Cleveland Clinic Purchases Cleveland Play House Property

Wednesday brought good news to the Midtown area of Cleveland with the announcement by the Cleveland Clinic that it was purchasing the Cleveland Play House and its 12 acres property

This is good news on many levels.

First, it enables the Cleveland Play House to accomplish its goal of consolidating to with Cleveland State University's drama program into the Allen Theatre at Playhouse Square.

Shedding expensive, lower quality overhead, for a higher quality, more popular destination with shared expenses is a good fiscal decision. Activity begets activity and the aggregation of all of the region's theatre companies into one district is good planning and smart business.

Furthermore, the Cleveland Play House seems to have received a hefty price for their property. 300,000 square feet of theatre space likely has little, if any value, to the Clinic, though I would expect them to be more sensitive than any other buyer to the property's heritage. Renovating the property will likely cost more than simply tearing them structures down and building new. However, without taking sides on the merits of keeping the theatres up or tearing them down, the price of $12,000,000 to $15,000,000 reflects a land value of $1,000,000 to $1,250,000 per acre, depending on the final price - which sets a new high water mark for land sales in this area.

Making money in real estate has been and continues to have a simple formula. Acquire property in the path of job and population growth. And as surprising as it may seem to residents of North East Ohio, Midtown and University Circle are experiencing both. And recent sale prices reflect this trend. The Cleveland Clinic has proven itself to be a friendly neighbor. It would be hard to justify the price based on recent, comparable sales. But as they did with Health Space, the Clinic, out of concern for its neighbors perhaps, paid a price which no other buyer would have matched.

The Cleveland Play House won the lottery when the Clinic agreed to their price and they should be thankful that they were so lucky.

Second, the 12 acres form almost a perfect rectangle and are contiguous to the Clinic's main campus. This site enables the Clinic to expand onto a rare large site owned by one seller in the highly fragmented Midtown area. Given that the only sector in the US to add jobs in the first quarter was health care, anything which enables the Clinic or - for that matter - University Hospitals to grow is something we should all support.

Midtown and University Circle are benefitting from the growth in this industry and now the growth gets a boost in the western direction - away from University Circle - creating a new market - normally overshadowed by the more mature and dense Circle area.

One interesting spin off of this sale is the Museum Of Contemporary Art's planned relocation. Hopefully this sale will help the museum - and not hurt it - in its quest for donor's dollars for the construction of its new museum at the corner of Euclid and Mayfield. Initial reports say the relocation will not occur until 2011, giving the Museum time to raise money. Losing the vibrant Museum would be a loss we can not suffer - but I think it is safe to assume all parties in the transaction are aware of its value and will work together to assist in the relocation.

Employment Changes -

New Office Park being Developed Near the Chagrin Highlands

Amid all of this bad news, last week Hemingway Development purchased the former St. Jude's Catholic Parish, from the Cleveland Catholic Dioceses for $2,000,000. Hemingway will be clearing the land to make way for a 17 acre office park, and expect to announce their first new building soon.

Amid all of the bad news in the economy, it is important to note that real estate development is still occurring. The park will be an inexpensive alternative to the Jacobs Group's Chagrin Highlands development, which is just up the street, north on Richmond Road. Asking sale prices will be in the $350,000 per acre range verus Chagrin Highlands land prices in the high $500,000 range.

Cleveland First Quarter Trends

Sales continue to be down while leasing remains the alternative choice for users. New credit/financing is still difficult to obtain especially with the 30% equity requirement.
In all industry classes, free rent and other concessions are being offered by landlords and in all likelihood will increase in the next year if the economy doesn't make a change. Landlords of spec space are also unable to move rents and continue to focus on concessions to increase occupancy. For buyers with good credit, now is a good time to buy good quality assets at prices not seen since the early 1990s.

Industria Marketl:
This region is not seeing over-building as many other markets across the country are seeing, which in turn means vacancy levels are staying stable. Usually this market is run by automotive and construction, which are seeing downturns, whereas aerospace continue to be at normal capacity. Many of the planned construction has been put on hold, however 460,000 square feet is currently under construction, and is taking place in the southeast submarket.

Overall vacancy for industrial in the region is 10.3% and average asking rent is $3.49/sq ft NNN.
Downtown: 9.0% $2.19/sq ft
Northeast: 9.3% $3.34/sq ft
Northwest: 17.7% $3.98/sq ft
Southcentral: 8.9% $4.84/sq ft
Southeast: 10.4% $4.81/sq ft
Southwest: 10.8% $5.38/sq ft

Office Market:
Vacancy in the region increased only 42 basis points since last quarter (negative absorption) for the first time since 2003. Some questions remain regarding the final impact of PNC consolidates in the National City Bank Headquarters. 100,000 square feet of Class A space is under construction in the east submarket.

