Cleveland Industrial Market Report – Q1 2024

Overview

Cleveland and Northeast Ohio’s industrial real estate market started 2024 on solid footing, showing continued stability despite other commercial real estate sectors facing significant headwinds. Although the market has cooled off from the historic leasing and sales activity that occurred in 2020 and 2021, the market remains strong and there is still increasing demand for industrial space across all classes of buildings.

Market Commentary

In the first quarter of 2024, Cleveland’s industrial real estate market experienced positive net absorption to the tune of 173K SF, according to JLL. The vacancy rate remained steady at 3% regionally, according to both CBRE and Colliers. JLL reported a slightly higher vacancy rate of 3.5% for the quarter, while Newmark reported a 4.3% vacancy rate.

Overall leasing activity in Cleveland and Northeast Ohio increased slightly compared to Q4 2023, reaching over 1.65M SF of space. Year over year, leasing activity was 65% higher than Q1 2023, according to CBRE. Across all industrial asset classes, lease rates remained mostly unchanged from the previous quarter. However, Newmark reported a 6.5% year over year increase in industrial asking rents. Although this was a notable increase, it’s significantly less than the 2022 and 2023 YoY lease rate increases of 12% and 11%, respectively.

In Cleveland, CBRE reported that the average asking lease rates for Warehouse, Flex and Manufacturing properties were $5.61/SF, $8.24/SF, and $5.54/SF, respectively. According to Colliers, across Cleveland and Akron, the average asking lease rates for Warehouse, Flex and Manufacturing properties were $5.48/SF, $7.98/SF, and $4.00/SF, respectively. Asking lease rates across all industrial property types averaged $5.47/SF in Q1 2024, according to JLL. Newmark reported an average asking lease rate of $6.21/SF for the quarter, the highest ever for the Cleveland industrial market.

There is currently 1.187M SF of industrial space currently under construction across Northeast Ohio, all of which is already pre-leased. There are no new speculative warehouses in the development pipeline across the region, so supply will continue to be constrained while demand remains steady. With supply being limited and vacancy remaining low, market activity across Northeast Ohio has been subdued in recent quarters. Whenever interest rates are lowered, expect to see a surge in construction of industrial properties given demand is still outpacing supply by a wide margin.

There were several notable transactions that occurred in Q1 2024, along with some significant development projects that broke ground:

• 799 E 73rd St, Cleveland: 445K SF facility sold for $9M ($20/SF)
• 30701 Carter St, Solon: 302K SF building sold for $11.5M ($38/SF)
• 1210 Massillon Rd, Akron: 241K SF lease signed by an undisclosed tenant
• Viega began construction in February for a 180K SF manufacturing facility in Turnpike Commerce Center – the project is expected to cost upwards of $200M and will be completed in 2025
• Cardinal Health is building a 248K SF warehouse and distribution center in Walton Hills

In talking with many industrial property owners in Q1, it was clear that they are in need of additional space for their businesses, but are unable to lease or purchase anything that fits their needs. Across Lorain, Medina, Cuyahoga, Stark and Lake Counties, many business owners are electing to build additions onto their existing warehouses, with the hopes of occupying it entirely for their own use, or listing extra space for lease on the open market. There is certainly enough demand to fill any unused industrial space.

Economic Commentary

On April 10th, inflation data was released showing the CPI index rose 3.5% in March as compared to a year ago, with shelter and energy costs primarily driving the increase. Given the unexpected increase, the market has now changed their expectations regarding when the Federal Reserve will begin to lower interest rates. The CME Group has adjusted its forecast for the 1st projected rate cut to now occur in September (CNBC). However, others believe rate cuts won’t begin until 2025.

As of February 2024, the US unemployment rate was 3.9%, while the Greater Cleveland metropolitan unemployment rate was 3.8%. However, Cleveland’s Manufacturing sector saw a 1.2% YoY decline in employment. Cleveland’s Construction sector saw a 2.2% YoY growth in employment during the same period. Year over year growth in the Trade, Transportation and Utilities sector was 0%. Across the region, the Education & Health sector experienced the highest YoY employment growth, reaching 3.8%.

Outlook

Cleveland’s industrial real estate market is positioned for continued growth. Vacancy rates, rent growth and absorption rates all prove that the market is performing well, albeit at a slower pace than prior years. Given the lack of new supply under construction and continued demand for industrial property, industrial real estate should continue to perform well in the coming quarters. Tenants and owners will continue to evaluate their commercial real estate needs over the coming quarters, and I’d expect to see a continuation of increasing lease and sale rates across the industrial sector.

Sources: Newmark, JLL, Colliers, CBRE, CNBC, Crain’s Cleveland, Bloomberg, US Bureau of Labor Statistics