Market Update: Through the Eyes of a Demographic Expert

January 24th Event at The Music Box Supper Club By Hillary Lyon, NAIOP Communications Chair, and Founder, ART Every Space


Keynote: Richey Piiparinen, Managing Partner at Producer Cities, LLC Panelists: Alec Pacella, CCIM, Managing Partner/Senior Vice President, NAI Daus, and David Stover, SIOR Principal/Executive Managing Director, Hanna Commercial Real Estate, Moderator: Richard Y. Pace, President, Cumberland Development.

Richey Piiparinen, Managing Partner at Producer Cities, LLC, VP Strategic Insights with the Unify Project, and former Director at the Center for Population Dynamics at the Maxine Goodman Levin College of Urban Affairs at Cleveland State University, is a wealth of information and is not short of opinions. Our city could grow and learn a lot from his thoughts and unique perspective. His work focuses on migration, demography, culture, economic and community development. His research and writing on urbanism, culture, and social trends has appeared in various media outlets including; NPR’s Morning Edition, Los Angeles Times, Washington Post, Huffington Post, Business Insider, Cleveland Magazine, and the Cleveland Plain Dealer.

Piiparinen kicked off the event at Music Box on the morning of January 24th, 2019, with many interesting statistics and shared his research and thoughts on global trends and how they impact real estate, as well as economic development. Industrialization built Cleveland, however in his opinion, the de-industrialization of the housing stock has created a problem, as well as community issues. His keynote focused on both the macroeconomics and microeconomics for growth.

There is opportunity for Cleveland and our growth within the macro economy. Cleveland’s history is agriculture, which is still primary, manufacturing being our secondary source of employment, professional services our tertiary, and currently we are lacking the quaternary activities. The quaternary sector of the economy (knowledge, skill, ICT, R&D) is a newer area of focus for which we have the infrastructure in place here in NEO, we just don’t take full advantage of it, Richey argues. This is a newer approach and perspective as it’s based on more recent, contemporary activities and digital services like Facebook and Uber. These companies are disrupting the market in that they collect data, which is adding value through its intelligence, and so data capital is currently driving the economy. In NEO, Piiparinen believes the opportunity is within health care and sees the value of data collected locally within our major health systems, data that is then mined out to other states for research and development, like Boston.

The total GDP and real GDP are the main indicators of economic growth. Cleveland is growing faster than Columbus, year after year; our per capita GDP is 56,000/capita and is at the highest since it has been measured. Population growth is a big indicator of GDP, and Cleveland ranks 29 in GDP out of 383 total, we are up from 57th in 2001. Faster consumption drives an increase in larger cities, and according to Piiparinen, ultimately it is quantity versus quality that matters. There is a lot of wealth in Cleveland and if you look at higher education, there is a very high percentage of Clevelanders who have advanced degrees. A high volume of advanced degrees is another leading indicator of the fastest growing workforce when forecasting. We are again in a good place as Cleveland ranks 7th of cities with a high population of young professionals (age 25-44) who have advanced degrees (MBA, Legal etc.), and we follow great cities like DC, Boston, San Francisco, San Jose and Philadelphia.

Next, Richey mentioned that there are industry shifts, which are showing a rise of creative industries, and as a result, intense ramifications are building up between political and social issues within our society. In Cleveland, the “Eds and Meds” are driving our local economy, which is also the source of our industry shifts in NEO, to a rise in services from manufacturing. Richey and his team did a study that focused on this trend and skilled healthcare practitioners. Cleveland is not the only town known for “Eds and Meds”, Philly and Boston are other places that also dominate in these markets. Pittsburgh is starting to be recognized for smart intelligence that drives robots, and the study found that where our beloved city trails behind, is in Research and Development (R & D).

The number of patents, educational attainment rates, industry mix and slow growth are all factors of R & D. Piiparinen feels that R & D is a great opportunity where we can grow locally in order to better position ourselves globally. Cleveland is exporting health services since we have so many strong healthcare systems and also have a reputation for world-class care. We are creating a lot of the data, collecting it, however then we are sending it to the intelligence groups in both Boston and Philadelphia (within their Universities), instead of taking advantage of the intelligence opportunities from our data within our own region. So looking at both economic development and what is driving growth and real estate trends as well will assist in strategizing how to best grow our economy and be competitive.

The fourth industrial revolution is the globalization of artificial intelligence. Automated service jobs are increasing the need for AI software, especially in customer service. This is a source of growth but fewer jobs are attached to it since the key to AI is to find efficiencies. Amazon has been so successful in the digital space since it has consolidated retail by finding efficiencies in the supply chain while also leveraging the digital space. It is difficult to consolidate healthcare services and delivery, so it is hard to find a system for efficiency in the medical industry. Since healthcare is so inefficient the main factors for change are the monopolies, where forces are consolidated. Therefore the largest area for global growth is in a large network with affiliate hospitals, like the Cleveland Clinic, making our city very valuable since we have 3 large healthcare systems. Healthcare is only a scalable industry on a global level since only the larger brands will be tradable. It is predicted that the area with the most growth potential in healthcare is the next wave of robotics and the automation of services, like robotic surgeons who operate all over the world. In terms of real estate, this is another potential area for growth based on trends within the economy, both in large hospital chains and biotech, medical robotics and accompanying AI facilities, centers and related buildings.

