Cleveland has long been known for its industrial sector. And that sector remains resilient here, still attracting plenty of demand from tenants.
But the retail sector has been a pleasant surprise, too, according to Kevin Malinowski, executive managing director for Cleveland and Akron with Colliers. This sector also features low vacancies, with plenty of retailers eyeing Cleveland’s neighborhoods for new locations.
We spoke with Malinowski about the state of Cleveland’s commercial real estate sector. Here is some of what he had to say.
What asset classes are the strongest in the Cleveland market today?
Kevin Malinowski: Our busiest asset classes are industrial and retail. Those are the two if we are looking at the height of our market that are seeing the most activity. They are at the good equilibrium part of the market between expansion and hyper supply. These two sectors have stayed in that sweet spot for several years.
Our vacancy in the industrial sector in Northwest Ohio is especially low. Because of that we are seeing some new industrial construction. That new construction usually comes with a tenant in tow as opposed to a speculative build.
Why are these two sectors performing so well right now?
Malinowski: The thing that I would say about Cleveland and many of our peers in the Midwest is that we are at that point in the market curve between expansion and hyper-supply. A lot of the United States sits in hyper-supply. They are seeing their vacancies growing in these sectors. The Midwest has been holding strong with lower vacancies. The Midwest cities are right at that sweet spot from an industrial standpoint.
Historically in Cleveland we have not had a lot of speculative building in our industrial market. If you need space, our developers will build it.
When you have a vacancy rate near 3.1%, that’s a pretty tough industrial market when you’re looking for space. That lower rate is allowing us to see more conversions of existing buildings and new construction on the industrial side.
How about on the retail side? That’s performing well, too, right?
Malinowski: We see a lot of the same things with retail as we see with industrial. The retail sector is right in that part of the market curve between expansion and hyper-supply, too. We are not getting ahead of ourselves with too much new construction. If you look at our vacancy rate with retail, it’s about 7.9%. That’s pretty low, too.
What about the Cleveland-area office sector? I know that office is struggling across the country. How is it performing in Cleveland?
Malinowski: The office sector’s vacancy rates have been steady for several years now. Its overall vacancy rate is about 15%. That’s not as good as industrial or retail, but our office sector is in a much better place than it is in other markets. More markets have higher rates. They have lost rent.
Cleveland is one of the cities leading the United States in office-to-multifamily conversions. It’s a wonderful thing. It takes the denominator of the equation and reduces it. Without the conversions, we’d probably be in the same trough of the market curve with everyone else.
Can you talk about those conversions and their impact on the Cleveland-area office sector?
Malinowski: Our B- and C-class office buildings are the ones being converted. The nice thing about that is you gain new residential units in downtown Cleveland. And these buildings don’t look generic. Some of the new apartments have a generic feel. They don’t have a lot of character. That’s not the case with these office-to-multifamily conversions. Some of the older buildings have construction that you can’t replicate. It would be too expensive. Conversions are a win-win. You retain the character and you build a stronger residential presence downtown.
We have well over 21,000 residents in downtown Cleveland now. It’s like Baskin-Robbins with 31 flavors. Not everything looks vanilla. Renters can choose the style of apartment, building and location that suits their personalities. That is a win-win.
The city of Cleveland is focused on getting 30,000 residents living downtown. They feel that they can do this. The goal is to get 30,000 by 2030. There is alignment between our county and city leaders. They have a unified vision of where downtown Cleveland should go. That plays a huge role in making things happen. For developers, nothing is harder than when you have a vision but you must convince 10 different parties with 10 different visions of your vision. It’s a lot easier for developers when there is that unified vision.
Speaking of multifamily, how is that sector performing in the Cleveland area?
Malinowski: Market forces still make multifamily a compelling story. The construction that is going on in downtown Cleveland is primarily conversions to multifamily. It’s a healthy evolution of the market. People like living in multifamily buildings. They want to be connected to their communities. Then there are the mortgage interest rates and housing prices that make it difficult for many people to buy a single-family home. These factors are encouraging the growth of multifamily.
This is a good thing for downtown Cleveland. You need residents to make a vibrant downtown. If you go back to the early 2000s, there were pockets of residential downtown. Now you have full neighborhoods that are blooming. Cleveland is seeing residential growth not just in downtown but in the nearer surrounding areas, too, places like Ohio City and Tremont. We can now support activity in downtown after 5 p.m. Once you get that tipping point, an additional accelerant kicks in. One feeds on another.
Are there any new developments taking place in the Cleveland market that you’d want to mention?
Malinowski: What’s exciting is that all our major employers in Northeast Ohio are growing. We track the S&P 500 and our 20 largest employers. They have been exceeding the Fortune 500 average. That’s a strong value for Northeast Ohio.
I’m also excite about the projects and growth we see with NASA at the Glenn Research Center by Cleveland Hopkins International Airport. Then there is Blue Abyss, which purchased land in Brook Park. Blue Abyss picked Cleveland to build the deepest deep-water testing facility in the United States. These are both exciting for Cleveland. We have one of just 10 NASA centers nationally. That gives us a competitive edge. To have one out of 10 is a good thing.
The Cleveland Clinic is in full construction mode of its neurological institute, too. We have some exciting projects that are continuing to add fuel to the growth of Northeastern Ohio.
