Cleveland, like most Midwest cities, was enjoying an active commercial real estate market at the start of 2020. The industrial market here was soaring, apartment vacancies were plummeting and retailers were opening a steady stream of shops and restaurants downtown.
Then came mid-March and the COVID-19 pandemic. Ohio was one of the first states to take action to halt the spread of the coronavirus, with Gov. Mike DeWine ordering bars and restaurants to close on March 15. Since then, the city of Cleveland and its real estate community have been fighting to close deals, sign leases and develop new buildings in a far different, and more challenging, market.
To no one’s surprise, the fight against the pandemic and its impact on the economy and local real estate market was the focus of the sixth annual Cleveland Commercial Real Estate Summit held Aug. 13. Attendees watched the summit’s speakers online and panelists spoke from their homes, decks and offices. To keep attendees safe, this year’s summit was completely virtual, a first in the six-year history of the event.
But despite these challenges, and the stress that COVID-19 has placed on Cleveland’s market, panelists struck a hopeful tone during the summit: Cleveland will survive this challenge, they said. And when the pandemic is over? The city will emerge stronger than ever.
This was a main theme of the apartment panel, which featured moderator Steve Novak with Siegel Jennings Co.; Daniel Burkons, senior managing director of investments with Institutional Property Advisors, a division of Marcus & Millichap; Nick Soeder, principal broker with Adams Lynch Associates; Ezra Stark, chief operating officer of Stark Enterprises; and Michael Panzica, owner of M. Panzica Development.
Novak asked panelists what they are seeing today in the Cleveland multifamily market. Soeder set the tone with his response, saying that Cleveland’s apartment sector is performing far better today than anyone could have expected when the pandemic hit in mid-March.
“The multifamily market in Cleveland is extremely strong,” he said. “There is more activity form buyers, both locally and from across the country. We are seeing buyers coming in from the East and West coasts. There is a lot of uncertainty out there, that’s true. But there is a lot of activity, too.”
Burkons agreed, striking his own positive tone with his response.
“We are still closing deals right now,” Burkons said. “Some deals have gone through. Some did fall apart. But we are starting on some big deals now. There is a lot of money on the sidelines of this market, and with some of the value-add deals the pricing has gone down. But there are still deals to be done.”
Stark said that while the Cleveland multifamily market is solid as a whole, certain submarkets are performing better than others.
He pointed to the city’s University Circle area as a strong point today. Downtown Cleveland’s apartment market, though, is sluggish. The reason? There is an oversaturation of development in downtown, something that COVID-19 only exacerbated.
Stark said that he expects to see more challenges in the future as Cleveland’s economy continues to struggle as a result of the shutdowns imposed after the pandemic hit.
“We are seeing an increase in concessions now,” Stark said. “We are seeing an overall decrease in demand. It’s going to be a challenging environment for multifamily.”
Panzica said that once the COVID-19 pandemic swept into the country, several investors paused their activity. Many of them are still in pause mode, he said. The challenge? No one knows when these investors will be ready to jumpstart their activity again.
“There is a level of irrationality,” Panzica said. “Not every project is created equal. The notion that every project will be affected two or three years from now the same way they are affected now is not necessarily accurate. We still have to wade through some of the irrationality that investors are feeling right now.”
Panzica said he is seeing certain trends in the multifamily market today. Some renters, for instance, are moving out of two-bedroom apartments and into one-bedroom units. They no longer want to share close quarters with roommates as the benefits of social distancing are emphasized by public health officials.
At the same time, some renters living in larger cities such as New York, San Francisco and Chicago are moving back to their smaller hometown cities to avoid the crowds. Others are doing this because they are working remotely. It’s just as easy to work from an apartment in Cleveland as it is to work from one in New York City. And an apartment unit in Cleveland comes with a far lower monthly rent.
“Apartment rents are trending upward,” Soeder said. “We are benefitting from boomerang folks coming back to town.”
Panelists also wondered if COVID-19 would inspire large numbers of renters to move from downtown Cleveland and the city’s more urban neighborhoods and into suburban communities. It’s easy to social distance in the suburbs. And suburban apartments tend to come with more space and amenities such as outdoor swimming pools. Those are useful during times of quarantine.
Stark said that during the least 10 years, apartment demand shifted strongly toward the urban core. He said that even during the earlier days of the pandemic, urban apartment properties were still seeing decent, if reduced, traffic.
Then came the protests against police violence against African Americans. Stark said that once the protests hit the downtown area, and the rioting that came with them, traffic to urban apartment buildings came to a halt.
“It was like hitting a cliff,” Stark said. “From that point until now, the traffic in downtown Cleveland has been virtually nonexistent. If we want to maintain some strength in the downtown residential marketplace, the city needs to double its efforts in providing security.”
Stark said that his change might not be a temporary one. It could instead be the sign of a long-term reverse move from city apartments to suburban multifamily.
“Millennials want the suburban lifestyle for security, for the good school districts and social distancing,” Stark said. “As more people work remotely, too, it affects where people want to live.”
Panelists also addressed possible changes to Cleveland’s 15-year tax abatement policy. Since 2004, the city has provided 15-year, 100-percent tax abatements on newly built home and residential developments. Critics say that the abatements have been increasingly concentrated in trendy areas such as Tremont, Ohio City and University Circle. Opponents of the abatement say it is only increasing inequity in the city.
