cleveland's commercial real estate market: a heat check

They're all talking about it: The LA TimesForbes, Politico MagazineThe Washington Post. They'll all tell you the same story: Cleveland is the place to be. 
At the beginning of 2014, Cleveland was “up-and-coming.” Now, the city has arrived.
Thanks in part to the national excitement around LeBron James, Johnny Manziel and the 2016 Republican National Convention, our economy continues to grow.
The convention alone is expected to produce an economic impact of more than $250 million, according to the Denver Business Journal. And, Time Magazine predicts a big boost thanks to the return of LeBron James.
So, what does it mean for the city’s commercial real estate, now and in the near future? Things are looking up, but there’s still a lot of work to be done.
New Downtown Development Creates Desired Destination
The city’s reinvention started long before all of the recent publicity. In 2012, Cleveland added the $350 million Horseshoe Casino, and in 2013, the $465 million Convention Center and Global Center for Health Innovation Facility. Another milestone: Phase one of the Flats East Bank development also was completed in 2013.  
Brain gain and urbanization -- driven largely by millennials -- remains a key factor in Cleveland’s reinvention. Between 2000 and 2012, the city gained more than 60,000 people aged 25 and over with a college degree, according to a recent report by Cleveland State University.
New opportunities in Cleveland have made the city a desired destination and an attractive place to build a successful career. Unemployment is down to 6.6 percent (down 0.6 percentage points year-over-year). Professional and business services led the way in regard to job growth so far this year (1,200 year-over-year), despite a relatively stagnant period for new jobs.
More significantly, these newcomers continue to fuel interest and demand in the downtown market. New restaurants like Urban Farmer, Red, the Steak House and Butcher and the Brewer along with new residential developments like The 9 already have set a new standard. Have you seen the popular T-shirt emblazoned with the phrase “Vacation in Cleveland?” It’s no joke, especially with the opening of the Westin Hotel in May and a handful of other hotel projects already under construction.
The second phase of development on the Flats East Bank has commenced. Among other projects, future developments here will include The Big Bang (dueling piano bar), Flip Side, FWD and a new Crop concept from chef Steve Schimoler. A long-awaited full-service downtown grocery store, Heinen’s, will open in the rotunda of the Ameritrust complex.
With an increasingly young populace, and positive numbers in job growth, Cleveland’s national image has shifted from down-and-out to up-and-coming.  
Downtown Living Outshines Office Space Demand, Drives Urbanization
Amidst the buzz, we’ve identified an overarching trend in Cleveland’s commercial real estate: A significant number of office buildings are being purchased with the purpose of transforming formerly commercial spaces into residential units.
Downtown living space is in high demand. According to the Downtown Cleveland Alliance (DCA), apartment occupancy hit an astounding 98 percent at the end of the second quarter, and 15 residential buildings currently are under construction.  
Usually, vacant buildings in need of change are targeted for this purpose. More recently, however, even those buildings with office tenants are being adapted or proposed for residential. This is a big difference. Now, residential is trumping office space, potentially pushing out office tenants in exchange for residents. At the Tower at Erieview, 10 floors of office space are currently being proposed to be converted. That building joins the Halle Building, Standard Building and The Residences at 1717.
But this rush for residential is a good thing. Urbanization in Cleveland will eventually fuel the office and retail market, and will (in the process) fill up vacancies. Overall, this trend will create a healthier marketplace and strengthen the core of downtown Cleveland.
Recent Activity Pours ROI into the City
Now that popular names and prominent events are opting into Cleveland, the city can accelerate already ongoing improvements. Wins (primarily the GOP convention) are driving money into the area, and impacting the value of real estate.
The reinvention of Public Square is a good example. That’s been in the works for years now, and with a little push, it might finally happen. After millions of dollars are poured into Public Square, the makeover will have a positive impact on all surrounding office buildings and residential apartments in terms of value.
But, the fundamental ROI of recent activity has been renewed interest from national investors. There’s an excitement downtown that the city hasn’t seen in over a decade, one that’s fueling residential development, interest from national investors and, overall, great change for the future of the local economy.
This editorial was written by Scott Pick, Executive Vice President in the Cleveland office of JLL (Jones Lang LaSalle). Pick has more than 15 years of experience in the CRE field.
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