How business owners can succeed in Cleveland’s slow-but-steady real estate market Featured

10:49pm EDT October 31, 2012
How business owners can succeed in Cleveland’s slow-but-steady real estate market

The Cleveland-area real estate market doesn’t have the highs and lows as compared to the national trends, but that’s not to say it hasn’t been slow. Over the past five years, land sales came to a halt, developers stopped speculating new development and new construction became scarce. However, Joseph V. Barna, SIOR, a principal at CRESCO Real Estate, says that a slowly improving economy combined with a shortage of available, functional, existing structures, will spark a need for new development.

“For example, the technology corridor along Euclid Avenue, from East 40th Street to the Cleveland Clinic, has seen a tremendous amount of redevelopment as well as new construction,” he says. “Five or six years ago, when you drove down Euclid Avenue, you’d see a lot of deteriorated vacant buildings. Now you see that many of them are full to capacity, including the new construction.”

Smart Business spoke with Barna about current and future real estate trends and how to find the right opportunities.

What is the state of commercial and industrial real estate in the U.S. and how does it compare with Northeast Ohio’s market? 

Over the past five years, the real estate industry has been depressed across the U.S. However, when markets are challenged, many figure out alternative ways of overachieving and new trends emerge. This, combined with a slowly improving economy, has led to an uptick in activity.

Cleveland is viewed as a second- or third-tier market with a declining manufacturing base and not a large distribution hub, so it does not experience the volatility the balance of the industry does. Most industrial users are in the 10,000- to 50,000-square-foot range, within single-tenant or multi-tenant

buildings.

The industrial vacancy rate in Cleveland is at about 8.3 percent, which is under the national average of 9.3 percent. This is somewhat misleading, as new construction has been shut off and some larger, older inventory demolished. As the economy went south, people bought existing buildings and either expanded or renovated them because the cost was significantly lower than building new. Therefore, the existing inventory is dwindling away. The same is true for the combined blended vacancy between the central business district and suburban office markets, which is at about 12.2 percent, under the national average vacancy rate of 15.2 percent. Again, there’s been very minimal new construction in our office market.

Within the Cleveland area, what areas and types of property are hot? 

On the industrial side, the airport area in southwest Cleveland has a very low vacancy rate and is always in demand. Also the I-480/I-77 sector, south of Cleveland, is in high demand, as well as the southeast. In general, in Northeast Ohio, it’s difficult to find well-maintained, functioning manufacturing buildings. There’s also a shortage of high-cube, clean distribution space on the west side of Cleveland.

What will the future of Cleveland’s real estate market look like?

There’s an ongoing need for functional product to accommodate current and future demand. On the sales side, as product diminishes, building values are starting to creep up. Land should also start selling again. There may also be a need for new construction for those requiring specialized buildings. Growth markets will be primarily in specialized manufacturing or a niche-type industry, which can’t be easily reproduced elsewhere because of regional expertise in such manufacturing areas as polymers. The biotech and health care industries are also in a constant state of growth.

As for leasing, there is still a glut of multi-tenant space for users in the 5,000- to 50,000-square-foot range and today’s leasing rates are about 6 percent lower than five years ago. This means pricing will stay flexible for this product type.

How can business owners succeed in this environment?

If you’re a tenant, you’re in the driver’s seat. You can be pretty aggressive on what you want and how you want it because of the amount of available space in that mid-market range. If you’re in an existing lease, start looking at least a year out on the renewal in order to evaluate alternatives. Then, you know what you have to negotiate with while sitting down with your landlord. Because lease values are down, it may be in your best interest — if your location works and your needs aren’t going to change — to go in earlier for a blend-and-extend. You offer to extend your commitment to the property if you can renegotiate your lease rate today. Most landlords welcome the opportunity to secure a tenant for a longer period and will give up a little now instead of losing a tenant down the road.

If you’re a property buyer, you’re going to see a swing toward a seller’s market because of the lack of product, especially if it’s a good, functional building.

Is now the time to buy or lease commercial property?

It’s a good time to do both. If you can find what you need it’s going to cost significantly less than new construction. And while there is still some inventory it’s a good time to ensure you’re not missing an opportunity, because values will increase. In terms of being a tenant, it’s a great time to do your lease deals or re-up early.

Real estate is in a constant state of change. So, be aware of market trends both across the country and locally, and revisit your long-term objectives every couple years. Surround yourself with the right professionals, whether a real estate attorney, contractor, appraiser, banker or real estate broker, to get the most for your expenditures. Whether it’s a good or bad market, there are always positives. You just need to understand your goals and how to take advantage of what’s out there to better position yourself for the future.

Joseph V. Barna, SIOR, is a principal at CRESCO Real Estate. Reach him at (216) 525-1464 or jbarna@crescorealestate.com.

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