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In Cleveland, Developer Puts Down Stakes by the Lake
Cleveland's longtime dream of developing its Lake Erie waterfront took a step forward last month when its City Council approved plans for a $700 million development.
The big question now is whether the developer can secure construction financing to build what would be one of the downtown area's first ground-up residential developments in three decades.
If the developer—a venture of Trammell Crow Co. of Dallas and Cumberland Development, LLC of Cleveland—can pull it off, it would be an important sign that lenders are getting more willing to take risks on construction projects.
"I still think we have our challenges," said Ross Halloran, an executive at Bellwether Enterprise, the mortgage-banking company securing financing for the project. "When we do entice national players in here, we do get a little bit of an extra critical look, an extra due diligence because it is Cleveland."
The development would be built over three phases, adding more than 1,000 apartments, 800 parking spots and office and retail space to Cleveland's central business district.
The Cleveland City Council has approved a 50-year option-to-lease agreement for the more than 20-acre site, located north of the Cleveland Browns' stadium and the Rock and Roll Hall of Fame and Museum. The city and the CEO of Cumberland, Dick Pace, still are negotiating the price of the lease, which includes an option to renew for another 47 years.
Cleveland has lagged behind cities like Baltimore, Seattle and San Francisco in embracing its waterfront. Today the area is mostly fenced off and occupied by industrial buildings including a water-treatment plant, salt mine and the city's harbor, located on the lake for the past 190 years.
In the early days, the harbor gave passage to basic necessities like food, and later the iron ore and steel that formed the backbone of the city's economy. In 2012, the Cleveland-Cuyahoga County Port Authority gave back an unused portion of the harbor to the city, opening up 18 acres for new development.
Mr. Pace says Cleveland's lakefront doesn't have much retail, entertainment or residential use. "That's what we're trying to create, a place that has life 24/7," he said.
Developers increasingly are looking at downtown waterfronts in smaller cities such as Cleveland where prices are still low and returns could be high, said Christopher Leinberger, a visiting fellow at Brookings Institution who specializes in land-use strategy.
"This is very much in line with where the rest of the world is going. It's only natural that Cleveland would embrace that trend," Mr. Leinberger said.
Backers of the project and real-estate-industry officials in Cleveland are optimistic. They point out that demand has been increasing for rental apartments in the city, which is beginning to attract young workers and others interested in a more urban lifestyle.
The downtown's population has risen by 88% since 2000 to more than 12,500, according to a Downtown Cleveland Alliance report published in April. Restaurants, microbreweries and art galleries dot Cleveland's once-lifeless streets.
Cumberland hopes to add a school, boutique hotel and restaurants to the lakefront, which hasn't yet seen the benefits of that downtown growth. Apartment rents will range from $1,000 to $2,000 a month, making them affordable to young professionals, empty-nesters and families.
With an office-vacancy rate of 18.5%, Cleveland developers have chosen to turn old office space into apartments rather than build new buildings. Mr. Pace has worked as the architect on many of these downtown conversion projects.
Since 2011, more than 30% of the city's lowest-class office space has been converted for residential or hotel, according to Terry Coyne, a senior broker at Newmark Grubb Knight Frank.
Still the Cumberland project faces challenges. The development site is on a former landfill located about a 10-minute walk from downtown. The city plans to build a pedestrian bridge to connect the two areas.
Also, the developer is trying to get financing at a time when lenders are still hesitant to take on risky construction projects.
Construction and development loans held by U.S. banks in the first quarter were just $214 billion, a third of the prerecession peak of $632 billion, according to the Federal Deposit Insurance Corp.
Mr. Halloran said the project's developers plan to use 25% to 30% equity to finance the development. He said they hope to wrap up financing by late fall and break ground early next year.
"When I left Cleveland after college, downtown wasn't the place to be," Mr. Halloran said. "Now everybody coming back to Cleveland wants to be downtown. There's life there."