Office Sector
Office vacancy continues to climb higher in Cleveland as of the third 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 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 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 1.1 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 third quarter, rent growth in Cleveland sits at 1.1%, 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.
The pace of office deliveries picked up in Cleveland over the past 12 months and just over 450,000 SF was added to the market which is more than twice the annual average over the past three years.
Medical offices were behind 60% of deliveries over the past year, most of which were build to suit projects. The largest delivery in the market in recent quarters is a 150,000-SF property on Rockside Woods Blvd. in the Rockside Corridor submarket. CBIZ occupies 60,000 SF at the property, which delivered in 23Q4.
Despite an uptick in deliveries, total office inventory in Cleveland saw little change over the past five years. The removal of largely vacant office buildings, particularly in the CBD, is the main driver of Cleveland’s stagnant office inventory. More than 4 million SF of office space was removed from downtown Cleveland over the past decade and converted into other uses, namely residential and hospitality. Conversion activity is ongoing in the market, and current projects include Erieview Plaza, which will add 367 apartment units to downtown this spring, 700 Prospect Avenue, which will deliver 123 units later this year, and the Baker Building which is being converted into a boutique hotel.
Office inventory in Cleveland may see a modest increase over the near term as construction activity remains at a multi-year high. Around 1.1 million SF underway, representing 1.0% of market inventory. While high for Cleveland, this is a modest figure compared to the national benchmark of 1.0%. Oncoming supply presents minimal risk to the market as speculative development accounts for just 5% of space underway.
Paint and coatings giant, Sherwin-Williams, is behind the largest project under construction. The company’s new headquarters at downtown Cleveland’s Public Square will total 1,000,000 SF and will be the largest delivery in downtown Cleveland since 2002. The 36- story tower will replace the company’s current offices and Landmark Towers and will house 3,100 employees. Sherwin-Williams is also building a new 600,000-SF research and development facility in Brecksville. Total investment for both projects is estimated around $600 million.
The largest speculative project is being built near Sherwin-Williams’ new research and development site in Brecksville. Local developer, DiGeronimo Companies, began construction on Valor Acres in early 2023. The mixed-use development includes a 168-unit apartment building that delivered in 23Q4, with plans for a hotel and retail space. A 127,300-SF office property is underway and slated to deliver in late 2024. DiGeronimo Companies will occupy about half of the new office building and will relocate its corporate offices from Independence to the new site.
Industrial Sector
Industrial vacancy remains balanced in Cleveland heading into the second half 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 3.3% compared to the national benchmark of 6.6%.
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 8.9%. 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 2.2 million SF, representing 0.6% of inventory, which is well below peer markets in the region as well as the national average of 1.8%. 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 5.6% as of the third 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 prepandemic 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.
While down from recent years, investment activity in Cleveland is holding up well compared to pre-pandemic averages. Just over $100 million traded hands in 24Q1, which is 70% above the second-quarter average in the five years preceding the pandemic.
While sales above $40 million were rare in the market prior to the pandemic, it was not uncommon to see deals closing between $10 million and $30 million. The effects of high interest rates are felt most among larger deals, and just seven trades above $10 million were recorded year to date, which is less than half the prior year.
The active buyer profile has shifted in recent quarters, considering the significant move away from larger deals. Over the past five years, acquisitions from institutional buyers were rare, and the bulk of top deals came from public REITs or private buyers such as developers. While there is still some activity from institutional players, the lion’s share of top deals come from developers, with users and individual buyers also filling the gap.
Assets that delivered within the past 10 years support pricing in the market. In 23Q4, Trident Capital Group based in Boston, Massachusetts acquired a 185,000-SF warehouse at 14790 Foltz Parkway in Strongsville that delivered in 2016. Minnesota-based developer, Founders Properties, acquired the multi-tenant asset for $15 million. At $81.30/SF, pricing on the deal is in line with comparable properties that traded in mid-2022 prior to the steady rise in interest rates.
The top sale year to date closed in April when Roay Oak Realty Trust based in Rochester, New York purchased a 347,000-SF warehouse in North Ridgeville for $36.5 million ($105.13/SF). The property delivered in 2017 and is fully leased to Riddell Sports Group.
