Office Sector
Office vacancy continues to climb gradually higher in Cleveland as of the fourth 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 9.7% 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 1.3 million SF is under construction in Cleveland and represents 1.1% 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 fourth quarter, rent growth in Cleveland sits at 0.0%, compared to the national benchmark of 1.0%, 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 3.4% compared to the national benchmark of 6.8%.
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 9.1%. 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 2.1 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 6.4% as of the fourth 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%.
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
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 190,000 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 1.2%, year-over-year gains in Cleveland fell more than 200 basis points quarter over quarter and underperforms the national index of 2.2%.
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’s economic outlook for the fourth quarter of 2024 remains cautiously optimistic. The city’s economy has shown resilience throughout the year, driven by steady growth in sectors like healthcare, manufacturing, and technology. The Cleveland Clinic continues to anchor the healthcare industry, while local manufacturing has benefited from investments in automation and supply chain improvements. However, challenges remain, particularly with inflation and higher interest rates dampening consumer spending and business investment. Nonetheless, Cleveland’s diversified economy positions it to withstand broader national economic pressures heading into late 2024.
In commercial real estate, Cleveland’s market is experiencing a mixed outlook. The office space segment continues to struggle with high vacancy rates as remote work trends persist, and many companies are downsizing or reconfiguring their space needs. Class B and C office buildings, in particular, face difficulties attracting tenants, while newer or renovated spaces with modern amenities are in higher demand. Industrial real estate, on the other hand, remains a bright spot. The demand for warehouses, distribution centers, and manufacturing spaces is robust, fueled by growth in e-commerce and the need for more efficient supply chains.
For the remainder of 2024, Cleveland’s commercial real estate market is expected to see further bifurcation. Retail spaces, particularly in suburban areas, may experience stable demand, though urban retail faces challenges due to changing consumer habits. Multifamily housing continues to show strong performance, with rents rising and vacancy rates remaining low. Investors are likely to focus on industrial assets and residential developments, while the office sector may continue to see consolidation and repurposing of underutilized buildings into mixed-use or residential spaces.