The Covid-19 pandemic sent shockwaves through the commercial real estate market, yet the mufti-family sector has long held strong against uncertainty and economic swings, including the effects of the pandemic.
Known for stability and decreased risk as opposed to other asset classes, and with strong rent growth in most urban markets, the multi-family market has been incredibly active. Coupled with historically low interest rates, the market is flooded with buyers looking for multi-family assets. Many of these buyers, who typically focus their efforts in the top real estate markets in the country (New York City, Miami, Los Angeles, Dallas, etc.) are looking to Midwest markets as pricing has ballooned in the top tier cities.
Cleveland offers a distinct advantage over larger cities, as pricing for multi-family properties is modest in comparison and the yield spreads are typically much better than in competitive or larger markets.
According to David Leb with Cushman & Wakefield | CRESCO Real Estate, “Cleveland has always been an under-the-radar city when it comes to major multifamily developers and owners, and Northeast Ohio’s population decline over time has scared off many out of the largest players. But downtown Cleveland has thrived over the past 10 years, and our downtown is adding residents every year. Out of town investors and developers are looking more at Cleveland as a city with better returns than many other major markets, and the future is a lot brighter in Cleveland than it used to be”
Here are some reasons why multifamily buyers and developers are choosing to invest in Cleveland:
- Cap rates are higher here than in competitive markets. Cap rates can be used as indicators for investors for what to expect in terms of return on investment. The higher the cap rate, the higher the likely return. Northeast Ohio cities including Akron and Cleveland are showing higher cap rates for rental properties than many competitive markets, with Cleveland at an 8.0% average market cap rate (CoStar)
- The apartment market here has very low vacancy. In fact, it has performed well for the past decade and multifamily properties have proven resilient even during recessions and the recent pandemic. While the national vacancy rate hovers around 6.4%, Ohio’s is at 4.6% and Cleveland specifically is 4.7%. Over the past five years, vacancy rates in Ohio decreased at an annual rate of 9.55%, indicating a positive occupancy trend trajectory.
There are several reasons for the trend toward renting rather than owning. Steadily rising median home prices put homeownership out of reach for many people who are still recovering from potential losses associated with the pandemic. Additionally, baby boomers are interested in downsizing, and a multifamily property is ideal because it typically offers hassle-free living. Millennials are looking for low-maintenance urban living options near the bustling centers of downtown.
- Many newer construction properties have 15-year tax abatement programs. The City of Cleveland’s Residential Tax Abatement Program helps keep operating costs significantly lower and protects buyers from a big spike in real estate taxes in the event of a sale. Meant to stimulate investment in development or redevelopment, it temporarily eliminates 100% of the increase in property tax resulting from eligible projects, including investor-owned multifamily properties.
- A lack of new home construction increases rental probability. Recently, housing prices and construction costs skyrocketed in Northeast Ohio and stock is very low. This means many Cleveland-area renters are likely to keep renting. In fact, realwealthnetwork.com named Cleveland one of the top places to buy rental property in 2021, thanks in part to the city’s growing Millennial population (who are more likely to rent), affordability, Downtown appeal, and job growth. As purchasing a home becomes less appealing in the current state of the market, Northeast Ohio residents are consistently choosing rental properties.
- Employers in Cleveland are growing. Northeast Ohio is home to the headquarters of 10 Fortune 500 companies including Sherwin Williams, Progressive Insurance, Goodyear Tire, Cliffs, FirstEnergy, Aleris, Eaton Corporation, TravelCenters of America, KeyCorp and Parker Hannifin. Not to mention, we have the world-renowned Cleveland Clinic, and University Hospitals and Metrohealth to round out our healthcare institutions. The Northeast Ohio region has the second-heaviest concentration of employment headquarters among the 20 largest metros in the U.S., according to TeamNEO, with 68% more than the national average. This pipeline of employment means more professionals looking to live near where they work, and urban rental properties’ occupancy rates soaring.
In Cleveland and other Northeast Ohio communities, there are on-market and off-market opportunities for investors to consider.
When asked why Cleveland is seeing more investment from larger multifamily buyers and investors, David Leb added: “Apartment developers and owners are all trying to identify markets with upside, stability, and higher returns on their investment. Cleveland has the fastest growing healthcare economy in the United States, is home to 10 fortune 500 headquarters, the 2nd largest theater district in the United States, yearly rent growth on downtown apartments, and pricing on investment properties that have higher returns than competitive markets like Columbus, Pittsburgh and Indianapolis. The economic stability is there and the upside potential is there, and investors all over the country have noticed and started to focus more of their capital on Northeast Ohio. The secret is out on Cleveland.”
To learn more about how CRESCO, Greater Cleveland’s leading commercial real estate company, can help you with your property needs, contact us at 216.520.1200, or fill out the form below. A CRESCO professional will contact you shortly.