Apartments Continuing to Change the Landscape

Stan Bullard, Crain's

Construction workers hired by Geis Cos. of Streetsboro and its subcontractors are starting to put the foundations in place for a five-floor apartment building at 1910 Abbey Ave. that will dramatically change the block best known for the former Abbey Market.

It's still known by the working title of Abbey Avenue Apartments because the final name — or, in contemporary realty developer parlance, "branding" — is not set yet. However, developer Michael Panzica, the principal of M. Panzica Development of Cleveland, is looking forward to completion of the upscale apartment building and 10 rental townhomes on the block next year.

The more than $35 million project has gone from the design-build plan (also by Geis) approved in January by the Cleveland City Planning Commission to an ongoing building project. It did so despite escalating interest rates that are expected to tamp down the noisy apartment building boom. But the question will be when.

Panzica said in an interview that he, like other real estate developers, is putting up projects with a floating-rate construction loan that will be replaced later with long-term financing. He sees the impact of rising interest rates from record low levels in straightforward terms.

"The floor has risen for interest rates, yes. But the new rates are being priced into expectations of (project) owners," he said. "They're not planning on the rates of middle 2021 and are still historically low." The other side of the equation, the run-up in material and building costs over the last year, has moderated some. And as much as costs have climbed, so have upper-scale rents.

The result, for well-located and well-planned projects, is that Panzica and others of the risking-taking type known as developers see opportunity in the market.

"While Duck Island (the segment of Tremont where Panzica is building) has hot substantial single-family building, it's been relatively untapped for multifamily development," Panzica said.

Although the spike in interest rates led by the Federal Reserve's effort to tame inflation is big news, rates remain competitive for builders and developers. Such multifamily deals are getting rates in the mid-4% range, compared with 3.5% a brief time ago.

And other developers are also pushing forward. Since the spring, both Aha Development of Cleveland's plan for 12 rental townhomes on Fulton Avenue in Ohio City and Krueger Group's new 27-suiter at 1278 West 58th St. near Breakwater Avenue have landed a total of $7 million in construction loans and filed legal documents signaling an intent to build.

Moreover, Aha's looking at building a mix of for-sale and rental townhomes south of Lorain Avenue on West 44th Street, a clear sign of continued development appetite.

Many veteran multifamily developers privately say they will not apply the brakes to slow down in the sector until rates hit 6%.

However, that being said, the availability of construction labor and, for many, the run-up in building costs still remain worries. So, there may be a gradual slowing in the years ahead.

CoStar, the online realty data provider, reports that the Cleveland apartment market absorbed a record 3,000 units in 2021. Moreover, it reports that new projects are 75% leased when they open. That is a sure sign new suites in Cleveland are retaining their allure. The bulk of the region's units are in the University Circle to Detroit-Shoreway area, including downtown Cleveland.

Rising rents, justified by the new product, are helping momentum for the time being. The effective market rent, diminished by minimal concessions, is $1,062 monthly. Rents climbed an average of 6% over the past year, topping a three-year average of 4%, CoStar said. Other sources say rents have moderated the past month. Apartment owners in the region also say the substantial growth in new multifamily units has not emptied older units, as replacement tenants are surfacing to replace higher-income tenants who occupy sharp, amenity-rich suites.

Ralph McGreevy, executive vice president of the Northern Ohio Apartment Association trade group, said he believes the market considerations are balancing out.

"I think the time to build is not over," McGreevy said. "We didn't build (apartments) here for so long that it's going to continue here. It's likely not the case in other, more intensely developed markets."