Overall vacancy for office in the region is 19.2% (Class A: 14.4%; Class B: 21.2%; Class C: 24.9%)
Downtown: 20.2%
East: 15.5%
South: 19.4%
Southwest: 16.5%
West: 22.8%

Non-Residential Construction

Article from Grubb & Ellis Research & Knowledge Center/Research Director Robert Bach

Non-Residential Construction Inflation % Change Year/Year








May 18, 2009

After several years of sharp increases, construction costs for commercial real estate are plunging, down by 4.3 percent in April compared with April 2008. Speculative construction starts have dried up along with the availability of credit, and demand for construction materials has plunged across the globe. Nevertheless, core inflation as measured by the Consumer Price Index, which excludes food and energy, increased by a comfortable 1.9 percent in the 12 months ending in April, which means that broad, economy-wide deflation is not in evidence. Some economists think that inflation, not deflation, poses a greater risk to the economy, spurred by growing federal debt and massive injections of liquidity by the Federal Reserve. While the conditions are present for inflation to catch fire, there is no match to light the fuse; wages are deflating, not inflating, as employers eliminate jobs, a trend that is likely to persist into 2010. Most analysts expect the recovery, when it comes, will be gradual at first, which should provide a window for the Fed to remove excess liquidity by selling off the Treasuries, mortgage-backed securities and other bond instruments it has been buying recently. The decline in construction costs is good news for landlords and tenants who need to refit their spaces. A moderate increase in inflation might be considered good news for commercial real estate owners and investors; in the 1970s and early 1980s, when inflation was high, real estate was viewed as an inflation hedge along with gold and commodities.
Source: U.S. Bureau of Labor Statistics, Grubb & Ellis

Robert Bach, Senior Vice President, Chief Economist, has 30 years of professional experience in real estate market research, consulting and city planning. His commentary on the real estate markets is provided here on a weekly basis.

First Quarter 2009 Sales

Every quarter, we keep track of the commercial sales in the ten county region, over $1,000,000, and post this information at the CoyneReport.com.

As you can see from the information below, the market has consistently slowed each quarter since the 4th quarter of 2007, which was the high water mark for the most recent boom market.

This trend reflects not only a decreased demand, but a lack of liquidity in the market. The leasing market has recently experienced a resurgence, as the sales market has slowed. More information on the leasing market will be coming next week.

The number of sale transactions are down 34% from the previous quarter and down 69% from this time last year.
The total amount of sale volume is down 57% from the previous quarter and down 83% from this time last year.

Medical Mart alternative

Rather than ask where the Medical Mart and corresponding convention center should be located with our sales tax bond issuance, wouldn't it make more sense to ask if that is the best use of our money?

If there is no other use for our investment, than it is difficult, in these uncertain economic times, to argue against a large public works project, and the subsequent increase in tourism and downtown retail activity.

However, if the money could be earmarked for the investment with the highest return, would a Medical Mart and convention center be the first choice? Considering both are guaranteed to lose money even in the rosiest of scenarios, the answer is clearly no. Yet we pursue it as if it will solve the region's problems. The money should be treated as if it were in our own wallets - which it is - yet we are letting people invest it with the express purpose of losing money.

Were I in charge, where would I invest the money?

I would mimic the Kalamazoo Promise and create the Cleveland Tomorrow Scholarship Program. The rules would be simple. Any four year graduate of Cleveland Public high schools would be granted a college scholarship, equal to the cost of in state Ohio universities average tuition, for every semester they successfully complete. Whether they attend for one semester or receive a degree, they would qualify for the scholarship.

If parents knew their children could receive free tuition to college, it is likely that the response would be positive. People would move into Cleveland, rather than out, driving up home sales, lowering crime, increasing the quality of the schools. Foreclosure rates would drop and real estate tax values would stabilize or increase - providing more money to the schools.

I have not run the numbers to understand if the bond issuance is enough money to support free tuition for every student - but I bet it is close. $400,000,000, plus $9,000,000 annually to support the Medical Mart's annual loses would go a long way toward scholarships. Furthermore, the increasing real estate tax value could likely assist with supporting any shortfalls in scholarship amounts.

And if one student, who attended a college using this incentive program, decided to move back to Cleveland and started the next Google, the results would be spectacular - far more inspiring than a Medical Mart or Convention Center and perhaps a much greater return on our money.

Terry Coyne Introduction

Terry Coyne, SIOR, CCIM, has been assisting clients resolve their real estate problems in the Greater Cleveland area since 1995. Buying, selling, leasing or building, Terry has helped clients with requirements from 5,000 square feet to 649,000 square feet and from 1 acre to 340 acres. Terry has been the frequent Top Producer at Grubb & Ellis-Cleveland.