Between 1997-2012, Cleveland apartment absorption was extremely volatile. During strong economic times, absorption was strongly positive but in recessions, net move-outs were severe. The absorption volatility mirrors that seen in high-beta markets on both U. S. coasts. Beta is a measure of the volatility and performance of apartment investments relative to alternative real estate investments.
For a market of Cleveland’s size, however, new supply remains negligible. Cleveland’s population is more than 2 million with apartment stock at about 174,000 units. Historical average new supply is 457 units and absorption is 691 units, a difference of approximately 234 more units absorbed than delivered.
Cleveland Market Fundamentals
After four consecutive years of positive absorption, Axiometrics forecasts absorption to turn negative during 2014 and 2015 by a cumulative total of 2,368 units. New supply is forecast to total 1,381 units during that time. Absorption is expected to rebound during 2016-2017 and outpace supply by an average of 1,163 units.
The metro’s occupancy rate and effective rent growth mirror each other and show a moderately high degree of correlation of almost 60%. Historical occupancy and effective rent growth in the market averages around 93.2% and 1.2%, respectively. Occupancy dipped to 90.0% in 2002 and down to 91.4% in 2009 but rebounded after both recessions, peaking at 95.3% in 3Q13. Axiometrics forecasts occupancy to decelerate by 160 basis points through 2015 to reach 93.7%. Occupancy is expected to average 94.5% from 2016-2018.
Effective rent growth in the metro moves almost coincidentally with the occupancy rate, with similar peaks and valleys. However, after the the recent recession, rent growth peaked earlier (2011) than occupancy (2013).
From a cumulative decline of -5.9% in 2001 and 2002, rent growth jumped by 3.0% in 2006 and then dropped -2.6% in 2009, a function of the recession. Rent growth bounced back to 4.3% growth in 2010, passing the previously established historical high of 4.2% during 1999. Effective rent growth averaged about 3.0% from 2011-2013, about 180 basis points above the long-term average. Axiometrics forecasts effective rent growth to average 3.1% in 2013 and to average a fairly healthy 3.0% over the next five years.
Cleveland’s Employment Situation
The Great Recession and preceding housing bust started in 2007 in the Cleveland MSA, as the local economy lost about 7,700 jobs. Job losses continued in 2008 through March of 2010 as the metro area shed more than 82,000 jobs.
Job growth turned positive in April 2010 and from that point through December 2012, approximately 37,000 jobs were recovered. However, job growth stalled as the metro area lost more than 11,000 jobs from January to October of 2013. Meanwhile, the majority of MSAs around the U.S. gained jobs during the same period.
The MSA’s consistent decrease in employment is clearly concentrated in a few sectors. That the Government sector lost jobs is not surprising, but the contraction in Professional & Business Services, a category encompassing a variety of businesses from corporate headquarters to scientific, technical and management, equates to slow growth in apartment market fundamentals. The slow job growth scenario is expected to continue through the next few years, but new supply is expected to increase, hurting the apartment market’s fundamentals in the metro area during 2014 and 2015.