Cleveland, Ohio
The Forest City

Geez. Even Detroit never had a name like “The Mistake on the Lake.” Cleveland was ranked the No. 1 poorest city in the US in 2004 and 2006, and the No. 11 most dangerous US city in the 2008 Morgan Quitno rankings (and the No. 7 most dangerous city in its population group). In the ’90s, when US cities started reinventing themselves and getting their population back, Cleveland lost 5.4% of its people. Today, three out of ten Clevelanders live in poverty. The Economist recently ranked it the most liveable city in the U.S.

Wait, what?

Yup. It’s a city that doesn’t come up in the news, and that people don’t talk about unless you live around there or want to go to the Rock and Roll Hall of Fame, but Cleveland’s one of the biggest “sleeper” cities in terms of places in the U.S. to live. And don’t expect it to be sleepy for too much longer. Do expect it to be a place we invest pretty vigorously in.

Here’re some fun facts. Cleveland’s job market, which has been in free fall for a lot of the decade, decelerated last year, and looks to gain jobs in 2009. A lot of Cleveland’s economic vitality is tied to health care, one of the few sectors of the economy that isn’t hurting from the recession. The Rust-Belt-Turning-To-Green-Belt phenomenon is definitely in the works here. BioFormation, an organization dedicated to supporting the growth of health care bioscience facilites, is based in Cleveland, and over the last two years has snagged $405 million for health care venture investment in the metro area. A lot of this is going into technological health care investment, and that’ll likely get even more of a boost if Obama’s health care plan (A big part of which is computerizing health care records) goes through in this next year. The educational, professional, and business services sectors have all actually expanded over this last year as well.

Other figures support the concept that Cleveland reached its nadir earlier in the decade and is on the rebound. It may have made No. 11 and 7 (for US overall and population group, respectively) in Morgan Quitno rankings for violent crime in the US, but the year before it was No. 7 and 4. Population growth may have declined 5% in the ’90s, but in the ’80s it dropped 12%, and the ’70s, 23%. Tactician Corp estimates that in the next four years, population loss will turn around and the metro area will begin net gains of residents again, predicting a 1.8% increase by 2013.The Globalization and World Cities Study Group and Network even ranked Cleveland as having “Some Evidence of World City Formation”, a distinction it shared with the likes of Vancouver and Cairo.

Luckily for us (not to mention you, you savvy investor), real estate data are buttressing these facts. Rents have risen consistently but slowly over the last three years, and with 2008 effective rents expected to rise 3.4% to $718 a month, there’s a lot more room for them to go, according to Marcus & Millichap. Construction of single-family housing was plummeting even before the housing bubble burst, reaching its peak in 2004. Vacancy rates have sunk to 5.3% in 3Q 2008, amounting to a 20 basis point year-over-year decline, and it’ll probably shoot much farther down. This is the real jewel here: Cleveland’s unit supply is low, and it’s not going to increase anytime soon. With the exception of one garden unit project in Medina (a far-flung suburb that doesn’t even register on certain accounts of the metro area), there were no investor grade projects being built this last fall, according to the Red Capital Group There are another reported 340 units being planned, but no ground has been broken, and current economic conditions increase the chances of delays. 275 condo units are being built, but none will be completed before 2010.

Cleveland probably isn’t going to be the recipient of any wild Western Canada-type boom where you can throw money out the window and somehow get more back, but it seems pretty obvious that, like Detroit, smart investing in particular pockets of the city will result in some rich rewards. We’re looking at a lot of buildings in the city right now. I’ll post again when we start putting some under contract, but here’s a sound bite for now:

Holmden Apartments.

Hardwoods, new boiler, new appliances, probably wouldn’t take a lot to upgrade, and it’s roughly $20,000/unit. A couple minutes off the intersection of two major highways. Lots of possibilities for a building like this.

Here’s another one I like:

Lynette Apartments

This one’s also around $20,000/unit, in a revitalized area near major medical and shopping centers. It’ll need a bit of work, but 2-bedrooms are renting for $550, over $150 below the median level. Tasty. There’s a lot we could do with this one too.

Anyways. More info to come as negotations push a little further, and of course we’re still looking in other areas. We’re poking our noses into Hamilton as well, and I’ll throw up a run-down of the area’s potential in a couple days.