Office Sector
Office vacancy continues to climb higher in Cleveland as of the second quarter of 2024. While up significantly from pre-pandemic levels, years of limited deliveries and conversion activity have kept vacancy below the peak recorded during the global financial crisis. Vacancy stands at 9.8% in Cleveland compared to the national benchmark of 13.8%.
Around -190,000 SF was returned to the market over the past year as firms continue to consolidate and adjust their office footprints. The impacts of relocations will likely persist over the next few years as leases signed prior to the pandemic approach expiration.
Tenants’ shift toward smaller spaces is also evident in overall leasing trends. The average lease size on new deals signed year to date is around 2,800 SF, a 15% decrease compared to the average new lease size in the three years leading up to the pandemic. Smaller leases are weighing on volume, and volume in 24Q1 totaled 340,000 SF, just half of the average first-quarter volume in the five years preceding the pandemic.
The impacts of tenant relocations are most evident in downtown Cleveland, where 12-month lease volume adjusted for submarket size is well below the market average, and space returned to the market represents 2% of submarket inventory compared to 0.2% at the market level. Meanwhile, net absorption remained positive in some of Cleveland’s top suburban submarkets, including the Chagrin Corridor and West submarkets.
In line with national trends, construction starts fell significantly amid high construction financing rates and ongoing uncertainty in the office sector. Around 1.2 million SF is under construction in Cleveland and represents 1.0% of total market inventory, which is slightly behind the national benchmark. Speculative development is even more limited and represents less than 10% of total construction in Cleveland.
Minimal supply additions have also helped to keep rent growth steady in Cleveland even as vacancy rises. As of the second quarter, rent growth in Cleveland sits at 1.9%, compared to the national benchmark of 0.9%, and is in line with the average annual growth rate in the five years prior to the pandemic. While landlords have been able to offer generous concessions to maintain face rents, rising vacancy and the uncertainty of office demand will likely put pressure on rents and force growth into negative territory by mid-2024.
While negative net absorption is likely to continue over the next 12 months, limited deliveries and a quiet construction pipeline should contribute to a slower rise in vacancy in Cleveland compared to many of the country’s major office markets.
Industrial Sector
While Cleveland’s industrial market has remained balanced over recent years, slowing leasing activity and negative net absorption over recent months is pushing vacancy higher as 2024 gets underway. Vacancy still sits near an all-time low at 3.6% compared to the national benchmark of 6.3%.
Limited availability of modern industrial space is weighing on leasing activity in Cleveland. The availability rate in Cleveland sits near 4.9% compared to the national benchmark of 8.8%. Quarterly leasing in 23Q4 was among the lowest since the onset of the pandemic, and totaled around 840,000 SF, which is just half of the average fourth-quarter volume in the five years preceding the pandemic.
In line with national trends, elevated interest rates are weighing on construction starts, and space underway in Cleveland totals 2.3 million SF, representing 0.6% of inventory, which is well below peer markets in the region as well as the national average of 2.0%. The pace of deliveries will slow notably over the near term as construction activity slows, which will likely support tight market conditions even as net absorption remains muted.
While down from recent peaks, limited availability in Cleveland allows for landlords to continue to push rents at a healthy clip. Year-over-year gains average 5.5% as of the second quarter of 2024, which is still well above the 10-year average for the market. Gains are modest relative to regional markets, however, particularly those with a heavy concentration of logistics demand such as Columbus, Louisville, and Indianapolis, where rent growth sits above 8%. According to the Base Case forecast, industrial rents in Cleveland could grow an average of 3.8% per year, compared to the pre-pandemic average annual rate of 2.8%.
Investment activity is holding up well in Cleveland when compared to pre-pandemic levels of activity. Just over $110 million traded hands in 23Q4, which is more than double the fourth quarter average in the five years preceding the pandemic. Investors targeted recently delivered and fully leased assets, which supported volume and pricing in the market.
Despite a slowdown in leasing activity, tight vacancy and limited deliveries should keep Cleveland’s industrial market on solid footing over the near term.
Construction
A key factor behind Cleveland’s modest construction pipeline is a lack of vacant land open for new development. Market participants report a lack of shovel-ready sites in Cleveland, which makes it difficult to build modern industrial space that is in high demand. In fact, many of the market’s recent deliveries have consisted of repurposed vacant retail locations and aging manufacturing facilities or built on the site of demolished properties.
One of the largest projects of 2023 was built on the site of the former Ford Stamping Plant in Walton Hills. Local developer DiGeronimo Companies, in partnership with Scannell Properties, delivered a 247,000-SF distribution facility at the site, which is part of the larger Forward Innovation Center redevelopment project. The portion of the project located in Walton Hills, known as Forward Innovation Center East, could ultimately include up to 2.1
million SF of space.
Forward Innovation Center West is located in Brook Park and is being built on the site of the former Ford Cleveland Engine Plant No. 2, which closed in 2012. The first building, totaling 247,000 SF, delivered in 2023 and is leased to Victory Packaging. Another 127,000-SF property is currently underway and slated for delivery in mid-2024. Plans for the 210-acre site call for 3 million SF of industrial space total.
