatically different types of units. The 30 or more condominium units at The K&D Group’s Stonebridge Waterfront will complement the successful 159 existing apartment units at the project.

Also taking advantage of the water and high-end amenities, Quay 55, a 138-unit conversion of a former warehouse terminal building on Lake Erie, opened in April and offers unequalled views and luxury apartment living. The renovation of the former Bingham Building Warehouse into 340 upscale rental units should also have a dramatic impact on the market. The project will be phased with the first units available in early 2004. Negotiations should almost be concluded at that time to bring the first grocery store to the Warehouse District, which has long been needed to satisfy the growing residential base in downtown Cleveland. Developer Gus Georgalis’ Pinnacle project, which will add almost 90 new units with commanding views of downtown and Lake Erie, will be another option in upscale downtown living.

While it may appear that all the action is in the growing downtown housing market, there is still activity in the inner-ring communities and the outer-ring communities along interstate arteries. Inner-ring communities — such as Lakewood with its high-profile West End Development — hope to improve and strengthen their viability with expanded and improved commercial and residential properties at the expense of existing structures. Crocker Park, a mixed-use development in suburban Westlake, will offer a new concept to this market including high-end residential in conjunction with retail and office space. The K&D Group continues to acquire and improve the quality of older existing multifamily properties in built-up communities by implementing aggressive capital improvements in the suites and by adding amenities.

There is negligible land available for development in Cuyahoga County and, as a result, there will be smaller, scattered-site projects in the city of Cleveland. There is also a push by Goldberg Companies, and others, for ground-up development in Lake, Summit, Portage, Medina and Lorain counties. Land is available in these areas, and developers are focusing on large units with home-like features but at affordable price points.

While it may be argued that there are not any areas in need of more multifamily development, existing inventory in inner-ring communities is in continual need of upgrading. Also, with the increasing focus on the educational centers and the medical/technology complexes between downtown Cleveland and University Circle, some informed industry experts feel that more multifamily units should be built in these areas to serve the increasing student and employee population.

Still a heavily dominated local ownership basis, Cleveland has recently attracted developers and management companies from other markets through acquisitions or renovation projects. Kennedy-Wilson is overseeing the Bingham Building conversion, and Cincinnati-based Town Properties is managing the 1900 Euclid Avenue project near Cleveland State University. However, local firms are still controlling some new development.

The biggest shift in the type of units being offered is the increasing number of for-sale units, to take advantage of today’s low interest rates. Developers are adding attached parking, offering townhome style of construction and increasing the size of living units to retain or attract renters as opposed to potential buyers. The target tenant today is one who chooses to rent, as opposed to one that wants to own. Upscale projects are most susceptible to the economic equation of rent versus own. Industry players hope that interest rates rise to drive occupancy levels back up.

Vacancy and rental rates differ depending on properties, submarkets and size of units. While some mature properties in developed areas may be achieving rents in the 60 cents- to 80 cents-per-square-foot range, some developers of newer, larger square footage units are targeting rents in the 80 cents to $1-per-square-foot range. For them, monthly rent instead of rent per square foot is the yardstick. For Warehouse District renovations, it is not uncommon to see rents from 95 cents to $1.15 per square foot depending on unit size. But across the board, concessions and deal rates are bringing down effective rents. Some properties are reporting vacancy rates of 4 percent to 5 percent, while other properties may be reporting vacancy rates in the high teens. There is no consistent market number as management, amenities and attention to detail make the difference, property by property.

In the future, we should expect to see more for-sale multifamily projects and conversions to condominiums in the CBD, and a continued slowing of new, suburban ground-up development. Location and commuting time will contribute to the success of these projects. Lastly, if interest rates rise, look for vacancy levels and effective rents to stabilize with improvement following quickly.

— Paul Misterka is vice president, investment property sales, at Colliers International.

Industrial

As 2003 comes to a close, the greater Cleveland industrial market is enjoying a more positive conclusion than in the past. Since early 2000, the industrial market has experienced a significant slowdown, and it has only been in the last 6 months that there has been a resurgence in activity. The last round of economic indicators reported that gross domestic product has risen 7.2 percent, and the activity in the Cleveland market parallels that growth. There has been evidence of many positive trends recently, including stabilization of lease rates and existing building sale prices, as well as an upswing in new construction, projecting that the clouds may continue to clear into 2004.

This past year, there have been a number of substantial construction projects started that will add approximately 2.5 million square feet of industrial space to the current industrial base of 282 million square feet.

