THURSDAY, NOVEMBER 06, 2008
by Dan RafterClevelandLike commercial brokers, developers and lenders across the country, those doing business in Cleveland are looking for ways to adjust to the nation's harsh economic climate. Midwest Real Estate News late last month spoke with four commercial pros doing business in the Midwest city. They shared their thoughts on those commercial sectors that are still doing well and those that are struggling, the steps Cleveland has to take to bolster its public image and the hopes they have for the future of their city.
Participating in the roundtable were
Scott Garson, vice president with
NAI DAUS; Bob Garber, managing partner with
CRESCO Real Estate;
Bob Nosal, managing director with
Grubb & Ellis; and Charles Williams, vice president with
KeyBank Real Estate Capital.
Midwest Real Estate News: There certainly is enough depressing economic news to go around. Let's start off on a positive, though: What commercial sectors are still doing well in Cleveland, even in these troubling economic times?
Scott Garson: Healthcare is still doing quite well. The Cleveland Clinic and University Hospitals are doing a lot of expansion in the area. They are acting as an anchor in some ways. We are seeing a lot of spin-off development coming as a result of their expansion efforts, the satellite offices they are opening.
Bob Garber: I don't think it's an overstatement to say that the way the clinic goes, the way University Hospitals goes is the way Cleveland goes these days. Also, Cleveland is still a local market still doing local business. Our local companies are not being enticed to move to neighboring states. They are still here. I think we'll see the lease market in the city get healthier, too, as the capital dries up. Companies will no longer be able to afford new construction.
Garson: We are seeing a lot of lease activity right now. People sometimes forget that Cleveland is still one of the strongest manufacturing centers in the country. We have had a decrease in distribution, but we are still strong in manufacturing.
Charles Williams: Another sector that's doing well is multi-family. In our portfolio, we are not having any questions or problems with multi-family. We are seeing at the front end more people looking for multi-family, unfortunately because of the increased number of foreclosures. More are moving back to apartments. On the backend, Fannie and Freddie have helped keep that market strong.
Garson: We're also seeing a lot of development around the universities. Developers are taking older buildings there and redeveloping them. There is growth there.
Garber: Senior and assisted-living facilities, too, are showing a lot of growth. That is a sector that is almost recession-proof. Older residents have to live somewhere. A lot of them are searching for that one-bedroom apartment with assisted-living options.
Garson: That's a good point. Remember, the population in Cleveland is older on average than in many other cities.
MWREN: Healthcare and medical office seem to be strong sectors in many of the Midwest markets we cover. Looks like this is the case in Cleveland, too.
Williams: Definitely. A couple of years ago, KeyBank created a separate healthcare division. It's that strong of a market.
Garber: People are living longer these days. They need more medical attention.
Garson: The Cleveland Clinic is one of the largest employers in the city.
MWREN: How have the tougher financing requirements impacted commercial lending in Cleveland?
Williams: The reality is, there is still money for solid deals. Still, we are definitely pulling in the reigns on new business. We are focusing on our long-standing relationships and clients. We are not looking to do one-off deals right now. We want our existing clients to be taken care of now. Our deals now are more equity-driven, more relationship-driven. Today, if the leasing and equity is in place, the deal will still get done. Strong deals will always get done.
Garson: The tougher financing has definitely hit retail hard here. To get enough pre-leasing is more of a challenge now. Owner-occupied deals are the ones that are still getting financing. For the investment deals, we are looking at 60 percent, 65 percent loans. Those are hard to get done today. For owner-occupied, though, there are still opportunities out there. With all respect to KeyBank, the smaller banks are the ones that might be able to make some of the loans we are looking at now.
Williams: We are fortunate that KeyBank was not involved in the sub-prime lending market. So we haven't suffered from that. There is some concern out there nationwide, though, that the shoe may drop if one of our large retailers go under. How will that ripple through the market?
Garber: Cleveland doesn't get a lot of really big deals. We don't get a lot of the $40 million, $100 million deals here. Our deals are more in the range of $1 million to $1.5 million. They're done by local developers. They're medium-range type loans. That kind of capital is tough to get out of the bigger banks. It's the smaller banks that swoop in to get that kind of business.
MWREN: The retail sector is struggling in so many cities. How is it Cleveland?
Williams: There is concern, though, about exposure to different retailers. What if we get blindsided and a Dick's Sporting Goods or a PETCO goes under? What if Wal-Mart decides to shut a store down? They can afford to do that. That can leave a lot of square feet of retail to be absorbed.
Garber: There are only so many retail projects out there right now. I think the market has been saturated by so many retailers. When you start seeing the karate studios showing up in strip malls, the last-gasp type of businesses, you know you're in trouble.
Bob Nosal: We received a call from a client the other day. We went out to see a 60,000-square-foot retail center. We drove up to this brand new retail center, and saw that it was absolutely vacant. It looked nice, but there were already weeds starting to grow in the parking lot. The one tenant in there was a gym. There are no anchors. What is the lender on that project thinking now?
