Cleveland Apartment Vacancy Stands Out, but Market for New Spaces Remains 'Very Strong'

Article from Crain's Cleveland Business by Stan Bullard.

Amid a building spurt, apartment vacancy in the Cleveland region ticked up to 6% at the end of 2018, from 5.8% a year earlier. The data from the Marcus & Millichap investment real estate brokerage also put the Metropolitan Statistical Area in a spot it rarely sees in good economic times, as the fourth-highest in the firm's rankings of markets nationally.

That company includes San Antonio, which leads the nation with a 6.8% vacancy rate, followed by Houston with 6.4% and St. Louis at 6.1%. Even though vacancies are up thanks to lots of new suites hitting the market — by Cleveland standards — there's no perceptible whining from insiders.

In an oft-repeated phrase among multifamily owners and developers, Ari Maron, spokesman for the Cleveland-based MRN realty company, which produced the East Fourth Neighborhood and Uptown retail/multifamily properties, said he's bullish about the region's apartment market.

"The market seems very strong," Maron said in a phone interview as he discussed the company's project to open: the 25-suite Market District Lofts in part of an Ohio City office building. At Uptown, 11471 Euclid Ave., MRN's complex with first-floor retail and upper-level apartments at University Circle, occupancy is almost 100%. And that's after the nearby One University Circle and Centric projects opened the doors to a total of 548 suites last year. Each is barely less than half a year into its rent-up period.

Steve Rubin, a principal at Little Italy-based Midwest Development Partners, which led a partnership that produced Centric, with 272 suites at 1999 Circle Drive, said 42% of its suites are leased and the building is signing new leases at a double-digit pace weekly.

"We're doing well," Rubin said. "We're ahead of schedule. We're very bullish on University Circle." To prove it, he pointed out the company is continuing to pursue a long-range plan to build nearby Circle Square, also known as UC3, which will have seven buildings.

Rubin said Centric opened after the leasing season in the fall, but he noted it's not long until next month's Match Day, when medical school graduates learn about residencies and other appointments, which brings a flock of new prospects to the market.

At the 20-story One University Circle, Mitchell Schneider, who developed the property with Sam Petros, said the 276-suite building at 10730 Euclid Ave. is 70% leased.

"We're getting better rent per square foot than we expected and feel the building is gaining momentum," Schneider said. Reflecting the influx of a large number of new suites, CoStar, the online realty data provider, estimates there's 10% vacancy in the University Circle area, double the five-year average.

More apartments also have gone on the market this year in the eastern suburbs. Pinecrest, the retail-office-residential project in Orange Village, added 87 units, and Van Aken District in Shaker Heights added 103. The largest source of new is at The Aster, which opened 206 units on Park East Drive in Beachwood and is 55% leased, according to CoStar.

Adam Fishman, a principal at Cleveland-based Fairmount Properties, one of the developers of Pinecrest, said, "We've been thrilled with the response. People are really getting the work-live-play environment we created here." He was nonplussed by the region's rising vacancy, as he believes such new-breed, mixed-use projects are a different product from typical apartment-only buildings.

The East Side action is the first time in four years that multiple projects have opened in that area and accounts for much of the region's vacancy. That's a big change from multiple years of several apartment projects opening in downtown Cleveland.

The largest project to open downtown last year was the Halle Building, 1228 Euclid Ave., which Doug Price, CEO of Willoughby-based K&D Group, said is fully leased. Besides substantial holdings downtown, the company owns thousands of suites in the eastern suburbs. Its portfolio has about 3% vacancy, and that is concentrated in its high-rise buildings.

"This winter is much better than last winter was," Price said. "We're seeing the number of tenants moving out as they buy houses continuing to decline." CoStar puts downtown vacancy at 9% as of last Thursday, Feb. 7, but it does not provide prior-year figures.

Other factors show that despite the uptick in vacancy, the market remains strong. The typical concession on the East Side's new properties is one month without paying rent for the winter months, while such deals are scarce downtown.

Dan Burkons, an Independence-based senior director of Marcus & Millichap, said that while other regions may have lower vacancy rates, concessions in those markets are more prevalent. Employment is continuing to grow in the Cleveland region, especially on the East Side, and new household formation remains strong, he said.

"I still know of people who are living at home," Burkons added.

Michael Barron, a Marcus & Millichap senior managing director also based in Independence, observed that current construction rates are the strongest in decades.

"Yes, it's moving the needle on vacancy," he said, but it is a growth period in the sector that Cleveland has not seen since the 1990s, which this period eclipses. He also pointed out that the 2,000 suites completed in 2018 in the Cleveland MSA is lower than opened in either Columbus or Cincinnati. Moreover, the Cleveland figure pales compared to 12,000 suites in Houston and 16,000 in San Antonio.

Marcus & Millichap forecasts vacancy may dip to 5.8% at the end of this year as fewer projects are under construction and 1,600 units are scheduled for completion in 2019 in the region, including new buildings in downtown Cleveland and Ohio City.

Ralph McGreevy, executive vice president of the Northern Ohio Apartment Association trade group, said, "Everyone I talk to in the apartment business is excited about the market. This is our season to expand our marketplace when there have been other times we have not been able to do so."

Moreover, 6% is not a bad number, he added, as the market has seen higher vacancy figures in the past during downturns. And that was when no new units were going up. For example, in Marcus & Millichap's 2010 report, the Cleveland MSA had vacancy of 7% at the end of 2009 and just 56 units were added in the region.

"We have to take advantage of when the market is hot," McGreevy said. "It's the right thing to do for our community to add new product. No one is looking at the Marcus & Millichap report with doom and gloom. It's an exciting time."

Don't expect the climbing vacancy to reduce the appetite for more multifamily projects here.

Mark Vogel, a mortgage broker and senior managing director of Berkadia's Cleveland office, said climbing vacancy alone won't make it more difficult to get financing for new developments so long as other metrics remain strong.

"Lenders typically estimate 5% vacancy when they analyze applications for new projects," Vogel said. "Moreover, and more important, lenders are extremely interested in making multifamily loans."