Apartment projects continue to change the landscape
Construction workers hired by Geis Cos. of Streetsboro and its subcontractors begin laying the foundations for a five-story apartment building at 1910 Abbey Ave. which will radically change the block best known for the old Abbey Market.
It is still known by the working title of Abbey Avenue Apartments because the final name – or, in contemporary developer parlance, “branding” – is yet to be determined. However, developer Michael Panzica, the director of Cleveland’s Mr. Panzica Development, looks forward to completing the upscale apartment building and 10 rental townhouses on the block next year.
The more than $35 million project has moved from a design-build plan (also by Geis) approved in January by the Cleveland City Planning Commission to an ongoing construction project. It did so despite rising interest rates that are expected to dampen the noisy apartment building boom. But the question will be when.
Panzica said in an interview that, like other real estate developers, it sets up projects with a variable-rate construction loan that will later be replaced by long-term financing. He sees the impact of rising interest rates from historic lows in simple terms.
“The floor has risen for interest rates, yes. But the new rates are built into the expectations of (project) owners,” he said. “They are not forecasting mid-2021 rates and are still historically low.” The other side of the equation, the skyrocketing cost of materials and construction over the past year, has moderated some. And as costs have gone up, so have top rents.
The result, for well-located and well-planned projects, is that Panzica and others of the risky type known as developers see opportunities in the market.
“While Duck Island (the segment of Tremont where Panzica is building) has substantial single-family building, it has been relatively undeveloped for multi-family development,” Panzica said.
While the spike in interest rates prompted by the Federal Reserve’s efforts to control inflation is big news, rates remain competitive for builders and developers. These multi-family offers obtain rates of approximately 4%, against 3.5% a short time ago.
And other developers are also moving forward. Since the spring, Aha Development of Cleveland’s plan for 12 rental townhouses on Fulton Avenue in Ohio City and the Krueger Group’s new 27 suites at 1278 West 58th St. near Breakwater Avenue have landed a total of 7 million in construction loans and filed legal documents. signaling an intention to build.
Additionally, Aha plans to build a mix of townhomes for sale and rent south of Lorain Avenue on West 44th Street, a clear sign of a continued appetite for development.
Many veteran multi-family developers are privately saying they won’t apply the brakes to the industry’s slowdown until rates hit 6%.
However, that being said, the availability of labor in construction and, for many, the increase in construction costs remain concerns. So there could be a gradual slowdown in the coming years.
CoStar, the online real estate data provider, reports that Cleveland’s apartment market absorbed a record 3,000 units in 2021. Additionally, it reports that new projects are 75% rented when they open. It’s a sure sign that Cleveland’s new suites are retaining their charm. The bulk of the area’s units are in the University Circle area of Detroit-Shoreway, including downtown Cleveland.
The rise in rents, justified by the new product, is currently contributing to the dynamic. The effective market rent, less minimum concessions, is $1,062 per month. Rents have climbed an average of 6% over the past year, topping a three-year average of 4%, CoStar said. Other sources indicate that rents moderated last month. Area apartment owners also say the substantial growth in new multi-family units hasn’t gutted older units as replacement tenants surface to replace higher-income tenants occupying quality apartments and rich in equipment.
Ralph McGreevy, executive vice president of the Northern Ohio Apartment Association trade group, said he thinks market considerations balance each other out.
“I don’t think the time for building is over,” McGreevy said. “We haven’t built (apartments) here for so long that it’s going to continue here. That’s probably not the case in other more intensely developed markets.”