Northeast Ohio Market Snap Shot | Summer 2011

What a difference a year makes. Total U.S. investment transaction volume was up by 120% in 2010, compared to the same period in 2009, and overall cap rates were down 30 basis points (bps) to 7.4% according to Real Capital Analytics (RCA). This trend not only continued in 2011, but also sped up. Commercial property sales reached $44.2 billion through April, a 75% increase over the same period in 2010, at an average cap rate of 7.35%.

Continued investor demand for core assets in primary markets has been a significant factor to increased sales, but activity is increasing in secondary markets such as Northeast Ohio as well. We have seen a large uptick in activity over the last two quarters in properties offered for sale. Consequently, the trend in the secondary markets appears to be the reverse of the primary markets – new offerings are preceding sales. Since secondary markets generally present more risk and less growth, this trend makes sense as investors ease away from the primary markets as supply tightens.

Investors interested in Northeast Ohio are seeking safety or stability, or both. As a result, properties which attract the most interest include single-tenant, net-lease with long-term credit; grocery anchored shopping centers; medical office buildings near or on hospital campuses; senior housing; and sale-leasebacks. The amount of capital chasing these assets continues to increase, and the lack of supply in certain markets has created a “scarcity premium,” driving pricing to levels we have not seen since 2007, even here in Cleveland. This is combined with historically low interest rates and a return to more reasonable credit underwriting to drive the pace of property dispositions.

Owners of these properties should evaluate whether a possible sale now makes sense to take advantage of the scarcity premium. Low interest rates are also helping to stabilize cap rates for properties that may not necessarily fit into one of the “hot” property buckets. Either way, as we look out on the horizon, we see continued loosening of the capital markets and good opportunities for investors and owners alike.

The Ice Cream Comeback

Apparently the economy is not responding the way we all hoped a year ago. Business growth has slowed along with employment. It seems consumers are driving any recovery at all right now. This has limited new real estate projects to build-to-suits and renovations, especially in Northeast Ohio.

So when we saw the latest news headline that the ice cream business is booming and new facilities are being built, we thought what a great way to bring the economy back and hopefully commercial real estate with it. Considering it is like the tundra in northern Ohio 6 months out of the year, we may question this cool strategy, but hey, after the last few years, we're ready to try anything.

House Bill 58 WILL Retain American Greetings in Ohio - UPDATE

Updated 3/8/11 - Turns out tax incentives do work. American Greetings is staying in Northeast Ohio, even if they don't know just where yet. The bill passed by Ohio's legislature and quickly signed by Governor Kasich was the difference. The Plain Dealer has good coverage here, which includes a video, time lines and several other good points of information. The original post is below.

Original Post -
American Greetings, the well-known card company, has much more incentive to stay put in Northeast Ohio. House Bill 58, set to be signed by Governor Kasich, was approved by the House on Wednesday, as the Plain Dealer reported. The bill creates a new refundable job retention tax credit.

AG has been toying with the idea of moving to Chicago, which would have been a hit to a Northeast Ohio economy that is slowing, but successfully, clawing back. (As a side, just because the Insider is a superhero movie nut - Cleveland is where the new Avengers movie will be filmed...). AG's commitment to the city of Cleveland is important on a number of fronts, not just financially. AG is a dynamic company that recruits and wants to retain young talent. That is something Cleveland needs and can support, but we need high-profile companies like AG to make sure they are here. AG staying will also help in discussions with various airlines' commitment to the city as two proposed mergers move forward - Delta and Continental (who has a primary hub here), and Southwest and Airtran, who compete as the low-cost carriers between the Cleveland Hopkins airport (Southwest) and the Akron-Canton airport (Airtran).

E&Y Tower Moving Forward

Though we've known about the project and the financing structure for some time, the deal FINALLY closed yesterday for the construction of Cleveland's first CBD office tower in nearly 20 years. What will be known as Ernst & Young Tower, the first tenants include E&Y, Tucker Ellis, a large law firm based in Cleveland, and us, CBRE Cleveland. E&Y Tower is expected to open early 2013 and will include a hotel, conference center and several restaurants.

This is the beginning of what could be a boom for Cleveland. Waiting shortly behind the Tower is the construction of the new casino, which will be housed temporarily in the Higbee Building on Public Square, and the new convention center and medical mart. These developments, along with the strong activity in the Health Tech Corridor in Cleveland's Midtown, will hopefully push Cleveland in the right direction.







FORUM Architectural Services LLC, provided by www.cleveland.com

Optima closes on The Huntington Building in Cleveland

Optima International out of Miami Beach Florida recently closed on the The Huntington Building in Cleveland, a 22-story office building consisting of roughly 1.3 million square feet.  The story broke in late March by the Plain Dealer that Optima was considering the acquisition.  Word on the street is that they paid $18m, or $13.85/SF.  This is going to be very interesting to watch considering that over 600,000 SF of tenants will be vacating the building over the next few years and Costar reports a current total vacancy of 335,000 SF.  In addition, since purchasing One Cleveland Center two years ago, Optima has yet to make a new market office deal in that building. As probably an understatement, the Cleveland commercial real estate community is very interested to see what Optima has in store. There is apparently no redevelopment plan in place. Very interesting indeed.

