Marcus & Millichap

Cleveland Industrial Research Report

Cleveland Metro Area, Second Half 2017

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Vacancy Reaches Historical Low, High Yields Capture Buyer's Attention

Vacancy nears 4 percent, prompting gains in asking rent. Cleveland's prime location on Lake Erie and proximity to several inner Midwestern cities underpin demand for the market's industrial assets. Strong net absorption has pushed the vacancy rate down more than 400 basis points from the previous cycle peak, reaching a record low this year. Additionally, a lean construction pipeline and pre-leasing will further benefit vacancy improvement. Two out of three separate projects have been added to inventory in 2017, each of which is fully leased. The largest development is the 347,000-square-foot Riddell manufacturing facility in North Ridgeville. Riddell, a football equipment manufacturer, plans to relocate from both of its existing spaces, one of which is within the metro and the other in Illinois, to the new location by yearend. The remaining two projects are Class B warehouses located in Geauga and Medina counties. The moderating pace of construction this year, coupled with strong net absorption, will edge up asking rent to a nine-year high.

High yields pique investor appetite for industrial assets. Improving market fundamentals and average first-year returns up to 200 basis points higher than many other markets will keep investors active in Cleveland's industrial properties. In particular, warehouses and manufacturing buildings will continue to dominate deal flow in 2017. Additionally, interest for light manufacturing facilities has also began to pick up, with few available listings driving up property values. Assets near downtown, within the Solon neighborhood and along the exits of major transportation routes will garner investors' attention. These properties can trade with initial yields as low as mid-7 percent while marketwide industrial assets can change hands with average first-year returns up to mid-9 percent depending on quality and location.

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