CITY HIGHLIGHT, DECEMBER 2005

CLEVELAND CITY HIGHLIGHTS
Christopher Seelig, James Samuels, Ron Markowitz, Gary Gruehl, Joseph Ditchman Jr., Kevin Kuczynski, Warren Morris and Thomas Gustafson

Cleveland Retail Market

Last year, the focus on retail real estate in Cleveland was on lifestyle centers, with Legacy Village in its first full year and the addition of ETON and Crocker Park. This year, big box development is driving the market, with 7.5 million square feet of new big box developments proposed or under construction in the Cleveland market. This seems like a lot of space to add to a population base that hasn't grown significantly in decades, but there is no shortage of anchors and junior anchors signing deals. Eight Wal-Mart Supercenters, six Targets, three Lowe's Home Improvement Warehouses, and five Home Depot stores are proposed, are under development, or have opened in 2005 in the Cleveland market.

The first Wal-Mart Supercenter in Cuyahoga County is underway as part of the $120 million, 1 million-square-foot Steelyard Commons power center being developed by Beachwood, Ohio-based First Interstate Properties.

Other in-fill developments include the 600,000-square-foot City View Center in Garfield Heights and a Target and Giant Eagle at West 117th and Interstate 90. McGill Property Group is developing City View Center on a former landfill site, a first for Ohio. Rysar Properties, primarily an in-fill housing developer, has assembled more than 50 parcels for its redevelopment of a former residential neighborhood at West 117th and I-90 on Cleveland's west side.

There are also some major redevelopments of existing retail centers in the works. A joint venture between New Plan Excel Realty Trust, The Richard E. Jacobs Group and Transwestern Investment Company is redeveloping the Westgate Mall in Rocky River. The retail center is undergoing a transition from enclosed mall to a combination of streetscape and big box tenants to capitalize on the success of lifestyle centers. In University Heights, Cedar Center is being redeveloped by The Coral Company to add northeast Ohio's first Whole Foods Market, while across the street, the city of South Euclid is prepared to use eminent domain to jump start the redevelopment of its portion of Cedar Center into a mixed-use development. The most ambitious redevelopment plan on the drawing boards is Scott Wolstein's $230 million plan to develop a new neighborhood on the east bank of the Flats, complete with restaurants, retail space, a cinema, and multi-story office and residential buildings.

In the outer suburbs, there is no shortage of green space projects. Forest City Enterprises, McGill Property Group, Zaremba Group, United Commercial Property Group, Visconsi, Liberty Development, and Schottenstein all have big box projects in the works.

The one thing missing in all of these projects is grocery store anchors. With the exception of Whole Foods Market, there are no new grocery stores being added to the market, only relocations. In fact, after the closing of several Tops stores, there are fewer grocery stores open in the market now than in 2004. The dearth of grocery retailers is likely the effect of the lack of population growth combined with the upcoming onslaught of the Wal-Mart Supercenters set to come online in the next year.

Cleveland has experienced the entry of a number of new retailers and restaurants to the market this year, including Petco, Urban Outfitters, H&M, Melting Pot, Maggiano's Little Italy, Flemings, Qdoba Mexican Grill and Sushi Rock. There are several planned new entries to the market in 2006 including Filene's Basement and The Fresh Market.

The Cleveland retail real estate market has remained strong, with low vacancy rates currently just above 7 percent. This low vacancy has kept pressure on rental rates with prime small space rates of more than $30 per square foot not uncommon. Land prices have seen the highest increases with developers quoting ground rent as high as $175,000 per year for a 1-acre outlot.

— Christopher Seelig, sales associate; James Samuels, vice president; Ron Markowitz, senior vice president; and Gary Gruehl, vice president, work for Cleveland-based NAI Daus.

Cleveland Industrial Market

Cleveland has a rich history as one of the primary heavy manufacturing hubs in the United States. However, as heavy manufacturing operations have moved overseas, the market has weakened in this region and around the country. The effect on real estate has been a precipitous decline in the need for heavy manufacturing space.

Even though this decline has occurred, the high inventory of aging manufacturing facilities with cranes and power sources does present opportunities. Brokers and landlords are finding ways to be innovative and make the existing spaces work for their client. Very aggressive deals are available and many tenants are taking advantage of them. The third quarter 2005 vacancy rate for the city of Cleveland was 13.44 percent for industrial and flex space. For the greater Cuyahoga County market, industrial and flex vacancy stood at 11.8 percent, and the suburban markets around greater Cleveland registered a 10.3 percent rate.

On the flip side, the strength of northeast Ohio's industrial market space is in warehouse and distribution. However, today's clients have a very defined set of requirements. Clients are looking for facilities that have high bays with clear heights of 24 feet or better and open floorplans.

Another interesting dynamic to note in the industrial market is the use of flex space by non-traditional users. Companies that would typically occupy office or retail space are moving into flex space. Flex space can offer substantial savings on lease rates, room for companies to grow, and the benefit of having shipping and receiving capabilities with docks and drive-ins. Clients recognize the savings and the benefits of flex space and are working with brokers and landlords to find ways to utilize industrial space to fit their office and retail needs.