Panelists, though, said that the abatement has boosted development in Cleveland’s downtown neighborhoods. Without it, they said, developers wouldn’t be able to afford residential developments in this part of town.
“The thought of taking the abatement away is an absolute joke,” Stark said. “If you take the abatement away, watch development go to a complete halt. If you want to stop transactional real estate in the multifamily sector in downtown Cleveland, get rid of the abatement.”
Burkons agreed with this sentiment.
“I don’t make more or less money because of the tax abatement. But I’m going to tell you, as someone who is active in different areas of the market, downtown Cleveland wouldn’t exist in the way it does today without the tax abatement,” Burkons said. “Downtown multifamily developments wouldn’t make economic sense without the tax abatement.”
Panelists on the second panel, the Cleveland Market Update, focused on the challenges and success stories taking place now in the office, industrial, retail and opportunity zone markets.
And as with the apartment panel, the CRE pros speaking during this session expressed hope that though the Cleveland market is facing challenges now, it will emerge strong once the pandemic lessens its grip on the country. Speaking on this panel were moderator Suzanne Hamilton, senior vice president for commercial with ERIEBANK; Doug Holtzman, vice president with Anchor Cleveland; Fred Herrera, senior vice president with CBRE; Rico Pietro, principal with Cushman & Wakefield/CRESCO Real Estate; and Craig Miller, president of Duffy + Duffy Cost Segregation.
Hamilton kicked off the panel by asking speakers how their particular sectors are performing today.
Herrera, who specializes in industrial, said that his sector remains strong. Consumers are ordering more online today than they were before the pandemic. This has resulted in an increased demand for distribution centers across the country, Herrera said.
“Industrial has been weathering the storm quite well,” Herrera said. “There have been some sectors hit negatively by the pandemic. Some, though, are doing quite well. Industrial is one of those that are doing well.”
Herrera said that vacancy rates in industrial since the start of the pandemic are barely higher than they were immediately before the virus hit. He also said that industrial rents are higher today than they were at this time last year. Net absorption is down, but that’s because several large buildings in the Cleveland area that have been absorbed recently, most of them by Amazon, are not yet accounted for in the numbers.
“The industrial market has held pretty steady,” Herrera said. “E-commerce is driving the market. Food-related businesses are driving the market. PPE-related goods are important, too. Most of the activity in the market today is coming from one of those groups. When the crisis hit, it was a shock to the industrial sector. After that first couple of weeks, though, things have stayed pretty active. Showings, sales and leasing activity are all solid.”
Pietro, who works in the office sector, said that the Cleveland-area office market hit a pause in April and May. Since then, there has been a limited pick-up in activity. Pietro said that during the last eight weeks or so, the Cleveland-area office market’s deal flow has been 20 percent to 25 percent of what the area would normally see in the summer months.
Pietro, though, did say he expected activity to increase once COVID infection rates drop or a vaccine or better treatments for the virus are developed.
“Right now, office sales are all over the board,” Pietro said. “Investors are tracking cash flow. Cash flow is traditionally pretty healthy in the office sector. If investors are chasing cash flow, the office market is still a good place to invest.”
Miller, whose company provides income-tax shielding for commercial real estate professionals, said that the national economy is in for a long struggle, even after the pandemic ends. He said that in some industries, such as restaurants and auto dealers, job gains that the United States saw in the last five years completely evaporated in March and April. Unemployment will remain persistently high in these businesses, he said.
“The outlook isn’t good for many of these industries,” Miller said. “Those jobs might not return until 2025.”
On the positive side? Miller said that the multifamily and assisted-living sectors remain strong, while industrial is the top-performing sector today.
Holtzman specializes in retail. His sector, of course, is struggling mightily during the pandemic. He said that the rising number of retail bankruptcies is proof of this. What’s interesting, though, is that many of the big retailers who have recently filed for bankruptcy protection – Stein Mart, Pier 1 and Art Van Furniture – were already struggling before the COVID-19 pandemic. The pandemic just hastened their filings, Holtzman said.
“It was projected that the bankruptcies we are seeing today would occur over a 10-year period. We didn’t think they’d happen over just 10 weeks,” Holtzman said. “For those of us who touch, feel and see retail every day, we knew the antiquated models these retailers were working with. It was just a matter of time before they would have to file for bankruptcy.”
The news in retail hasn’t been all bad. Holtzman said that he is seeing signs of recovery from retail tenants that have learned to adapt and work in this challenging market. Restaurants, for example, have boosted their drive-through, delivery and curbside pick-up businesses. This has helped many of them survive the pandemic.
“There is a lot of uncertainty among retailers about how things might change for them,” Holtzman said. “Tenants are concerned that there might be another shutdown. That would be a huge disruption. A lot would never recover from another shutdown. They were shut down for two months already during a busy time for retailers and restaurants. It was a challenging time for them.”
Holtzman said that retailers will have to continue to reinvent themselves. Those who have already done that will have an advantage when the retail market returns to some level of normalcy, Holtzman said.
“Look at what the restaurants have done. They have pushed their drive-through windows. They have added more patio space,” Holtzman said. “Sit-down restaurants were making all their money on sit-down eating and bar business. They have had to figure out how to better orchestrate the take-out process of the business. Once some of those restaurants can open with 100-percent occupancy, if they can keep those extra streams of income moving full-force, they can see an increase in sales over what they saw before COVID.”