Spotlight on Cleveland
Cleveland is forecasted to see a net decline in jobs of 7.1% in 2020, as well as a gain in jobs of 1.9% in 2021 for a net two-year job decline of 5.3%. Cleveland’s apartment market is expected to see (annual) net absorption of 6 units by the end of 2020 as well as net absorption of 153 units in 2021. Inventory is expected to grow by 1,407 units by the end of 2020 and by 404 units in 2021. This will yield a vacancy rate increase from the current 4.0% to 5.4% at the end of 2021. Cleveland’s average apartment asking rent is expected to fall 1.8% in 2020 and fall 0.3% in 2021. Effective rents are expected to decline 1.5% in 2020 and fall 0.4% in 2021. Looking further out, both Cleveland’s apartment asking rents and effective rents are not expected to surpass their respective 2019 highs until 2023.
Economic Overview
Cleveland – Job Losses Rank it in the Bottom 25 of 82 Metros
Cleveland’s economy had frequently trailed the rest of the U.S. over the last two or three decades, and the recent decline was somewhat consistent with that trend: it lost 100,100 jobs from February through July, a decline of 9.4% which ranked 59th of 82 metros. Cleveland’s jobs had declined 15.9% through April but then regained 7.4% in May through July as its economy re-opened. Cleveland’s unemployment rate climbed to 14.0% in June which ranked 71st of 82 and was one of the highest in the Midwest, above Columbus (9.9%), Cincinnati (9.0%) and Dayton (10.7%), but lower than Detroit (17.8%) and Chicago (16.4%).
Most of the Midwest has seen lower COVID rates than the rest of the U.S. Ohio’s governor was one of the first in the country to shutdown schools and restaurants which helped the state keep cases low. Cleveland had a COVID case per 1,000 of 7.5 as of the end of July which ranked in the top 20 lowest. However, this rate climbed 111.6% from June, on par with many other metros. The metro-level job losses through June had shown a small correlation (coefficient of 33%) to COVID cases per 1,000 residents in that metros in the Northeast U.S. had both the heaviest job declines as well as the highest COVID cases. More recently, other metros including Phoenix, Miami and Charleston have seen COVID cases spike yet show some of the smallest job declines. Like New York, governors in these states imposed stricter measures on masks and restaurant closings et al to slow the growth of the virus. While rates of new cases have slowed in these stats as of late August, they could face a return of job losses after adding jobs in May and June. This could lead to deeper commercial real estate distress, especially in late fall as consumer businesses will no longer be able to operate outdoors.
Still, the commercial real estate statistics have yet to show much, if any, impact from the pandemic. Cleveland’s apartment rent increase was 0.6% in the quarter, while its apartment vacancy rate declined 0.1%. Over the year, apartment rents rose 2.9%, while the vacancy rate declined 0.3% year over year. For the office market, the average office rent decline was 0.5% in the quarter, while the vacancy rate increased 2.3%. Annually, the office rent fell 0.4%, while the vacancy rate rose 1.8%. The apartment market recorded positive net absorption of 122 units in the quarter; the office market had negative absorption of 78,0000 square feet.
Cleveland’s office market shed 14,000 jobs from February to July, a decline of 6.1%. This ranked 66th of 82 metros yet was better than the U.S. rate of loss which was 6.6% through July. The overall metro average, however, was 4.6%. Moreover, Cleveland’s employment services industry, which includes temporary jobs, contributed 41% of these office sector losses, which was above the U.S. average of 30% during the same period.
Cleveland’s well-known health and social services sector lost 14,300 jobs from July 2019 to July 2020, a decline of 8.4%. Most of these were likely social services jobs. The Bureau of Labor Statistics numbers show that Cleveland hospitals have not shed any jobs over the year, which likely includes the famed Cleveland Clinic. Private education shed 7,400 jobs over the year (-22%). Year-over-year comparisons eliminate seasonal fluctuations inherent in these sectors and the ones listed below.
Cleveland’s manufacturing suffered losses of 9,500 jobs from July 2019 to July 2020. ArcelorMittal had announced layoffs of 450 in the metro in late July.
Cleveland’s loss in leisure and hospitality over the year was 34,300 jobs, a decline 30.9%. This net loss in leisure and hospitality jobs accounted for 26.5% of the total job losses in Cleveland. The equivalent U.S. share of total jobs lost in this sector was 35%. United Airlines has already announced layoffs of 450 employees at Cleveland Hopkins Airport. Separately, Cleveland’s retail sector shed 5200 jobs in the last four months for a decline 5.4%, which ranked 44th of 82 metros. A number of malls in Cleveland have seen partial conversion to industrial space. A CBRE report counted five projects in Cleveland (including former Walmart operations in Willoughby and Bedford Heights) with mall-turned-industrial space that converted 3.5 million square feet of retail into 2.5 million square feet of industrial space. (Source: Biz Journal).
Cleveland’s transportation and warehouse sector lost 3,200 jobs over the year, a decline of 9.3%, while its construction sector added 300 over the year (+0.7%).
Supply & Demand
Cleveland’s apartment market had net absorption of 122 units in the quarter, while new construction added no new units to the inventory. This pulled the vacancy rate down to 4% from 4.1% in the first quarter. For the year, net absorption was 764 units, an occupancy growth rate of 0.7%. Inventory growth was 487 units, for a growth rate of 0.4%, which brought the vacancy rate down from 4.3% a year ago.
Rent Growth
Cleveland’s average apartment asking rent increased 0.4% in the quarter to $969 per unit. The effective rent increased 0.6% to $930 per unit. For the year Cleveland’s average apartment asking rent climbed 2.4% while the average effective rent increased 2.9%. This annual effective rent change ranked 20th highest of the 82 metros.
Transactions
There were no recorded apartment transactions in Cleveland in the second quarter.
