CITY HIGHLIGHT, DECEMBER 2007

CLEVELAND CITY HIGHLIGHTS
Keith Hamulak, Nicole Smeader, Joseph Martanovic, Kevin Kuczynski, Barry Holtzer, Christopher Hondlik and G. F. Coyle III

Cleveland Retail Market

Retail developers have built 1 million square feet or more annually for the past 5 years in Northeast Ohio. This has kept retailers, leasing agents and the brokerage community very busy filling space. In the Cleveland area, 2007 was very much a year of absorption. Retail vacancies are in the high single or low double-digit range in most submarkets. Development activity has slowed some on the heels of 5 brisk years; our research indicates that there are a few projects that have broken ground or will break ground early next year in Northeast Ohio: The Plaza at SouthPark in Strongsville, Deerfield Crossings in Amherst and Bridgeview Commons in Garfield Heights. However, the bulk of the retail activity has been focused on absorbing existing retail space.

Giant Eagle has absorbed the majority of the vacant space left by Tops grocery stores when the corporation vacated the region. The availability of the Tops real estate was also a factor in fewer grocery-anchored shopping centers being built this year compared to previous years. The big box retailers continue to actively identify in-fill and relocation opportunities. The rapid-fire expansion of retailers such as The Home Depot, Lowe’s Home Improvement Warehouse, Wal-Mart and Target will continue, albeit at a slower pace than in recent years.

Wal-Mart has opened a Supercenter at Steelyard Commons, which is filling a retail void on the near south side of Cleveland. Target opened on West 117th Street on the Lakewood/Cleveland border and has filled a retail void on the near west side; Giant Eagle will soon join Target there. It’s too early to determine if the retailers will exceed expectations in these markets; however, if the sales projections are met or surpassed, expect additional retail development in the city of Cleveland and the first-ring suburbs. Many in the industry are waiting to see the sales numbers posted by these new centers before entering the downtown retail market themselves. If sales aren’t up to expectations, expect to see development continue in greenfield markets more so than in the city.

Developers are pursuing referendum initiatives in Boston Heights, Broadview Heights, Orange and Solon, Ohio. In the event these developers are successful, Northeast Ohio could experience more than 1 million square feet of new construction again in 2008. Additional speculative development has been proposed for Cleveland’s central business district, and includes The Flats East Bank project proposed by Scott Wolstein along with Stark Enterprises’ Warehouse District mixed-use project. Wolstein’s project has cleared several obstacles over the past year, and Stark’s vision and success in the suburbs bodes well for the planned project downtown.

The city of Cleveland is blessed with a number of active community development organizations (CDCs), which are taking their neighborhoods retail market into their own hands. Several CDCs are undertaking major renovation projects in their neighborhoods — Northeast Shores Development Corporation is in the process of redeveloping the Waterloo District and the Detroit-Shoreway CDC has created the Gordon Square Arts District. Both of these projects are worth mentioning because of their impact on the local neighborhood. These projects are located on the major arteries that serve each neighborhood and provide positive first impressions for visitors making their way through the city. I anticipate that both projects will be a catalyst for New Urbanism movements and ultimately will lure residents from the suburbs back into the city.

Some trends to expect in 2008 include shrinkage in the casual theme restaurant industry; the redevelopment of major arteries serving neighborhoods within the city; increased environmental awareness and green initiatives; and a slight increase in rental rates. Investment activity should to remain strong, given the significant number of out-of-state buyers showing interest in Northeast Ohio.

— Keith Hamulak is a sales professional in the Cleveland office of CB Richard Ellis.

Cleveland Multifamily Market

Interest in residential development, both new construction and the conversion of existing commercial properties to residential space, throughout Cleveland’s central business district continues to grow, as does interest in mixed-use development. Stonebridge Plaza, the fifth phase of The K&D Group’s Stonebridge project, opened this fall to brisk sales. The price of units in the upscale condominium and apartment complex ranges from $150,000 to more than $800,000. The sixth phase, a multi-purpose shopping and gathering space, will continue to aid progress in The Flats district by offering much needed amenities such as dry cleaning, dining, a convenience store and a fitness center.

Although multifamily development has traditionally been focused on the Warehouse District and The Flats, a number of projects are changing the dynamics of the city and breathing new life into underutilized or long-ignored areas. The first residents are beginning to move into The Avenue District, Zaremba’s mixed-use project at East 12th Street. The first phase of The Avenue District consists of loft apartments, penthouses, townhomes and retail space. Pricing for lofts and penthouses ranges from approximately $270,000 to $895,000, with townhomes priced at approximately $370,000. Future plans include additional for-sale housing, art galleries, cafes and boutiques. The Triangle redevelopment project in University Circle, a joint effort by Zaremba and Rick and Ari Maron, also promises to revitalize the area by transforming a stagnant collection of existing retail space, apartments and vacant land into a thriving residential and retail district with an emphasis on art and design.

