HEARTLAND SNAPSHOT, JUNE 2011

Cleveland Office & Industrial Market

Cleveland may be a long way from its once-upon-a-time ranking as the fourth largest city in America, but the metro region is not as down on its luck as its Rust Belt reputation and this post-LeBron era would have it.

Some $1.5 billion in five current or planned development projects are underway in downtown Cleveland. The biggest project in scope is Flats East Bank, a mixed-use developed by the Wolstein Group and Fairmount Properties that will, among other things, bring 475,000 square feet of office space to the metro market. It is already 95 percent pre-leased, with Ernst & Young taking approximately 200,000 square feet.

The recently completed expansion of the Cleveland Veterans Affairs Medical Center on University Circle added an eight-story tower with 222 patient beds, a 135,000-square-foot administrative building and a 2,080-car parking garage.

American Greetings Corporation announced in mid-May that it had chosen a 13-acre site in Westlake for its new $100 million headquarters. Stark Enterprises will develop the 700,000-square-foot corporate headquarters, along with 250,000 square feet of new retail, off Main Street at Crocker Park. The project could start in 2012 with occupancy slated for 2014. 

There are two economic indicators that demonstrate Cleveland’s recovery from the recession. The city has regained nearly 15 percent of the jobs lost during the recession, and the Port of Cleveland reported that break-bulk shipments were up 111 percent from 2009 to 2010.

The uptick in manufacturing employment has stabilized the industrial real estate market to 9.5 percent vacancy, following eight consecutive quarters of increased vacancy. Rents have remained flat, averaging approximately $3.70 per-square-foot. About 1 million square feet of new warehouse product was delivered in 2010, with over half of it to Superior Beverage. This year, no speculative development is occurring, but Best Buy is building a 368,000-square-foot distribution facility in the Southeast submarket that should break ground on a by mid-2011.

However, the region still faces substantial challenges, particularly in the downtown Cleveland office market, which currently is approximately 19 percent vacant. Compare this with the healthier suburban office market, which is near 10 percent vacant. The overall vacancy rate for Cleveland area offices is running near 12 percent. First quarter absorption was slightly more than negative 400,000 square feet.

Approximately 13 percent of Class A space in the central business district (CBD) is vacant. This recent spike was principally caused by financial institutions. A number of CBD office buildings are in danger of foreclosure or have already been taken over by lenders, as recently happened with the 21-story KeyBank Center.

Adding to downtown’s woes, Eaton Corporation has announced it would leave its CBD headquarters in the for a build-to-suit development in the eastern suburb of Chagrin Highlands. Ferro Corporation is vacating its downtown office for a larger space in Mayfield Heights, which should have a positive impact on absorption in the eastern suburbs.

Rental rates average nearly $17 per square foot (PSF) overall, with the CBD slightly higher at roughly $18 PSF. The suburban rental rate average is about $16.50 PSF, but suburban asking rates range from $15 PSF to $25 PSF — flat compared with a year ago.

 Looking forward, the CBD office market is expected to lose more tenants, albeit at a slower pace than recent years. However, the region’s manufacturing segment is adding employment. Cleveland remains a vibrant industrial city with a number of major global companies headquartered here. Further, the multiple public-private initiatives in the region bode well for the Cleveland area and its ability to diversify its economic base in the future, increase employment and spur demand for commercial properties.

— Denise Hahn is a vice president and Jim Klements, CPA, SIOR, is a principal with Weber Wood Medinger/CORFAC International.

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