Rental rates in the third quarter of 2005 varied across the greater Cleveland market; in the city, industrial space went for $3.19 per square foot while flex space rented for $9.56 per square foot. In Cuyahoga County, industrial space fetched $3.87 per square foot compared to $8.11 per square foot for flex space. And in the suburban submarkets to the east, south and west, industrial space rented for $4 per square foot and flex space traded at $7.27 per square foot.

The corridor between Cleveland and Akron appears to be one of the prime areas for northeast Ohio's industrial activity. On the southwest side, Strongsville is experiencing a surge in development. The city has a newly planned 150-acre business park located along Foltz Industrial Parkway. The city is looking for both office and industrial users. Also in Strongsville, Duke Realty Corporation is involved in the development of a 175,500-square-foot building, 124,500 square feet of which will house the World Almanac Education Group distribution center.

On the southeast side of the market, one of the exciting new developments is the Hudson Crossing Project in Hudson, Ohio. Hudson Crossing is being planned as a 130-acre industrial and office park. The site is master-planned as a 1 million-square-foot industrial and office location offering great access to freeways and significant economic benefits through enterprise and foreign trade zones.

Presently, there is more activity in the industrial market than has been seen in 4 years. Deals are still slow to actualize, but the increase in activity is a positive indicator of things to come.

— Joseph Ditchman Jr. is a partner and Kevin Kuczynski is a senior vice president with Cleveland-based Colliers Ostendorf-Morris.

Cleveland Office Market

Traditionally speaking, Cleveland can be described as a stable real estate market. There are few spikes, high or low. Because of this stability, investors with excess real estate dollars from highly appreciating markets such as Arizona, California and Florida are seeking to invest their money in the Midwest. More specifically, it appears they are looking to invest in a stable environment. Premier office space is being sold for top dollar as investors realize that stable markets like northeast Ohio offer a bargain. Purchases such as One Cleveland Center, which sold earlier in the year for $141 per square foot, and the BP Tower, which sold in June for $118 per square foot, are proof that this market is valuable to investors.

In addition to increased investment dollars, positive job growth is also affecting the Cleveland office market. A shifting employer base has led to new job growth in the city. Historically, Cleveland has been known as a manufacturing town; however, since the late 1980s, the area has made a dramatic shift to a service-based economy. To this end, many of the major corporations that call Cleveland home are service companies such as National City Corporation, Sherwin Williams, Key Corp. and Forest City Enterprises, to name a few. In the first quarter of 2006, Quicken Loans, the nation's largest online home lender, will open a state-of-the-art Internet home lending center in downtown Cleveland. This will have a major impact throughout the city. The center is expected to bring 350 high-paying jobs to downtown.

The Defense Finance and Accounting Service (DFAS) recently announced that its operations would remain in the Anthony J. Celebrezze Building in downtown Cleveland. DFAS is currently the fourth largest federal employer in the greater Cleveland area. In the coming months, DFAS will add more than 200 new jobs. As new jobs come to the community, the office market will begin making positive strides. The addition of jobs will fuel the need for housing and retail space as young professionals migrate into the area.

The growing business population is spurring office development. In the coming year, the highly visible, formerly undeveloped southeast quadrant of Interstates 77 and 480 is poised to resemble its mature west side counterpart. The Dalad Group and Duke Realty Corporation are spearheading the development of Rockside Woods, one of the final available areas within the Rockside Road corridor. The development will consist of office and hotel space. The implication is that this will further enhance the robust suburban market just south of downtown, midway between the Chagrin business district and Cleveland Hopkins International Airport.

The culture of the overall Cleveland office market is changing and increased development in other sectors is strengthening the prospects for the city's office real estate market. Specifically, the combination of retail and residential development is acting as a catalyst for the Cleveland office sector. Zaremba, The K&D Group and The Wolstein Group are leading the increase in commercial development in downtown Cleveland.

The onslaught of new retail and residential development is beginning to generate additional activity to the office market and bringing some momentum in the downtown office market.

The K&D Group recently acquired Reserve Square in downtown Cleveland. The two 23-story residential towers house 200,000 square feet of office space as well as a retail component.

The office vacancy rate in the third quarter of 2005 for the Cleveland central business district (CBD) was 25.43 percent, which is higher than the first quarter of the year when vacancy stood at 22.3 percent. However, CBD Class A vacancy registered at 13.1 percent compared to 14.6 percent in the year's first quarter.

Suburban vacancy has experienced a decrease from 18.28 percent in the first quarter of 2005 to 15.86 percent during the third quarter. In that same time period, suburban Class A vacancy dropped markedly, from 22.56 percent to 15.07 percent.

— Warren Morris is a partner and Thomas Gustafson is a senior vice president with Cleveland-based Colliers Ostendorf-Morris.

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