Downtown residential apartment rental rates typically range from $775 to $2,200 and are increasing. Vacancies continue to decrease, with most properties operating at occupancy rates of 90 to 95 percent. The use of concessions has also been significantly reduced, if not eliminated, at many properties as the market strengthens. Although midwestern markets such as Cleveland typically lag national trends, rental demand is expanding at the strongest pace since the mid-1980s and there is good reason to believe this trend will continue.

The Northeast Ohio market is seeing a variety of new projects, including The Avenue District, MRN’s East Fourth Neighborhood and the proposed Collegetown project near Cleveland State University, which will bring at least 300 apartment units and 100,000 square feet of ground-floor retail to the East 18th Street area. This development activity is building positive momentum and bringing additional attention to the benefits of downtown living. The demographics are also favorable, as population growth for the 20- to 29-year-old age group, the group with the highest propensity to rent, is resuming after two decades of decline. Growth in the population of residents age 50 or greater is so strong already that, even with its high home ownership rate, this group is now significantly contributing to rental demand through lifestyle renting. Steady foreign immigration and the increasing diversity of the general population base are also among the key factors contributing to rental growth. Economic trends favor renting, as well; renting is favorable compared to the cost of owning when taking into account factors such as rising energy costs. Rental demand will also see a continued boost from rising interest rates and foreclosures as sub-prime and adjustable rate mortgages reset and hamper many home owners.

— Nicole Smeader is an associate in the Investment Properties and Private Client Group in the Cleveland office of CB Richard Ellis.

Cleveland Industrial Market

The Cleveland industrial market is beginning to catch up to other major markets in terms of new high-bay distribution/warehouse offerings. Design and construction of this kind is not out of the ordinary in other regions experiencing industrial growth, but it is a new trend within Northeast Ohio. While Cleveland is still the ninth-largest industrial market in the nation, it has lacked major distribution centers featuring clear ceiling heights of 28 feet or greater.

The most significant concentration of activity currently underway in Northeast Ohio is in the eastern submarket, especially in the village of Glenwillow. Weston and The Geis Companies have partnered for the purchase of 212 acres in Glenwillow, and have begun the construction of two speculative buildings totaling more than 400,000 square feet. Premiere Development is also building a new distribution facility in Glenwillow totaling 182,000 square feet. The size of this high-bay spec development is unprecedented in this market. Customers are interested in clear heights greater than 28 feet; however, once the construction is complete, many potential users struggle with the concurrent increase in price per square foot.

Along with Glenwillow, the city of Solon, Ohio, is seeing a major share of area industrial development. Two factors have helped bring increased activity to these submarkets: Glenwillow and Solon have the last sizable aggregation of developable industrial land in Cuyahoga County and the village of Glenwillow has a very pro-business stance. Local government entities are willing to provide economic incentives and a business-friendly environment in order to attract new corporations.            

Other significant trends in the area include the redevelopment of existing manufacturing space and older, established industrial submarkets. A few of the larger developments in Northeast Ohio include the former Ford plant in Lorain, the former Hoover Company factory in Canton and the Lockheed Martin Corporation facility in Akron. All are being retrofitted for use as industrial space for new companies. This retrofitted space is more cost effective but does not always come with the clear heights that are available through new construction.

The vacancy rate for the Northeast Ohio industrial sector is 9.01 percent as of the third quarter — this rate has remained relatively steady over the past 3 years, with a slight decrease since third-quarter 2006.

The average rental rate for industrial space is $3.72 per square foot, while flex space goes for $7.57 per square foot. According to Colliers Ostendorf-Morris’ 3-year market comparison, rates are down for industrial space but have increased for flex space.

The Akron/Canton area south of Cleveland is a market that people should keep their eye on for the future. There are several office and industrial parks in the region, including the 635,000-square-foot office portfolio located on Embassy Parkway that was recently sold by Dellagnese Properties. In addition, Dehoff Development has continued to focus on the corridor between Akron and Canton for industrial development. Today, one of their most successful, high-grade parks is the AKCAN Industrial Park located just between Akron and Canton.

The Akron-Canton Airport, which also splits the difference between the two cities, is spurring new growth in the area. However, a contributing factor to the growth of the Akron/Canton area is that local politicians, including Akron Mayor Donald Plusquellic and Canton Mayor Janet Creighton, are aggressively reaching out to dynamically catalyze growth. Akron and Canton are becoming known for their pro-business attitudes, which will continue to attract new industrial users to the market.

— Joseph Martanovic, senior vice president, Kevin Kuczynski, senior vice president, Barry Holtzer, vice president, and Christopher Hondlik, vice president, all work in the Cleveland office of Colliers Ostendorf-Morris.

