Jeff Musser and Taylor Hawkins, senior vice presidents with Bellwether Enterprise, know the Cleveland market. Both of these commercial finance pros work in Bellwether’s Cleveland office, and both are productive. Hawkins and Musser have each closed capital transactions totaling more than $1 billion.
That’s why we spoke to them to find out just how strong the commercial real estate market is today in Northeast Ohio. Here’s a bit of what these two industry pros had to say about Cleveland and Northeast Ohio, commercial financing and the bright future they see in this part of the country.
Let’s start with the obvious question: How strong is the commercial real estate market in Northeast Ohio today?
Jeff Musser: The market here is very strong. There is a lot of investor appetite to provide capital in Northeast Ohio. The two strongest asset classes are multifamily and industrial. Of course, that’s not surprising. Those are probably the two strongest asset classes throughout the entire United States and the Midwest, too.
What’s different, though, is that we are starting to see a lot of investor appetite from outside of the Northeast Ohio region. Folks from the coast and Canada are looking to come in. They are looking to buy and develop properties in Cleveland and the region. That is helping to push valuations and transactions, too.
Taylor Hawkins: The lending market has been strong for a long time. Our team had a record year for transactions in 2018. We closed just shy of $1 billion in commercial mortgage financing. In 2019, we did even better. We surpassed $1 billion. We expect this year to be another strong year for mortgage financing. And, like Jeff said, we expect much of the transaction volume to be made up of apartment and industrial transactions.
What are some of the reasons for the strong CRE market in Cleveland and Northeast Ohio?
Musser: Actually, 2019 started off with a slow January, with worries that the Fed was going to raise interest rates. A big driver in providing a boost to the market, though, was that the Fed reduced interest rates throughout 2019. That sent a message to the market that the Fed will be accommodative. What the Fed has done by lowering interest rates is to give investors confidence that rates are going to be low for the foreseeable future. That has helped spark the commercial real estate market not just here but across the country.
Hawkins: I think that on a macro level, there is still a lot of demand for all types of apartments and all types of industrial space. There is demand for everything from luxury to workforce housing and for brand-new industrial space to older, well-located industrial space. That is helping to boost the entire commercial real estate market.
Similar to what Jeff was saying, at the beginning of 2019 there were concerns that the Fed was going to keep raising rates. It was the middle of the year when we saw a major uptick in activity. And that’s partly because the rates were going down.
You mentioned earlier that an increase of outside investors are coming into the market. Why is that?
Musser: There’s just been a lot of great press getting out there about Northeast Ohio. People see the strength of our medical and educational fields. That makes our market an attractive one. Our cap rates, relative to what you can get on the coasts, are a big advantage. People can come to Cleveland and get better yields than they’d get on the coastal markets.
Hawkins: There’s also a lot of activity in this market right now. The amount of new inventory in all the asset classes here lags other markets. A lot of existing inventory has been improved or absorbed already. We are tight across all the asset classes. That increases the demand and value in our market.
In other markets, we’ve seen a rising demand for multifamily units in downtown areas. Are you seeing this in Cleveland, too?
Hawkins: There is still a strong demand for apartments in the core of the city. We can look out the windows in our office and see three new apartment buildings under construction right now. We can see several others that have been completed and filled.
Musser: What we are starting to see now are empty nesters moving downtown. It’s not just people fresh out of college or people in their 20s and 30s. We are seeing empty nesters and people who are more established in their careers moving downtown. They are selling their homes and moving downtown. That’s another big driver for the downtown apartment market.
Hawkins: In addition to the growth in the immediate core of the downtown CBD, we are seeing demand for new apartments in the surrounding neighborhoods of Cleveland. There’s growing demand in neighborhoods such as Ohio City and University Circle. These neighborhoods are seeing significant growth in multifamily, too.
Obviously, industrial is performing well across the country. How strong is this sector in Cleveland and Northeast Ohio?
Musser: Ecommerce is the big driver. I think on the investor side, industrial is a very attractive asset class because the ongoing capital costs are low in general when compared to office, residential or retail. With warehouse space, when a tenant moves out, you don’t have the large costs to update or refresh the space like you might have when a retailer or office tenant moves out of a space.
Hawkins: There’s been an interesting narrative playing out in the shift from retail to ecommerce. Several old mall sites have been redeveloped into Amazon distribution centers. That’s a big driver here. But we are also seeing growth in manufacturing space for medium to small businesses that want to occupy 20,000 to 30,000 square feet. They need high-quality industrial space, too.
Musser: The industrial industry has continued to expand since the Great Recession. Companies continue to need new industrial space.
Do you have any concerns that there might be a slowdown in the CRE market here in 2020?
Hawkins: From a real estate perspective, I don’t see anything in the fundamentals that would point toward a downturn. I think getting outside of our industry and into the entire economy, I look at the yield curve inverting in 2019. That does make you wonder a little bit about what might be happening.
Musser: You prepare for the worst and hope for the best. It’s prudent for developers, lenders and intermediaries to take that approach. You need to have a healthy sense of what risks might be out there. You have to make sure you are prepared in case there is a slowdown. Saying that, we don’t see anything out there that would cause an immediate slowdown in the industry.
How about the retail and office markets? How strong are they in the Cleveland region today?
Musser: On the office side there has been a lot of space in the C-minus category in the downtown core that has been taken offline and converted to multifamily or, in some cases, hospitality. That has helped tighten the office market. There are still a few properties that have had substantial vacancy that have not been converted. Good quality office space in Cleveland is still highly attractive. It’s not easy to find big tracts of space in Class-A or B-plus buildings. There is not a ton of space available.
Hawkins: I think that 2020 and beyond is going to be a great time for office in the CBD. There is a very limited supply and growing demand right now. That is going to help boost demand for high-quality, well-located office space.
Musser: For retail, I think that 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 converted to industrial use here. They were in great locations, but not great locations for retail.
Hawkins: It’s all about location, location, location. If the 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, which has helped to reinvigorate the balance of retail. We are seeing other spaces being re-tenanted with quick-service food or other restaurants or other experiential type of users.