Rust Belt Recovery: Employment Gains and Strengthening Multifamily Markets Seem to Be the Name of the Game in Three Real Estate Markets in the Midwest-Cleveland, Detroit and Minneapolis-St. Paul
Bell, John, Mortgage Banking
An uneven economic recovery has its winners and losers. The turn-around sectors producing growth are often narrow and insufficient to boost an entire regional economy. Yet currently, the rebound in the Midwest is revealing an economic spark in the heartland that may be missing elsewhere around the country.
Three Midwestern cities--Cleveland, Detroit and Minneapolis-St. Paul--are evidence of just that:
* Cleveland, once an outpost of the Rust Belt, is transforming itself into a bustling business and commercial center.
* Detroit is undergoing a rejuvenation in the wake of a resurgent auto industry.
* Minneapolis-St. Paul is overcoming an uneven stretch at the end of 2011, implementing a vigorous recovery with a ramp-up in hiring.
Following are close-up snapshots of these three markets, from the perspective of their commercial real estate sectors. In the case of Cleveland, the recovery includes the 18-county area of Northeast Ohio.
Cleveland and Northeast Ohio have put their Rust Belt image in the rearview mirror as they stage a substantial economic comeback.
One of the main reasons for the turnaround is steady job growth. The region has posted year-over-year employment growth for six consecutive quarters, according to Cleveland-based Team NEO in its year-end 2011 report issued in February 2012. Team NEO is the region's private economic development hub.
The region's unemployment rate at the time was better than the national average at 7.6 percent versus 8.2 percent nationally, Team NEO says.
Moreover, gross regional product (GRP) is expected to grow in 2012 for the third consecutive year, with the total exceeding $184 billion. By 2015, Northeast Ohio's manufacturing GRP is expected to outpace U.S. gross domestic product (GDP) in the 2010-2015 period. U.S. GDP is expected to grow 17 percent to 18 percent, while North-east Ohio GRP is expected to grow 27 percent to 28 percent, Team NEO says.
This growth pace would seem also to bode well for commercial real estate lending.
Avoiding the potholes
The current turnaround in this market comes courtesy of a regional economy that was able to avoid the potholes of a sluggish U.S. economic recovery.
Tom Waltermire, chief executive officer of Team NEO, says the primary business drivers of the region's economy are high-growth sectors such as bio-med and energy. He says other important contributors are manufacturing sectors such as automotive (a $3.5 billion sector), plastics, rubber and paint; and specialties such as food products.
Not too many years ago, Cleveland and environs were riddled by manufacturing reversals and widespread job losses.
E.J. Burke, executive vice president and group head of KeyBank Real Estate Capital and Corporate Banking Services, a division of Cleveland-based KeyBank, comments, "We had economic reversals, including a lot of job losses. Over time, that stopped new growth."
Steven Sweress, principal with Pinnacle Financial Group Inc., Independence, Ohio, a suburb of Cleveland, concurs. "Cleveland was hard hit by job losses," he says.
Despite more recent gains, the region was impacted by the sluggish U.S. economic recovery. Michael Dostal, senior vice president of Cleveland-based FirstMerit Bank for its Northeast Ohio region, says, We felt the crunch. Property values were impacted and rents were reduced. Buyers have had reduced access to debt and the overall reduction in developer equity dramatically slowed sales velocity."
He adds, "Now, however, the improving regional economy has concentrated a major flow of investment dollars [more than $2 billion] into Cleveland's CBD [central business district] development."
Projects include: a $465 million Cleveland Medical Mart & Convention Center; a $275 million Flats East Bank phase 1, which will feature a 450,000- square-foot office tower and 150-room hotel; a $6o million transformation of the former Crowne Plaza Hotel into the area's first Westin Hotel; and a $20 million renovation for a downtown building where AmTrust Financial plans to locate more than 1,000 employees. …