Office Sector
Office vacancy continues to climb gradually higher in Cleveland as of the first 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 9.4% in Cleveland compared to the national benchmark of 13.9%.
Around 35,000 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 24Q2 totaled 280,000 SF, just half of the average second-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 1.4 million SF is under construction in Cleveland and represents 1.3% 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 first quarter, rent growth in Cleveland sits at 1.1%, compared to the national benchmark of 1.1%, 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
Industrial vacancy remains balanced in Cleveland heading into the final quarter of 2024. While the US and many markets see record-level deliveries just as demand is softening, limited deliveries since the onset of the pandemic are keeping vacancy in Cleveland near historic lows of 3.8% compared to the national benchmark of 6.9%.
Limited availability of modern industrial space is weighing on leasing activity in Cleveland. The availability rate in Cleveland sits near 4.8% compared to the national benchmark of 9.2%. Quarterly leasing in 24Q2 was among the lowest since the onset of the pandemic, and totaled around 642,000 SF, which is well below the average second-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 2.5 million SF, representing 0.7% of inventory, which is well below peer markets in the region as well as the national average of 1.7%. 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 landlords to continue to push rents at a healthy clip. Year-over-year gains average 5.3% as of the first quarter of 2025, 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%.
Despite a slowdown in leasing activity, tight vacancy and limited deliveries should keep Cleveland’s industrial market on solid footing over the near term.
Retail Sector
Historically tight market conditions continue in Cleveland amid healthy consumer spending and limited new construction. These tailwinds have pushed retail availability to the lowest level on record. Macroeconomic headwinds are forming, however, which could weigh on retail demand heading into 2025.
While move-outs accelerated in recent months, spaces are getting backfilled quickly amid record-low availability. Around 40% of all available space on the market is rated Class C and is not typically a target for retailers that are actively expanding, further limiting the pool of available space on the market. This is particularly true among anchor or big-box spaces. Spaces larger than 20,000 SF that were recently vacated have been snapped up by retailers such as Grocery Outlet, Aldi, and Macy’s. Backfills have supported leasing volume, which totaled 276,000 SF, up 15% year over year. This kept the availability rate at 5.3%, well below the market’s 7.8% pre-pandemic average.
The sector’s performance varies among shopping center types and locations. Shopping centers in high-growth suburban areas with established retail clusters see particularly tight availability. Submarkets such as Southwest and Southeast have an availability rate of under 3%. Strip Freestanding locations, which benefit from strong leasing among service-oriented retailers, have less than 3.5% of inventory available, while availability among neighborhood centers and power centers is around 7%. Neighborhood centers see the highest availability rate, hovering around 8%, which have seen an outsize share of move-outs.
While tight market conditions would typically support strong rent growth, rent growth slowed significantly in Cleveland over the past 12 months. At -0.1%, year-over-year gains in underperforms the 10-year average of 2.3%. Rising operating costs weighs on retail tenants’ ability to keep pace with recent levels of rent growth.
While consumer spending remains healthy, the household savings rate is falling back to pre-pandemic levels and excess savings built up during the pandemic is shrinking, which could weigh on spending, and by extension retail demand. The retail sector is well-positioned to maintain balanced market conditions, however, as construction activity is at an all-time low and the market faces minimal supply-side pressure in the case of a pullback in demand.
Cleveland Economic Outlook
As of the first quarter of 2025, Cleveland’s economy is experiencing modest growth. According to the Federal Reserve Bank of Minneapolis, business activity in the Fourth District, which includes Cleveland, has grown modestly, with expectations for continued growth in the coming months. Consumer spending has increased moderately, particularly during the holiday season, and while demand for manufactured goods remains stable, some uncertainty persists due to potential policy changes. Employment levels have remained flat overall, with certain sectors like construction adding staff to support planned growth, while some manufacturers have reduced headcounts in response to lower demand. Federal Reserve Bank of Minneapolis
In the commercial real estate sector, Cleveland’s industrial market stands out as a leader in 2025. A report by CRE Daily highlights Cleveland as the top U.S. market for industrial investment, attributed to its strategic infrastructure that attracts logistics and manufacturing businesses. The city boasts a low 2.6% vacancy rate and competitive asking rents averaging $4 per square foot, making it an attractive destination for industrial investors. CRE Daily
Conversely, the office space market in Cleveland is facing challenges. The trend of remote and hybrid work, accelerated by the COVID-19 pandemic, has led to higher vacancy rates in office buildings. However, there is a movement toward returning to the office in 2025, with some companies enhancing office amenities and collaborating with developers to create housing within walking distance of workplaces to entice employees back. Despite these efforts, the office market continues to navigate the complexities introduced by evolving work patterns. NEOtrans