To the east of Cleveland, L’Oreal is adding the greatest amount of space to the Cleveland area with a 650,000-square-foot warehouse/distribution facility in Solon, built by The Geis Companies. Other sizeable projects in the east are the 60,000-square-foot Recreational Products building and the 60,000-square-foot Image Works building, both in Streetsboro. Additionally, Duke Realty Corporation has a 144,000-square-foot speculative building under construction in Glenwillow and a 120,000-square-foot building for Hy-Ko under development in Northfield.

In the west and southwest Cleveland submarkets, Oatey Company is building a 250,000-square-foot facility developed by Ray Fogg Corporate Properties, and Sysco Food Services is moving into a new 330,000-square-foot building developed by Chelm Properties. Geis is developing two major projects in the southwest submarket: the 400,000-square-foot Laich Industries building and the 100,000-square-foot Cleveland Growers building.

Consolidating its Akron and Cleveland Anheuser-Busch distribution facilities, the House of La Rose has hired Louisville, Kentucky-based James N. Gray Company to develop a new 380,000-square-foot warehouse and office facility in south suburban Brecksville. Lastly, near downtown to the east, the Cleveland Clinic is developing a new 60,000-square-foot laundry facility, and the Cleveland Food Bank is building a new 110,000-square-foot facility.

The trends permeating the industrial market this past year have been consistent with the nature of the marketplace. For example, sales are picking up because of the favorable interest rates, but leasing activity is slower to rebound. Smaller spaces (10,000 square feet to 40,000 square feet) are the most popular and have a quick turnover rate. Larger buildings that have not moved off the market quickly have not maintained value. As the manufacturing sector takes a hard hit, older buildings in Cleveland are popular for adaptive reuse projects and trendy downtown lofts.

Cleveland continues to endure the slow economy, with stabilized asking lease rates around $3.90 per square foot, high construction activity, and greater sales and leasing activity. Vacancy rates, however, may continue to rise as the new construction projects come online. The current vacancy rate of 10.33 percent is likely to peak as companies move into their new buildings. As the city adjusts to a different pace and a more creative outlook for the future, the Cleveland industrial landscape should continue to improve in the coming year.

— Howard Lichtig, vice president; Joseph Greenberg, associate; and Dana Poplar, marketing specialist with Los Angeles-based CB Richard Ellis.

Office

Tenants continue to have the upper hand in the Cleveland office market as competition among landlords remains robust. Throughout 2003, attractive lease rates and aggressive incentive packages gave tenants reason to explore alternatives. This environment has placed tenants in a strong negotiating position and is expected to bring increased activity in 2004. More companies will take advantage of market conditions and shop their tenancy. Historically, absorption is strongest when vacancy is high. The next 12 months should bring increased leasing activity as companies grow more confident in the improving economic conditions, reconsidering space alternatives.

Landlords, willing to see the wisdom of flexible terms and market rents, will also benefit from the struggling office market. During the first half of 2004, expect to see significant movement between competing buildings, resulting in a limited impact on overall absorption levels for this period. The lagging employment figures are expected to begin recovering in the second half of 2004, positively impacting occupancy levels going into the following year.

Mergers, downsizing and loss of corporate headquarters has stressed the northeast Ohio office market, especially in the central business district. Despite the absence of significant speculative construction downtown, additional space continues to burden the market. This abundance of space has forced the gap between Class A and Class B lease rates to narrow. Companies choosing to exploit current rates and incentives will be able to upgrade their premises for little or no increase in occupancy cost. Opportunistic owners of Class A space, who recognize these market realities, will benefit most. However, most landlords will be forced to adopt this strategy to satisfy tenant expectations.

The suburban markets began to show signs of improvement in the last half of 2003 with an overall positive absorption. The east and south markets, traditionally the suburban submarkets of choice, will be the first to benefit from the improved economic conditions. Significant vacancies in both submarkets will provide ample opportunities for expanding tenants. The east suburban market is the recipient of the sustained growth of Progressive Insurance as it continues to gobble up leased office space to fulfill space needs beyond its owner-occupied facilities. The Cleveland Clinic Foundation (CCF) has been another primary driver in the suburban landscape. Recently, in addition to taking over and subsequently removing a 200,000-square-foot south suburban building from the competitive inventory, CCF has leased an additional 40,000 square feet in this submarket. Activity of this type should continue to occur from a number of Cleveland-based companies.

— Deirdre McGuane is research services manager in the Cleveland office of Grubb & Ellis.

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