Cleveland Industrial Market Report – Q4’23

Overview

Cleveland’s industrial real estate market remained steady to end 2023. Industrial real estate continued to outperform other commercial real estate asset classes throughout the United States in terms of lease/sale activity and rent growth. Reshoring efforts from U.S. manufacturers continues to be a tailwind for the sector, and that trend is expected to continue in the coming year as companies look to fortify and regionalize their supply chains.

Market Commentary

In Q4, demand for industrial space reached its lowest point since 2018. However, 2023 average asking rents increased 10% YoY compared to 2022. According to CBRE, the vacancy rate in Cleveland increased to 3.1% due to the completion of a number of Spec buildings totaling over 1.8M SF. These spec buildings are the last one’s in Cleveland’s near-term construction pipeline, which could lead to more upward pressure on industrial asking rents in the region. Nationally, 505M SF of industrial space was under construction as of November. In the Cleveland market, only 900K SF of industrial space remained under construction, compared to 2.9M SF in Q3.

Cleveland’s industrial real estate market had over 425K SF of positive net absorption in Q4. FY 2023 net absorption was ~669K SF. Total leasing activity for Q4 was roughly 1M SF, a decrease of 1.3M SF from Q3. Cleveland’s Q4 asking rents reached the highest level on record, peaking around $6.13/SF. The average industrial asking rent for FY’23 was $5.69/SF. Average asking lease rates in Q4 were $5.74 for manufacturing, $9.16 for flex, and $5.85 for warehouse.

Large Transactions in Q4

• 823-825 Leona St, Elyria: 103K SF, $7.4M sale price, sold to Murphy Real Estate Services
• 9450 Allen Dr, Valley View: 118K SF lease for Avtron Power Solutions
• 4440 Warrensville Center Rd, Warrensville Heights: 475K SF sale-leaseback between Sherwin Williams and Industrial Commercial Properties

Overall Economy

The United States unemployment rate dropped slightly in November 2023 to 3.7%. The Cleveland-Elyria-Mentor MSA unemployment rate was also 3.7% as of November 2023. In the region, Construction and manufacturing sectors saw YoY employment growth in Q4’23, while the trade/transportation/utilities segment saw negative employment growth.

The stock market finished 2023 up nearly 24%, with more than half of that gain coming in the final two months of the year. The late year market rally was due in part to the Fed not raising interest rates and signaling rate cuts were on the horizon in 2024.

Inflation cooled as 2023 progressed, but unexpectedly jumped in December. Specifically, the CPI increased 0.3% in December and 3.4% YoY, compared with estimates of 0.2% and 3.2%. The Chairman of the Federal Reserve Bank of Cleveland, Loretta J. Mester, said in an interview last week that she would vote against an interest rate cut as the Fed’s next open market committee meeting at the end of January.

The Fed’s “soft-landing” is still in play, but changing market and political conditions nationally and globally, in conjunction with continued inflation concerns, will impact how the economy performs in 2024.

Sources: CoStar, Newmark, CBRE, US Bureau of Labor Statistics, Crain’s Cleveland, Stansberry Research, CNBC