Cleveland's Health Corridor Gets a Boost

Ohio is recognizing Cleveland's Health-Tech Corridor as a "hub" deserving of grant money and special preferred status, which should be a huge boost to the Euclid Corridor, the $250 million renovation between University Circle and downtown Cleveland. There are a number of well-capitalized developers who have an interest in seeing the corridor succeed. So strong is the faith in the corridor's success, one developer is building a  +100,000 sf spec building, probably the first of its kind in a number of years in Cleveland.

According to the Plain Dealer, being a hub "brings with it a $250,000 matching grant and priority status for millions of dollars in grants and loans that the Ohio Department of Development and other state agencies dole out yearly." The corridor is already pretty successful, an obvious reason why the state would want to focus additional resources there. Per the Plain Dealer, the has more than 75 biomedical companies, 45 technology companies and seven business incubators.

Fed Beige Book - "Further Signs of Strengthening"

The Fed published the Beige Book yesterday, which discussed signs of improvement nationally. Here are some highlights from the main summary regarding Cleveland/Fourth District:

- Consumer Spending - Cleveland reported recent sales strengthened and noted that retailers expect sales to improve during the upcoming months

- Manufacturing - Cleveland reported positive results in metals and fabrication, and increased auto or auto component production

- Banking - Most banks in Cleveland reported weak consumer loan demand, although a few contacts saw a slight increase due to seasonal factors. Not surprisingly, Cleveland saw flat business loan volume and tighter lending standards for commercial mortgages.

- Commercial real estate - Activity was slow across the nation, but Cleveland saw some development in the energy and industrial segments

- Employment - Cleveland reported strong demand for temporary workers. A pickup in employment was noted in the manufacturing sector, with little change in staffing for retail, energy, transportation and banking.

University Circle Development Secures Initial Financing

The argument for spending $250 million on the Euclid Corridor project just got a boost. MRN Ltd. developers has secured $44 million for Phase I development in University Circle, which includes Little Italy, Case Western Reserve University, and is the arts hub of Cleveland (Art museum, history museum etc.). It is a cultural center that is now linked to downtown through the Euclid Corridor Health Line (in honor of the Clinic of course). The new development, as the Plain Dealer is reporting, includes 102 "higher-end" apartments and 56,000 square feet of stores and restaurants. Though apparently scaled down from its initial design, the project is a very welcome step in making Cleveland a more vibrant place.

Photo courtsey of The Plain Dealer from cleveland.com

Relocating Company Breaking Ground in Brecksville

Some good news for Northeast Ohio was published by the Toledo Blade today - True North Energy will be building their new corporate headquarters in Brecksville. The site is set to be completed in May 2011. Many in Northeast Ohio will recognize the True North brand at Shell stations. True North is 50% owned by Shell. It's good to see companies moving into the region, though it's a little surprising True North is doing a build-to-suit. Office space right now is priced well below replacement cost. Roughly speaking, new office construction can be about $150 SF, while equivalent Class A office might be $100 SF. But like Eaton, True North must put some real value on having its own designed campus.

Eaton's Sprawling Beachwood Campus - A Giant Pond?

Eaton Corp. and Richard E. Jacobs Group, the lead developer of the project, submitted some site renderings of the proposed project at a Council meeting this past Monday night, per Plain Dealer reporting. As most know, Eaton has bailed on downtown and is developing a new 53-acre campus in Chagrin Highlands. They are seeking a variance to eliminate nearly 1,300 parking spots required under current zoning. The two site renderings submitted by Eaton are posted here. With some 2 miles of trails, it looks like a pretty nice campus (though one commentator suggested the giant pond made the campus look like a big toilet, which I'm sure is not the concept the design team had in mind). It's just too bad our Central Business District pushes companies like Eaton away. The crazy thing is that Cleveland will still get 50% of the tax revenue. This is what a PD reporter had to say in the comment section of the article:

From reporter Michelle Jarboe:
.... under a preexisting joint economic development agreement, Cleveland will receive a 50 percent cut of the income tax revenues generated by Eaton from the Chagrin Highlands campus, even though the property is in Beachwood.

But in reality, how much is Cleveland really losing from employee income tax, meals tax, hotels and entertainment, etc., etc. Not too mention the fact yet another major corporate business is leaving the CBD. At least it's still in Northeast Ohio.

(Photos courtesy of The Plain Dealer/cleveland.com, as obtained from Eaton/Richard E. Jacob Group) 

Challenges in Cleveland's Real Estate Market

The Plain Dealer, Cleveland largest newspaper, published a mildly interesting article today. Anyone that has read this blog should know, probably more intimately than most, the general problems and issues with, and potenital fixes needed for, commercial real estate. And not just in Cleveland. But its good to know what the non-real estate news sources are writing about CRE anyway.