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Cleveland targets new growth industries

The greater Cleveland market has been making great strides to strengthen its traditional manufacturing economy.

The Cleveland area is one of the nation's largest consumer markets with a population of more than 2.9 million. The metro area is home to an estimated 1.1 million households, making it the 14th largest metropolitan area in the country, according to the Greater Cleveland Growth Association.

"We've seen an increase in income and consumption, so demand for goods and services remains strong," says Jack Kleinhenz, chief economist and research and planning officer at the Greater Cleveland Growth Association. "The northeast Ohio economy has been great the past several years. We've certainly seen a very strong season of prosperity."

But while the economy is healthy, it is not moving at the rapid pace found in other regions of the country. One major roadblock for economic growth has been that Cleveland has seen a decline in population. The population has dropped at an average rate of 0.1% per year the last five years, according to the Reis Observer, a market report published by New York-based Reis Reports Inc.

"That doesn't mean the northeast Ohio economy is going south, it just means there is some redistribution occurring," adds Kleinhenz. The flat population growth does present a challenge given the tight labor market. Total employment in the Cleveland area is approximately 1.1 million as of June 2000, while the unemployment rate rose slightly to 4.5%, according to the U.S. Department of Labor, Bureau of Labor Statistics.

Nonetheless, non-farm employment was up 1.6%, or 18,100 jobs, in the first quarter of 2000 compared with the same period the previous year. "The employment growth is not at the U.S. norm, but we certainly have a good, stable economy," adds Kleinhenz.

Manufacturing continues to be a stronghold in the Cleveland economy, with auto and steel manufacturers among the area's largest employers. Manufacturing represents roughly 19% of Cleveland's employment sector. However, Cleveland is beginning to show signs of shifting to a more service-based economy, with services accounting for 30% of metro area workers, according to the Greater Cleveland Growth Association. "We're not just a rust-belt place anymore. We have a lot developing in northeast Ohio in terms of telecommunications, IT, medical technology and instruments and controls," notes Kleinhenz.

Office arena attracts telecom Cleveland is one of the major railroad centers in the United States, and has taken advantage of its position as a crossroad for major trunks of telecommunications. Kleinhenz adds that because fiber optic lines are typically laid along railroad tracks, a significant amount of telecommunication lines pass through Cleveland.

As a result, a number of telecommunications hotels have established a presence in the Cleveland area. Those firms provide a strong communications backbone, which has helped attract new business to the area, he notes.

Traditional industries such as vehicle manufacturing and plastics continue to dominate the Cleveland landscape. But there are also substantial opportunities in emerging industries. "It's important to recognize that we have a diverse set of complex industries," says Kleinhenz.

The highest demand for office space comes from the growing telecommunications sector. "The telecommunications explosion has been gobbling up high-ceiling and heavy-floor load space," says Gil Plavcan, a senior vice president in the office services group in the Cleveland office of Northbrook, Ill.-based Grubb & Ellis. An estimated 2 million sq. ft. of obsolete space has been converted for telecommunications firms.

"Presently, supply cannot keep up with demand for telecommunications space," says Plavcan. "Almost every broker in the city is trying to meet the requirements for telecommunications users, finding it's the same as selling or leasing."

The overall office vacancy rate remains steady at 12.62% - a small increase over the 11.23% recorded in the second quarter of 1999, according to Grubb & Ellis. "The Cleveland office market is stable, which means that after three exciting, above average years, settling back to normal seems like a slowdown, but in reality it's an average year," says Plavcan.

According to Grubb & Ellis, the Cleveland office market has absorbed more than 1.3 million sq. ft. of office space during the last 12 months, with nearly 400,000 sq. ft. of net absorption in the first half of 2000. The demand for space continues to fuel development. Nearly 500,000 sq. ft. of space was added to the market in the second quarter, with an additional 750,000 sq. ft. slated for completion in the next 12 months.

