HEARTLAND SNAPSHOT, OCTOBER 2008

Cleveland Multifamily Market

It is a great time to be an apartment owner/operator in the Cleveland market. At present, with the exception of select markets, there is very little new construction occurring either in the metropolitan Cleveland market or throughout the greater Midwest commercial real estate market. Such slow multifamily development can be attributed primarily to current rent levels and the cost of construction. However, with rising occupancies and reductions in concessions, rental rates are expected to increase in the next few years.

Additionally, due to lackluster condominium sales and tighter lending practices, many condominium developments are being converted to apartments, a new trend known as fractured condominiums. Those that aren’t being converted, such as the Lofts at Avalon Station and Blue Stone, are offering huge concessions to lure tenants. Finally, local officials are requiring more upcoming developments to be LEED-certified due to the fact that studies indicate that certified buildings outperform their conventional counterparts across a wide variety of metrics, including energy savings, occupancy rates, sales price and rental rates.

In particular, no market has seen significant growth, as the 256 apartment units that came on line in 2007 were evenly dispersed throughout the metro area.  Apartment construction has come to a standstill in 2008; however, since no new units entered the market in the first half of the year, this lends itself to the potential for stronger occupancy figures as well as future rent growth.

In the second quarter, the overall average apartment rent in Cleveland stood at $736, reflecting a solid 3.3 percent gain over last year’s figure of $713.  The rent costs ranged from $633 in the Lakewood/Brooklyn submarket to $1,124 in downtown Cleveland.

Year-to-year — ending in June — the average apartment vacancy rate dipped 70 basis points to reach 5.1 percent, which is the lowest second-quarter vacancy rate reported since 2001. The lowest apartment vacancy rate was reported in the northeast Cleveland/Interstate 90 submarket with 4.3 percent, while the highest was noted in the south Metropolitan Cleveland submarket with a rate of 7.6 percent.

Approximately 300 to 500 units throughout all three sectors — apartments, townhomes and condominiums — are planned and/or proposed in the next few years, including the Avenue District Townhomes in the Downtown Flats/Warehouse district, as well as the first phase of the West Hampton & the second phase of the Crocker Park complex which is currently under construction.

With regard to condominiums, there are two properties, District Park and The Flats, which are in the planning and/or proposed project stages in the Downtown Flats/Warehouse district. Additionally, Avenue District Condominiums are currently under construction and will include more than 200 units.  Chagrin River Walk in Willoughby, Ohio, on the east side of Cleveland, is also in the process of being built and will house approximately 75 units upon completion.    

Phases I and Ib of the three-phase $480 million Crocker Park mixed-use development has been completed at the intersection of Crocker and Detroit Roads in Westlake, Ohio.  This project will encompass 12 city blocks and boast approximately 900,000 square feet of residential space, 550,000 square feet of retail and restaurant space, and 250,000 square feet of Class A office product. 

In addition, substantial development is occurring in Cleveland’s University Circle submarket, which is situated a few miles east of downtown.  A $300 million urban residential project, known as the University Arts and Retail District, is being developed on an 8.5-acre site and is set to include housing and retail components next to new buildings for the Museum of Contemporary Art-Cleveland and the Cleveland Institute of Art.

The majority of multifamily development is occurring in Cleveland’s downtown and uptown submarkets in the form of condominiums, many of which will likely enter the market as rental apartments. The revitalization of Euclid Avenue and the surrounding corridor continues to spur development and attract investment in the area. Many developers anticipate that the revitalized downtown area will attract younger residents who prefer to live in the center of it all. 

The downtown Cleveland submarket, which encompasses The Flats and the Warehouse District, is an area to keep an eye on for future growth. High gas prices and overall inflation, which is expected to continue for the next few years, add to the appeal of urban living with less people willing to commute than ever before.

In addition to downtown, the far northwest side including Westlake and Avon Lake, are strong residential areas for both single-family, owner-occupied housing and multifamily housing. 

Mentor-On-The-Lake and Points Northeast, which are situated on the east side, are also attracting individuals looking for areas with high demand for employment, as well as multifamily communities that allow residents to take advantage of good schools, shopping and easy access to the lake and area amenities.   

Finally, with the growth of both Akron and Cleveland leading the two markets to almost converge as one metropolis, the area in between the two which includes North Royalton, Strongsville, Brecksville, Stow and Hudson are becoming tweener areas, halfway between the employment centers of downtown Akron and Canton and downtown Cleveland. In the future, expect to see more residential development along the Euclid Avenue corridor, particularly in areas closest to the Greater Cleveland Regional Transit Authority’s new bus rapid transit line.

Conversations with Jim Leonard of Pinnacle Financial Group have indicated that multifamily continues to be the most sought after property type for commercial real estate finance.  Currently, the bulk of such financings are being completed by the agencies (Fannie Mae and Freddie Mac), with banks and life insurance companies continuing to be active on a selective basis.

—  Rick L. Vidrio, associate partner, and Rick Brace, senior investment advisor work in the Birmingham, Michigan, office of Hendricks & Partners with assistance provided from Jim Leonard and Heather Mattei of Pinnacle Financial Group of Cleveland, Ohio.

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