Another way in which this might affect Northeast Ohio is the density of jobs. The most jobs will be located downtown and in the Health-Tech Corridor, perhaps in areas of economic development as well and where new buildings will take shape. The income level in Cleveland is up to 59% for those who make over $40K. Again, it is quality over quantity as the most highly populated areas are those with a high density of advanced degrees, Downtown, Lakewood, Tremont, Beachwood, both Shaker and Cleveland Heights. From the 1970’s to the 1990’s, the demographics didn’t change much, however in 2010 as gentrification was on the rise, the shift toward the urban core began and is continuing to increase. This is evident in real estate if you look at the density radiating from Public Square, Cleveland’s urban core. Sales prices are up from $142,000 to $200,000 for residential units ($220 is average in an urban core). Within two miles outside of Public Square, it is forecasted to grow at a shocking 560%. This is a bit of a social issue as well since some areas improve while some get worse. For example, Ohio City/Tremont continue to improve, are easily accessible via public transport, are valued high due to proximity to downtown, the lake, as well as MetroHealth, both neighborhoods also have great restaurants and nightlife near by, supporting the rise.

The recent investment into the new IBM space in Midtown and the study for the Mayor on the Health-Tech Corridor both further support this idea. IBM is also positioning itself well for the 4th industrial revolution with the recent acquisition of Explorys and with it, the AI from Watson and other projects. This artificial intelligence from Watson is of high value since it includes data from patient services, weather forecasting and touches on so many industries etc. Locally, the disconnect is that data is collected right here in Cleveland, but then sent to Cambridge to analyze. So we are losing an opportunity to be the leaders we’re not taking advantage of the data and its value. Eds and Meds also tend to be too focused globally so they loose sight of the local market which is most important when delivering healthcare services, due to local patient care etc. This presents an opportunity for Cleveland to look at having a unique vision focused on where we want to go and how to position ourselves accordingly with these trends, while also focusing on and expanding upon our strengths. According to Piiparinen, there needs to be a group organized (Entrepreneurs, take note) to lead the movement, get buy in and lead community engagement in order to see success in the future.

Richey ended the keynote with his ideas on “psycho-geography”, a term he coined. It is the idea that thoughts and emotions are tied to behavior and biases can affect decisions. Perhaps Cleveland is risk adverse because we are conservative and our history with the rise and fall of manufacturing. Real Estate can be a leading indicator as seen in the Industrial Economy of the 1930s. Perhaps the forecasting should be based on AI and the indicators need to be altered to better reflect our current economy and society.

Alec Pacella of NAI Daus shared some trends and reflections at this point in the event after a brief introduction. In Cleveland, Class A office space is strong and is at the healthiest level it has been in twelve years. It is under 10% and has a positive net absorption, as there is less vacant space now then even a year ago. Alec confirmed some of the concepts Richey introduced, in that he is seeing a lot of consolidation to downtown with several larger companies moving their headquarters, and some re-shuffling versus new entrants to the area. The last high point of the market was in 2007 at 18 to 19%, and twelve years later we are back at the same rate. The absorption in the suburbs is flat, however larger mixed-use projects (i.e. Pinecrest, Van Aken) have led to some success, especially with the rise of lifestyle centers and entertainment complexes, which have been a part of this rural development. Unfortunately, the highest rates we’ve seen in the suburbs is $24 a square foot to date and we are struggling to get back there. This tends to be the same story over and over again and the suburbs are just not a very attractive market when compared to the urban core.

Pacella then turned the focus to forecasting and in a more positive light, mentioned he is seeing lots of new entrants to the downtown and industrial markets as well as interesting transformations, like Millennia Companies’ updates to Key Tower. He gave way to the idea that perhaps Cleveland’s economy is benefiting from the outside capital coming in and that while Columbus has $1.6B in industrial; Cleveland isn’t far behind at $1B. In his opinion the suburbs are aging gracefully and while the last large industrial project was 2 Chagrin Highlands in 2002, he doesn’t think we will see much more in the next few years. He ended by saying that it is difficult to predict and hard to say what the future holds. He alluded to the fact that it is only a matter of time before we see some decline in the market. As he thinks that years which end in 3’s and 8’s tend to be high or low years and we have had so many good years that the opposite is looming.

David Stover from CBRE was up next to share his thoughts on the state of the market as well as what the future might hold. His findings are in line with Alec as he confirmed that Cleveland’s industrial market is in good standing. The vacancy rates seem to depend on the neighborhood as well as the type of building and amenities offered. For the last couple of years, we have been strong as it has been roughly 5%, and the average is 10-15%, so we are seeing historical lows in terms of vacancies. The lease rates within these buildings, however, have not changed in almost two decades.

The biggest contributor to growth in the industrial space is all of the large new construction, like the new Amazon building. The largest share of the market is held by only about 10 companies, Amazon, Fogg, McMaster Carr, to name a few. With construction costs going up every day, there is a threat as well as limitations on further growth and new development. Growth is also limited by the lack of good existing industrial properties that are available, which is a rising trend. The same thing is reflected in under construction properties, as the sales volumes have remained steady but the window to sell has shortened. Stover concluded positively saying that he has seen job growth as jobs return from overseas, which he hopes will continue. The event ended with a very interesting Question and Answer session and there is still a lot to debate and discuss further.

Advocacy, Education and Networking are the pillars of the NAIOP mission and each was illustrated at this event. As reviewed above, attendees learned about our current demographic landscape, trends in real estate, how we got there and potential forecasts for what is to come. This knowledge and message expands upon NAIOP’s goal to advocate for a prosperous future in Northern Ohio. Please check our website and join us at our next event to connect with those leading our industry into this 21st Century.