The bulk of new office development has been occurring in the south suburban market, which is desirable because of its central location between Cleveland and Akron. Other major projects that were completed in the second quarter include Eastpoint, a 170,000 sq. ft. project in the eastern submarket. The project will serve as the headquarters for the Austin Co. In the south market, the 205,000 sq. ft. Crown Centre II building was completed, and is already 60% occupied by the Cleveland Clinic Foundation.

The south and east markets account for the most significant vacancy increase so far this year. The vacancy rate in the east is 15.64%, while vacancies in the south are 13.66%, according to Grubb & Ellis. "I believe that you will see a burst of absorption in the east and south suburban markets during the last quarter of this year, because there are many companies in the market looking for space," adds Plavcan.

Downtown slowdown The only construction currently under way downtown is the 800,000 sq. ft. federal courthouse building. "What's holding Cleveland back from new development downtown is available space," says Plavcan. Of the 19 million sq. ft. of space downtown, there is approximately 3 million sq. ft. of vacant space available, including sublease space. In addition, the completion of the courthouse is expected to add to the multi-tenant vacancies as government tenants relocate to the new building, notes Plavcan.

However, construction is expected to start this fall on the first new multi-tenant building to be built in the CBD in a more than a decade. Courthouse Tower, a mixed-use project by local developer Bruce Felder, will add 100,000 sq. ft. of Class-A space to the downtown market. The project also includes plans for a new Doubletree hotel.

Industrial remains strong Vacancy rates in Cleveland's 310 million sq. ft. industrial market were a healthy 7.77% as of the second quarter, according to Grubb & Ellis. "In terms of activity in the overall industrial market, it's above average but not as strong as last year," says Spencer Pisczak, a senior vice president in the Cleveland industrial group at Indianapolis-based Duke-Weeks Realty Corp.

Net absorption during the second quarter was actually negative 2.4 million sq. ft., according to Grubb & Ellis. "A number of buildings became available due to the merger and acquisition activity and downsizing," says Pisczak. However, that consolidation activity has leveled off, and leasing activity is expected to increase. Roughly 1.6 million sq. ft. of space was under construction as of the second quarter, according to Grubb & Ellis. "Development to date has been above average," he says.

Demand for industrial space remains strong across the board. "In our market, small space under 40,000 sq. ft. is tight, and everything more than 150,000 sq. ft. is tight," adds Pisczak. "However, there are some vacancies in the 40,000 sq. ft. to 120,000 sq. ft. range. The most active areas are the southeast, south central and southwest due to the strong base of companies established in those markets, and the continued availability of land," he says.

Duke-Weeks recently completed the first building in its new Emerald Valley Business Park. The 200,000 sq. ft. warehouse will serve as a distribution center for Minneapolis-based Best Buy Co. Emerald Valley Business Park is a 230-acre industrial park in southeastern Cuyahoga County. "Activity is definitely not as strong as 1999, but it's still very good," says Pisczak. "Some deals are taking longer than normal, but the good news is they're getting done."

One obstacle to development in many of the inner-ring suburbs has been a lack of land that can be developed, obsolete facilities, and the cost of cleaning up brownfields. But the Ohio EPA has granted Cleveland an Urban Settlement Designation for nearly 12,000 acres throughout the city. This waives the costly aspect of cleaning up existing groundwater and brings redevelopment within reach for property owners.

A successful example is Collinwood Yards, a 47-acre abandoned rail yard that now houses Cleveland-based Jergens Inc. on 13 acres, and Consolidated Rail Corp. of Philadelphia, which has obtained 17 acres to construct an intermodal transfer facility.

Retail moves south Much of the new retail growth is moving further out from Cleveland to the east, south and west. "Retail is tracking with the demographic expansion," says Norm Peters, a senior vice president at The Cafaro Co. of Youngstown, Ohio.

The higher-income households in particular are moving south to areas such as Portage and Summit counties. "What's expected to happen in two or three years is an increase of retail activity in the southeast, southwest and south side of Cleveland," says Peters. "There is a need for retail development because that's where the construction and new homes are under construction."

Average metro household incomes are listed at $81,994 - slightly below the Midwest average of $88,893, while Cleveland's Consolidated Metropolitan Statistical Area has an effective buying income of $47 billion, according to the Greater Cleveland Growth Association.

