The Rustbelt Roars Back

5 Replies

Richard, 

Thank you for posting this, it was a thought provoking read. I'm having a difficult time assessing the articles about Cleveland's declining population and overall low % of college graduates vs. articles like this touting the strength of the health care sector and potential for economic rebound.

I would posit that one of the more beneficial things the city and most importantly inner ring suburbs (as city schools have a very poor reputation) can do is to continue to tear down abandoned housing. At $11,000 to tear down it seems the money will come back as taxes fairly smoothly, average new house probably has $60,000 to $70,000 of local payroll labor involved when utilities and sales/delivery are included. 

Boosting existing property values , and thus household wealth, in lower middle class neighborhoods and giving the construction sector a chance to possibly rebound will really ignite a regional economic recovery.

Another area I'd like to see some creative thought on is on getting long term vacant commercial repurposed or demo'd. I've visited Cleveland regularly the past 5 years cleaning up the vacant commercial space would do wonders for the visual landscape....perhaps some type of concerted effort on the part municipal authorities to occupy smaller scale existing spaces rather than clustering in newer larger all in one facilities, I'm thinking police substations in malls. DMV's in existing vacant strip malls as opposed to  stand alone facilities. The lost money in efficiency might come back in getting some of that vacant space occupied.

@Ray Browne Regarding your posit about the teardowns in Cleveland. The majority of the teardowns are in areas where demand is not high enough to produce a rebuild in the same place. And in a lot of these neighborhoods, that may be putting it kindly. The population density just isn't there and neither is the payback. 

But there have been teardowns in inner ring suburbs and beyond. I watched one in South Euclid, I know they have a handful more in the city, and that surprised me. A rebuild in some of those lots in the next five years, possible. But with rising rates, things may slow down. 

Reducing housing stock should push up prices, as long as the population isn't decreasing faster. And that is to your other point. I read the paper about Cleveland developments and such, but I also look at the census data on the City, County and MSA. Downtown vacancy rate is like 2% and they just keeping renovating more offices into apartments. 

The optimistic side of my brain says some people live downtown for five years, then move to inner ring suburbs to start families, because they grew up downtown and want to be near-ish. During this transition, new people move in downtown because the population has been steady and there has been growth. This should increase people in the inner county. The people from the last ten years will still be in the outer county so maybe everything is worth more and the population has rebounded. 

So on the ten year minimum investment, where do you plant your flag?

No company avatar mediumRyan Arth, Acacia Capital Investment Ltd. | [email protected] | (216) 832‑1935

@Ray Browne   Regarding your comment about the vacant commercial property. There is money available through the City's economic development department to occupy these spaces. The red tape is cumbersome but if you create employment, the deal can be worth a fair amount of money, if you bought it at a good price, even better. There is also County money available. A lot of business owners don't even know about this though. 

There is a viable entrepreneurial movement in Cleveland right now, but it can't fill all of the 30's & 40's buildings from the booming industrial era. Maybe in five to seven years?

I don't see the municipal level of the market getting together to use available buildings.

No company avatar mediumRyan Arth, Acacia Capital Investment Ltd. | [email protected] | (216) 832‑1935

@Ryan A. 

According to CoStar the Cleveland office vacancy rate is at 12.1% , http://www.costar.com/News/Article/Market-Trend-Clevelands-Office-Vacancy-Decreases-to-121/165271 , as of third quarter 2014. That is getting close to the national mark of 11.2%, these rates don't move that quickly but getting to 10% would be huge. 

There has been a mild swing towards first floor office as opposed to retail here in DC, in fact CoStar has their offices first floor street level now. Perhaps with the ever increasing portion of shopping being done online some of the Cleveland office buildings need to accept that the retail isn't coming back and repurpose their first floors. Another tactic Eastbank, a big commercial landlord in the Georgetown neighborhood here, used was to have pop-up shops from internet only brands doing short term residencies to fill empty space. No reason this couldn't be extended to national brands, perhaps every September when new models come out Ford could fill an empty storefront with a few of the new cars for passers-by to take a look at in a no pressure atmosphere.

As far as where to plant a flag, in a perfect world and functional market one cash flows and appreciates. At the very least one wants a clear cut exit strategy, in my opinion that is going to come from NNN single tenant commercial with solid leases and newly trendy neighborhood multi-family.

Personally I'm looking for a poorly managed family owned complex with short terms leases, somewhere I could add value with landscaping, and interior/exterior upgrades and re-lease to a new tenant group. Add amenities like bicycle racks, secure storage, in-unit wiring for cable if DirectTV/satellites are commonplace.  Even without appreciation if you can get the cap rate to an investor friendly level these things tend to be fairly liquid. If the overall market is indeed improving it gives you an extra margin of error on neighborhood selection. One can then hold for the length of initial financing (let's assume your stated 10 year commitment) before deciding whether to exit or refi.