The largest delivery in recent months is Westfield Commerce Park. Stonemont Financial Group developed a 450,000-SF speculative project at the intersection of interstates 71 and 76, which target access to Columbus and Pittsburgh. The project delivered in October and marks Stonemont’s first speculative development in Northeast Ohio.
Elevated construction financing costs are weighing on construction starts, which sit at a multi-year low in Cleveland. Around 2.3 million SF is underway, representing 0.6% of inventory, which is well below peer markets in the region, as well as the national average of 2.0%.
Few properties larger than 200,000 SF are underway, and the majority of projects under construction range from 50,000 SF to 150,000 SF, with an even mix between logistics and manufacturing facilities.
Retail Sector
Cleveland’s retail market is on solid footing as of early 2024. Retail availability remains near an all-time low of just 5%, 250 basis points below the historical average.
Limited availability is a key factor in below-average leasing trends, as tenants looking for space are unable to find quality storefronts in desirable locations. While annual leasing volume sits well below the annual average in the three years leading up to the pandemic, as a share of available space, it represents about 22% which is above pre-pandemic levels.
With softening leasing activity and fewer move-ins, demand formation in Cleveland slowed notably. As consumer spending pivots away from goods and toward services, tenants with smaller footprints, such as food and beverage users, are driving leasing activity. In Cleveland, food and beverage tenants represent 14% of leasing volume last year compared to just 3.2% of annual leasing in 2022. Fitness and health and personal care are also driving activity and account for 13% of annual leasing volume compared to 2% in 2022.
Limited deliveries also contribute to tight market conditions in Cleveland. Around 880,000 SF of space delivered since 2022, and speculative development represented about a quarter of recent deliveries. Of the space added to the market since 2022, just 7.3% remains available. The amount of space underway is well below recent averages as higher construction financing costs weigh on development activity. Just 220,000 SF of space is underway, which represents 0.1% of inventory compared to the national benchmark of 0.5%. And with construction starts at the lowest level in CoStar’s data history, supply will remain limited over the near term.
After hitting a peak of 4.5% in mid-2023, retail rent growth is beginning to decelerate in Cleveland. As of the second quarter, annual gains average 1.3%, which is still far above the 10-year average of 2.3% for the market. Cleveland is mid-range among peer markets in the Midwest for rent growth and performs in line with the National Index.
Investment activity held up in Cleveland in the second half of 2023 with $234 million trading hands, which is 24% above the average over the same period in the five years preceding the pandemic. Net lease deals account for many of the top deals closed in recent months, and higher cap rates relative to the national average are a draw for yield-motivated investors.
Despite moderating retail sales and a potential pullback in demand in the months ahead, limited deliveries and historically low vacancy should keep market conditions balanced in Cleveland over the near term.
Cleveland Economy
Prior to the coronavirus pandemic, the Cleveland market was experiencing weak employment and demographic trends. While national employment has recovered relative to early 2020 levels, total employment in Cleveland still lags. As of March 2023, employment sits 2.2% below pre-pandemic levels. This reflects the market’s exposure to vulnerable industries such as manufacturing, which continues to face headwinds from labor shortages, supply chain disruptions, and dampened domestic and global demand.
Healthcare services is one of Cleveland’s largest industries, and hospital networks Cleveland Clinic and University Hospitals represent the metro’s top two employers. Prior to the pandemic, area hospital systems continued to invest in new facilities, including a new 11-story, 270-room MetroHealth hospital on Cleveland’s west side (opening in 2023), a $236 million expansion of University Hospital’s Ahuja Medical Center in Beachwood, and the UH Seidman Cancer Center in Avon. UH also announced the addition of 1,000 healthcare positions. The Cleveland Clinic is actively expanding, as well, with a new hospital planned for Mentor; expansions of the Neurological Institute and Cole Eye Institute; and 1,300 new nurses, technicians, and physicians system wide.
The Ohio Tax Credit Authority also approved a 15-year job creation tax credit for the Cleveland Clinic, which could create 1,000 research and development jobs by late 2028 through the establishment of a new global center for pathogen research and human health. The center would anchor the Cleveland Innovation District, a planned innovation hub supported by a $565 million investment from the state of Ohio, JobsOhio, and the Cleveland Clinic.
The biomedical and technology sectors clearly benefit from the metro’s reputation as a healthcare powerhouse, aided by initiatives like the Health-Tech Corridor (HTC). The HTC, launched in 2010, is a 1,600-acre area on the east side of Cleveland linking Downtown Cleveland to University Circle. The area encompasses two major hospital campuses (University Hospitals and Cleveland Clinic), multiple business incubators, four academic institutions, and over 170 high-tech and health-tech companies. According to the 2018 Midwest Healthcare Growth Capital Report, biomedical companies in Cleveland ranked third in the Midwest for attracting capital investments.
The city received a significant boost in 2020, with Fortune 500 company Sherwin-Williams announcing that its global headquarters would remain in Cleveland. The company plans to invest another $600 million in northeast Ohio, including a new, 1-million-SF headquarters building downtown and 600,000-SF research facility in Brecksville, combined housing more than 3,500 employees. The company purchased a large parcel of land just west of Public Square in downtown for $49 million, which will serve as the new headquarters site. In June, the Cleveland City Council approved a tax financing package for the project, which expects to generate around $8.6 million in income taxes annually for the city.