Williams: What was the lender on that deal thinking making a deal on a development that had no tenants or anchors?
MWREN: What about public projects? Is there any of that coming to Cleveland?
Garson: There are plans for a new Cleveland Convention Center. But there is an argument going on now about where that convention center should be located. There is some thought that it should go behind Tower City Center (a large mixed-use development in downtown Cleveland) to get Tower City back up to speed. I think it makes a lot of sense to put that convention center downtown, to help bring some activity back to the center of the city.
Nosal: It feels better, I think, to have the convention center downtown.
Garber: That would seem to be the right venue to help turn Tower City around. There could be some positive spin-off from that. Public Square (a central plaza in downtown Cleveland) is not something to be proud off right now.
Williams: There is no reason to hang out in Public Square right now.
Nosal: To me, the best thing happening in Cleveland right now is the rejuvenation of the Euclid Corridor (one of Cleveland's main street, and the home to a $200 million bus rapid-transit project by the Greater Cleveland Regional Transit Authority.) I went with a research-and-development client to 71st and Euclid. We walked into a development there and the client stopped. 'This is what we want,' he said. It's the perfect location. There is housing next door. It's a stone's throw from the clinic. If you're looking for development opportunities, that is the area to look at. That is the best thing that has happened to this city. We are marketing the heck out of it.
Garson: Prospect Avenue is also showing a lot of life. There has been a lot of good redevelopment on that street. The small businesses along the street are investing in their stores. It's an attractive street right now.
MWREN: How about the office market? How is that doing in Cleveland?
Nosal: The East Side is strong. I don't think there is even a big block of space available on the East Side right now.
Garber: In Cleveland the majority of our office business seems to be a reshuffling of space. Tenant A will move to Tenant B's former space, leaving a vacant space behind. As long as the market doesn't go stagnant, we can make a living.
Nosal: By the end of this quarter, office vacancies in Class A in downtown Cleveland will be in the single digits. There is not much large Class A space available in downtown.
Garson: I worked recently with a client from out of the state. The client had looked at office space in St. Louis, Detroit, Indianapolis, Chicago and Cleveland. He said that Cleveland was the best place to be. There are low rents. There is easy transportation in and out. If we can find a way to get the message out, I think we can really promote the positives of Cleveland. Sometimes, though, it's hard to get that message out.
MWREN: That seems true. Why is it so hard to spread positive word-of-mouth about Cleveland?
Williams: I came here from Denver. I remember before we moved here spending time walking in downtown Cleveland. I saw a lot of potential. That's why we came. I saw what could happen here. If Clevelanders themselves would stop bashing Cleveland, we'd have an opportunity to really promote the city. We could talk about projects like The Flats (a mixed-use industrial, entertainment and residential in Cleveland lining the banks of the Cuyahoga River), and what an incredible project that is turning into. They say there are two people who hate Cleveland: Those who have never been there and those who have never left.
Garber: Our art district is phenomenal, too. Most people don't know that.
Nosal: And our music scene is excellent. Why isn't more being done to promote that?'
Garson: There is an amazing quality of life here. We don't promote it, though. We are our own worst enemy. There are some efforts to get that message out, but we can do more.
Garber: I think we need one big deal. Cleveland needs to win something, like a Boeing. The rest will follow that. Bringing in a few big-name companies is what we need.
Nosal: There is more going on here than meets the eye. Cleveland is positioned to take advantage of biomedical and renewable energy developers. People are looking for renewable energy. Companies are lining up to meet that demand. That is an area that we can really take advantage of.
Garson: We should take advantage of our manufacturing base and use it to work I the renewable energy field. There are tons of deals that happen in Cleveland that won't make the papers, that won't make the magazines. I've done over 85 deals in the last 10 years, and most of those deals didn't make the papers. People want to be here. They are investing in Cleveland. You just don't hear about it.
Nosal: We don't have huge population growth, but we do have a slow, steady population growth. We are a steady market. We are boring in that way. We aren't sexy. But if you're running a business, it's nice to be steady.
MWREN: What do you see in the next few months for Cleveland?
Nosal: We are concerned about next year. We are usually six to nine months behind a lot of other markets across the country. So if things are stopping now, the second half of 2009 might be a real challenge.
Garber: Things are going to be a little difficult next year. Companies are watching their budgets and cutting where they can. On the brokerage side, it is going to be a less-than-stellar year for most. We are seeing companies putting plans on hold. I don't think the brokerage side will be as fruitful as it has been in the past.
Nosal: We haven't seen a lot of REO business here yet. I think next year, unfortunately, we'll be busier with that.
Garson: We've just started seeing them in the last two weeks.
Williams: If we're not at the bottom, we are close. 2009 will be tough. The REO stuff is not out there yet, but it's coming.
Garson: There is a lot of frustration out there. But there are still good deals out there, too.
More Articles