Fully leased assets were a main target for investors in Cleveland in 2023. In 23Q3, local developer, Industrial Commercial Properties, sold a 150,000-SF warehouse at 7000 Denison Ave. in the Downtown South Submarket. Packaging company Greenbridge fully leased the property in late 2022. New Jersey-based developer ARCTRUST purchased the asset for $11.7 million ($77.66/SF). The building last sold to Industrial Commercial properties in late 2021 for $2.6 million ($17/SF).
Retail Sector
Heading into the second half of 2024, Cleveland’s shrinking consumer base and slow-growth local economy weigh on retail demand. The market still benefits from strength in the retail sector overall, with certain retailers continuing to expand in the region. Limited construction activity over the past decade has also pushed the amount of space available for lease to less than 8 million SF, which is well below pre-pandemic levels.
While an increased number of move-outs weighs on net absorption, limited availability is another factor in muted absorption trends as tenants struggle to find high-quality space. Average months to lease remains well below typical levels for the market, suggesting that when space becomes available, it is leasing quickly. Leasing activity maintains a steady pace despite tight availabilities, and 12-month leasing volume represents 22% of available space on the market, which aligns with the average recorded in the five years preceding the pandemic.
Tenants driving leasing activity in Cleveland include grocers, discount and off-price retailers, and fitness which were behind 42% of 12-month leasing volume and are behind the lion’s share of activity in spaces 20,000 SF and above. In line with national trends, food services represent a notable share of leasing activity and were behind 12% of 12-month volume in Cleveland. These retailers were behind more than half of leasing activity in spaces 3,000 SF and smaller.
Availabilities in Cleveland will remain tight over the near term as elevated financing rates and the high cost of labor and materials weigh on construction starts. Just 210,000 SF of space is under construction, which represents 0.1% of total market inventory. And with build-to-suit projects driving most of the construction activity in the market, less than 10% of space underway remains available.
While elevated consumption levels propped up rent gains in recent years, Cleveland’s weak demographic trends are starting to weigh on rent growth. At 1.0%, year-over-year gains in Cleveland fell more than 200 basis points quarter over quarter and underperforms the national index of 2.5%.
High prices and the elevated cost of debt will continue to weigh on spending in Cleveland. Higher costs are also impacting retailers and reducing profitability, which could lead to an uptick in store closures. This will likely keep demand trends muted in the months ahead, but market conditions remain balanced amid historically low levels of construction.
Cleveland Economy
Cleveland, Ohio, has been experiencing a mixed economic landscape in recent times. The city’s economy, historically rooted in manufacturing, has been diversifying, with healthcare, education, and technology sectors growing. The Cleveland Clinic and University Hospitals are major employers, contributing significantly to the local economy. However, challenges remain, including population decline and the need for workforce development to align with new industry demands.
The commercial real estate market in Cleveland is reflective of these economic trends. Office spaces have seen varied demand, with some areas experiencing high vacancy rates, particularly older, less modern buildings. In contrast, newer, more adaptable office spaces have maintained better occupancy levels. The shift towards remote and hybrid work models has also impacted office space requirements, leading many companies to reassess their space needs.
Retail real estate in Cleveland has faced similar challenges. The rise of e-commerce and changing consumer habits have put pressure on traditional brick-and-mortar stores. However, there has been a growing trend of mixed-use developments, where retail spaces are integrated with residential and office units. This approach aims to create vibrant, community-centered environments that can attract and retain both businesses and residents.
Industrial real estate in Cleveland has shown more resilience. The demand for warehouse and distribution spaces has been robust, driven by the growth of e-commerce and the need for efficient supply chain logistics. The city’s strategic location, with access to major highways, railways, and the Great Lakes, makes it an attractive hub for logistics and distribution operations. This sector’s growth has been a bright spot in Cleveland’s commercial real estate market.
Looking forward, Cleveland’s economic and commercial real estate outlook will depend on several factors. Continued investment in infrastructure, education, and workforce development will be crucial for sustaining economic growth. Additionally, adapting to changing market dynamics, such as the increased demand for flexible workspaces and the evolution of retail, will be essential for the commercial real estate sector to thrive. Local government and business leaders are focused on creating a supportive environment for both existing businesses and new investments, which will be key to Cleveland’s future prosperity.