Cleveland Office Market

The major trend for commercial real estate in Northeast Ohio is the development of mixed-use facilities. Primarily concentrated in the central business district (CBD), this development activity is having a major impact on the downtown Cleveland market specifically. The ability to live, work and play in the same contained community is an attractive feature for many new residents of Northeast Ohio. In addition, businesses are following the residential trail and gaining interest in the Cleveland CBD submarket. The long-term effect of increasing downtown’s population is that more and more businesses will locate to Cleveland’s CBD.

The development of solely office properties is slow, while mixed-use communities thrive. One existing, but expanding development is K&D Group’s Stonebridge, which located on the west bank of The Flats and consists of office, retail, entertainment, condos and apartment components. The construction of Stonebridge began in 2001 with a residential component, and is now in its sixth phase of development. The project presently includes a 55,000-square-foot office building along with four separate apartment and condominium complexes. The sixth phase will include a multi-purpose building housing retail, gathering space, a coffee shop, a restaurant and many other amenities.

There are a number of other mixed-use projects in various stages of development throughout the CBD, including K&D’s Reserve Square, Zaremba’s Avenue District, the Wolstein’s and Fairmount Properties’ Flats East Bank project, and Stark Enterprises’ Warehouse District mixed-use project.

Currently, the CBD, South, and West submarkets are seeing little in terms of true office development. These submarkets are experiencing higher rates of vacancy and therefore are not seeing new development projects. Although office development is currently slow in the CBD, major office projects are on the horizon. Three key developers have plans for office-only projects: The Jacobs Group at Public Square West, The Ferchill Group at North Point Tower, and Forest City Enterprises with Riverview Office Tower and The Prospect & Superior Office Building. If these projects advance they will add more than 1.6 million square feet of office inventory to the CBD. The vision for these developments is due, in part, to seven major downtown office tenants that are looking to occupy new space over the next several years.

The total office market vacancy rate as of the third quarter of the year is 13.62 percent. According to Colliers Ostendorf-Morris’ 3-year market comparison, vacancy rates have steadily declined since third-quarter 2005. Average rental rates as of the third quarter of the year equal $17.03 per square foot, and have remained relatively unchanged over the past 3 years

The Cleveland CBD is an area that people should keep their eye on for the future. There is a lot of exciting activity going on with outside investors making investments in Northeast Ohio and more specifically downtown Cleveland. This is a great sign of what’s to come for the development of downtown Cleveland.

— G.F. “Geoff” Coyle III is a senior vice president with Cleveland-based Colliers Ostendorf-Morris.

NEW NEIGHBORHOOD RAISING UP THE FLATS The Wolstein Group and Fairmount Properties are looking to bring upwards of 600 residential units to downtown Cleveland. Developers The Wolstein Group and Fairmount Properties are developing the Flats East Bank Neighborhood, an expansive mixed-use community along Cleveland’s Cuyahoga River just minutes from the central business district. Situated on 24 acres, the $400 million project will bring approximately 455 condominiums and apartments downtown, which accounts for a significant amount of the wave of new residential units currently being brought to the in-town market. For-rent units could be priced at $1,000 per month, and the cost of condominium and townhome residences could reach $1 million. Plans include a distinctive residential tower near the riverfront. This development will act as a connecting link between The Flats and the Warehouse District, as well as the revitalized Euclid Avenue. The Flats East Bank will also feature more than 280,000 square feet of retail; plans call for  a bookstore, a full-scale grocery store, a gym, a movie theater, shops, restaurants and night clubs. The retail won’t focus on merchandise users, as the downtown population isn’t large enough yet that such retailers can compete with those at Tower City. The Flats East Bank neighborhood will feature more than 250,000 square feet of retail; 400,000 square feet of office space; and a 120-room hotel. The project has received a major boost from public subsidies, with more than $100 million in public financing and grants so far. Some of the funding is earmarked for environmental remediation, public parking garages, utility and street improvements, and a park and waterfront boardwalk. The Cleveland-Cuyahoga Port Authority has issued $62.5 million in bonds that will be repaid by the city, parking revenue and new property taxes gathered from the new community. The project has gained traction of late thanks to increased interest downtown from office users. This unexpected development has lead the developers to expand their plans, and add more components to the neighborhood. The plan didn’t originally focus on that component, but demand has shifted. Columbus-based architect NBBJ is designing  an office building planned for a site between West Ninth and West 10th streets, with another planned for a site to the north. Both of the office towers are expected to total 400,000 square feet. A 120-room boutique hotel is also being planned for the site. The neighborhood will also feature 2,500 parking spaces in a mix of decks, underground spaces and surface lots. As for public amenities, the developers are expected to include a park, a small marina and a 1,200-foot boardwalk that will connect to the Towerpath Trail. The project is expected to be primarily complete by 2010.

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