One new open-air power center in the south metro area is Uptown Solon in the suburb of Solon. The 200,000 sq. ft. center is anchored by Bed Bath & Beyond, Old Navy, Pier 1 Imports and Borders Books & Music. Beachwood, Ohio-based Developers Diversified Realty Corp. developed the project, which opened in the fall of 1999.

DDR also is planning to break ground this fall or early spring of 2001 on University Town Center, a 450,000 sq. ft. open air center in Kent, which is located southeast of Cleveland near Akron.

Year-end vacancy rates for retail increased from 7.2% to 8.7%. The increase was due in part to the closing of several Builders Square locations. Despite the spike in vacancies, construction for 2000 is likely to exceed 1999 activity. Approximately 1 million sq. ft. of space is expected to be delivered for 2000, according to the Cleveland office of CB Richard Ellis.

Construction activity for 2000 is more in line with construction levels that typically averaged almost 1 million sq. ft. throughout the 1990s. Total construction in 1999 amounted to only 739,512 sq. ft., according to CB Richard Ellis.

Hotel construction takes a hit New construction is partly to blame for a dip in the hotel market. Average occupancies through June declined 1.7%, to 59.6%, compared with mid-year 1999 levels, according to Hendersonville, Tenn.-based Smith Travel Research. "2000 has softened up relative to 1998 and 1999, and we are seeing the impact," says Bob Boykin, CEO of Boykin Lodging Co., a Cleveland-based REIT.

That decline could be due to a number of factors such as the weather or the fact that attractions such as The Rock and Roll Hall of Fame and Museum are not as popular as they once were, Boykin notes. However, new hotel construction has compounded the problem. "The supply side of the equation has impacted the health of the lodging market here in a negative fashion," he says.

Cleveland has experienced a steady addition to its limited-service and mid-scale hotels in every market, including the airport, downtown and the east side. The number of hotel properties in the Cleveland market increased from 128 in mid-1999 to 137 in 2000 with the addition of 911 hotel rooms, according to Smith Travel Research. "Because of new construction, we've seen the wind come out of the sails a little," adds Boykin.

Demand for hotel rooms has been favorable. "We're anticipating the additions to supply will continue. We expect to see revenue growth slow into the low single digits, 2% to 4%," says Boykin. Average daily rates (ADRs) as of June were up 2.7% over the previous year, to $80.21, according to Smith Travel Research.

Multifamily recovery The multifamily sector is on the road to recovery. Cleveland's recession during the late 1980s and early 1990s produced a net out-migration in both residents and jobs. "Population in Cleveland has stabilized and is starting to increase," notes Charles Stone, a regional vice president at Cleveland-based Associated Estates Realty Corp. The metropolitan population is expected to rise slightly from the 2,220,520 recorded in 1999 to an anticipated 2,222,280 in 2000, according to Associated Estates Realty.

The city's effort to solidify its economic base and its investment in revitalizing areas of downtown are beginning to pay off. "People are coming back into the Cleveland MSA," says Stone. "That turnaround is having a positive effect on the multifamily sector. Rental rates are growing by 2% to 4%, while construction activity is also on the rise," he adds.

Although new construction never completely disappeared, it did slow down considerably after peaking in the late 1980s. Completions have averaged 524 units per year since 1992 - including the 479 units slated for delivery in 2000, according to Associated Estates Realty. One new Associated Estates development scheduled for completion this fall is the 300-unit Village of Avon in Avon, a suburb of Cleveland. The property features a townhouse-style design that has become popular in the Cleveland area, notes Stone.

New projects in the pipeline are expected to significantly increase the supply of rental housing. Approximately 1,365 units are likely to be completed in 2001, bringing the total inventory to 107,719, according to Associated Estates Realty Corp. An estimated 1,770 units are slated for completion in 2002.

Like other real estate sectors, the multifamily industry is enjoying the positive momentum from the city's economy. "We're seeing a city that has turned around, and now is in the recovery mode," says Stone.

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