CLEVELAND—Office sales have increased steadily in the Cleveland metro area since 2010 and, driven by out-of-state investors, is now approaching prerecession levels, according to a new study by JLL. In just the last two years office investment sales here have totaled more than $550 million. And the firm believes these buyers will keep sending their money to Cleveland in 2018.
“Cap rates have steadily compressed in the principal markets, and prices have really ramped up,” Andrew Batson, Cleveland-based vice president and director of research, tells GlobeSt.com. “Generally, investors are now looking inward and chasing yields.”
And Cleveland, like many older cities in the Midwest, has seen the fortunes of its CBD greatly improve. Millennials and empty nesters have flocked to luxury apartments in and near the downtown, and that has led many companies to lease space in the CBD. In addition, developers have converted much of the downtown's office space into apartments, further tightening the market.
“We've had three-and-a-half million square feet of office product in Cleveland's downtown changed into multifamily,” Batson says. And as Cleveland's multifamily boom began several years after similar downtown revivals in cities such as Minneapolis, it has room to run. “There was a lot of pent-up demand for multifamily units downtown, and now that they are here, they have filled up quickly.”
Local players have handled most of these conversions. “They know the market and feel comfortable here,” Batson says. And some are ready to launch new construction projects. Stark Enterprises, a Cleveland-based firm, recently received approval from the city to create The Beacon, a 29-story, 187-unit apartment tower atop a downtown parking garage at 515 Euclid Ave.
This activity will certainly keep office buyers interested in Cleveland. Three out-of-state investors in particular—Hertz, Shelbourne and Somera Road—have significantly grown their office portfolios from Cleveland projects, which now total more than three million square feet of space.
“You've seen a lot of value-add plays,” Batson adds, as investors realize the downtown's new profile will attract tenants if buildings get badly-needed updates. In 2014, for example, Skokie, IL-based American Landmark Properties Ltd. acquired 1111 Superior for a low price, when the 28-story tower was only 53% occupied. Within its first year of ownership, American Landmark renovated the lobby, added an executive fitness center and conference facility, and boosted occupancy to nearly 80%.
The CBD's vacancy rate for class A office space has fallen into the mid-to-low teens, according to Batson, and below 10% within trophy buildings such as Key Center, Ernst & Young Tower, and 200 Public Square.
JLL expects more transactions as a number of owners have put prominent assets on the market, including AECOM Center, 1100 Superior and the Tower at Erieview.
“We could see another two million square feet trade next year,” Batson says. “2018 could be as busy as 2017.”
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Brian J. Rogal
Brian J. Rogal is a Chicago-based freelance writer with years of experience as an investigative reporter and editor, most notably at The Chicago Reporter, where he concentrated on housing issues. He also has written extensively on alternative energy and the payments card industry for national trade publications.
