Commercial real estate activity remains strong throughout Northeast Ohio and in the Cleveland market. How strong? Midwest Real Estate News spoke with Jeff Musser and Taylor Hawkins, senior vice presidents in the Cleveland office of Bellwether Enterprise, about the strength of the commercial real estate market in this part of the state. These two industry veterans? They said that not only will 2019 go down as a record-setting year, next year should be a busy one, too.
Here is some of what Hawkins and Musser had to say about the health of Cleveland and Northeast Ohio’s CRE business.
Let’s start with the obvious question: How strong has the commercial real estate market in Cleveland and Northeast Ohio been this year?
Jeff Musser: The commercial real estate market in Northeast ohio is very strong. There is a lot of appetite on the part of investors to provide capital in this region. This year, the two strongest asset classes have been multifamily and industrial, which is probably what you are seeing throughout the United States and the Midwest.
What’s interesting, though, is that we are starting to see a lot of investor appetite from outside of Northeast Ohio. We are seeing investors from the coasts and Canada looking to come into our region to to buy and develop properties in town. That has really helped to push the number of transactions this year.
Taylor Hawkins: The lending market in Northeast Ohio has been on a very strong streak, too. In 2018 we had a record year for our team in which we closed just shy of $1 billion in commercial mortgage financing. In 2019, we will surpass $1 billion. So that’s a really strong streak. Much of this financing came in the multifamily and industrial sectors.
Why has the market been so strong in Northeast Ohio?
Musser: Actually, the year started slow in January with the Fed projecting interest rate increases. People were worried about what would happen with cap rates and interest rates. A big driver for the rest of the year was the Fed instead lowering interest rates and sending a message to the market that it was willing to make that change. That eased a lot of concerns.
I don’t think Northeast Ohio was alone in experiencing a slowdown at the end of 2018 and the beginning of 2019. That happened across the country. What the Fed has since done has given investors and developers the confidence that rates are going to be down for the foreseeable future, and that has helped drive activity.
Hawkins: On a macro level, there is still a lot of demand for all types of apartments and all types of industrial space, from luxury to workforce housing, from high-bay, brand-new industrial space to older, well-located industrial space. The middle of the year was when we saw a major up-tick in activity.
You mentioned outside investors coming to Northeast Ohio. What is bringing them here?
Musser: There are so many great things going on here. The medical and educational fields are big job drivers in Northeast Ohio. The positive press about our region is getting out there. Also, our cap rates relative to what you can get on the coasts give us a big advantage, too. People can come to Cleveland and get better yields than they can get on the coastal markets.
Hawkins: At the same time, the amount of new inventory in all asset classes that we’ve seen in the last 10 years lags what you’ve seen in other markets. A lot of existing inventory has been improved or absorbed. We are tight across all asset classes, and that only increases the value and demand for those assets.
We are seeing significant amounts of new multifamily construction in the downtowns of markets across the Midwest. Are you seeing the same in downtown Cleveland?
Hawkins: There is still very strong demand for apartment units in the core of the city. Just looking out our windows, we can see three new apartment developments under construction right now and several more that have been completed and absorbed. The demand for any multifamily project in the downtown is very strong.
Musser: What we are starting to see now is the empty nesters moving downtown, too. It’s not just people fresh out of college or people in their 20s or 30s. We are seeing more people who are either empty nesters or more established in their careers. They are selling their houses and moving downtown. That’s been a big driver for multifamily, too.
Hawkins: We should say, too, that in addition to the growth of the multifamily market in the immediate core of the CBD, we are also seeing demand for apartment units in the surrounding neighborhoods. Places like Ohio City and University Circle are seeing significant growth, too.
Obviously, industrial has been strong throughout the Midwest for a long time now. Why do you think that is the case?
Musser: E-commerce remains the big driver. On the investor side, industrial is a very attractive asset class because the ongoing capital costs are low when compared to office, residential or retail. With warehouse space, when a tenant moves out, you don’t face the same large costs to update or refresh the space as you would with a retailer or an office property.
Hawkins: There’s been an interesting narrative in Northeast Ohio in the shift from retail to e-commerce. We have several old mall sites that have been redeveloped into Amazon distribution centers. That’s been a big driver here. We are also seeing growth in manufacturing space for medium to small businesses occupying 20,000 to 30,000 square feet. These businesses need high-quality industrial space.
With how busy 2018 and 2019 have been, do you think we’ll see a slowdown in 2020, either in Northeast Ohio or the Midwest?
Hawkins: I don’t see anything in the fundamentals, both in terms of property-level fundamentals or with the capital that is behind it that would point toward a downturn.
Musser: You prepare for the worst and hope for the best. It is prudent for both developers and lenders to have a healthy sense of risk and what could happen if there is a slowdown. We all need to make sure we are prepared for one. But we don’t see anything out there right now that would cause an immediate slowdown.
We’ve talked about industrial and multifamily, but what about the office market? How strong is this sector in Northeast Ohio?
Musser: There has been a lot of C-minus and C-class properties in the downtown that have been taken offline and converted to multifamily. That has helped tighten the office market. There are a few properties that have had substantial vacancies that have not been converted. Good, quality office space is still highly attractive in this market. It’s not easy to find big tracts of space in A- or B-plus-class buildings. There isn’t a ton of that space available.
Hawkins: I think 2020 and beyond is going to be a great time for office in the Cleveland CBD. There is very limited supply and growing demand. That is definitely going to help grow demand for high-quality, well-located office space.
How about the retail sector? How is that one performing?
Musser: I think everyone can agree that there was an oversupply given the fundamental changes in individual shopping habits. I think the strong properties and strong locations will continue to do well. No one thinks retail is going away, but properties without strong fundamentals behind them will struggle. We’ve already seen two malls in this area converted to industrial space. They were great locations, but not for retail.
Taylor: Retail today is all about location, location, location. If retail properties are well-located, there will be a use for that land. We have seen extra retail converted to self-storage or converted to apartments. Other spaces have been re-tenanted with quick-service food, other restaurants or other experiential type of users.