Class B/C property operations, meanwhile, could struggle with sustained weakness in construction and service-related employment this year. Net absorption at lower-tier complexes has been negative for the past six quarters—a trend unlikely to reverse until more meaningful and sustainable job growth resumes.
Calling All Renters
Uncertainty over employment and a soft for-sale market will continue to keep more individuals in the apartment renter pool this year. The median price of an existing single-family home in the Cleveland metro was estimated at $93,700 in the first quarter, a year-over-year increase of 10 percent. Sales velocity of single-family homes has dropped 12 percent during the past year.
Fast Facts: Cleveland
Population: 2,056,588
Median Age: 40.4
Median Household Income: $54,416
Asking Rents: $717*
Effective Rents: $680*
Occupancy: 93%*
Unemployment: 8.9%**
Notable: The Port of Cleveland conveys 15 million tons annually and supports 11,000 jobs. Inbound cargo is primarily steel, machinery, and liquid/dry bulk, while most outbound cargo is machinery and steel. Plus, seven Fortune 500 firms are located in Cleveland including: KeyCorp, Eaton Corp., Parker Hannifin Corp., The Sherwin-Williams Co., TravelCenters of America, The Lubrizol Corp., and The Progressive Corp.
* 1Q 2010
** June 2010
Sources: Bureau of Labor Statistics; Economy.com; M&M Research Services; Reis; SRC
Indeed, instability in the for-sale market has helped support demand for Cleveland apartments, slowing the rise in vacancies over the past 12 months. First-quarter vacancy was estimated at 6.9 percent, up 30 basis points year-over-year but well below the 110 basis point increase of the preceding 12-month period. The number of Class A units has increased by 1 percent, or almost 300 units, in the past year. Despite this, more individuals opting for rental housing over homeownership drove down the Class A vacancy rate 10 basis points over the past 12 months to an estimated 7.2 percent in the first quarter of 2010. Job cuts, especially in the construction and manufacturing sectors, fueled an 80 basis point annual surge in the Class B/C vacancy rate to 7.1 percent in the first quarter.
In the most recent 12-month period, asking rents declined 2.4 percent to $711 per month, while effective rents dropped 2.6 percent to $674 per month. In the previous year, asking and effective rents increased 0.3 percent. Limited new supply and steadier demand for Class A units have minimized the decline in upper-tier rents. Class A rents fell 1.9 percent over the past year to $897 per month in the first quarter. A significant decline in demand drove down Class B/C asking rents 2.6 percent year-over-year to $641 per month in the first quarter. Concessions currently account for 5.2 percent of asking rents, up from about 4.9 percent of asking rents one year ago. A stabilization of vacancy should hold concessions near present levels.
Product Movement
Limited new construction is keeping the multifamily housing market in check. In the 12 months ending in the first quarter of 2010, multifamily permit issuance rose 40 percent to 680 units, though the current level of permit issuance is down 70 percent from the annual average since 2000. Builders are forecast to complete 240 units this year, expanding inventory by 0.2 percent. Just 56 units were added in 2009, and deliveries have averaged 300 units annually over the last five years. With the completion of 240 units in the Downtown/The Flats submarket during the first quarter, nearly 300 rental units have been added to Cleveland stock over the past 12 months. In the previous annual period, 144 units were delivered.
Additionally, approximately 700 rental units are planned for the metro, though no groundbreaking dates have been announced. More than half of the proposed units are slated for the Cleveland Heights submarket. Tight lending and an uncertain near-term economic outlook, however, will likely keep many of these developments sidelined through year end.
Roughly 830 condo units are planned in the metro, nearly all of which are located in the Downtown/The Flats submarket. No start dates have been set for the projects.
Over the past year, sales velocity fell 38 percent, compared with a drop of 1 percent in the previous year. During the past six months, sales activity has increased 20 percent from the preceding six-month period. The median price has fallen 18 percent year-over-year to $30,200 per unit. The decline reflects more conservative expectations for near-term operations, including additional vacancy and concession increases. Cap rates start at about 8 percent for high-quality Class A properties and average more than 10 percent in Class C assets, both up about 100 basis points from one year ago.
Looking at the remainder of 2010, investment activity will rise slightly in the months ahead as higher yields draw more investors back into the market. Interest will center on upper-tier properties in areas that offer greater stability, such as Shaker Heights, University Circle, and submarkets in the northwestern portion of the metro.
No doubt, Cleveland will find a way to go on without the King.