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Apartments A Safe Haven for Developers

By STAN BULLARD

David Joe Kaufman, who is a partner with his brother Jay in the University Lofts apartments and condominiums at 2010 Euclid Ave. in Cleveland, speaks for many devel- opers when he says, “It’s a wonderful time to be in the apartment market”.

The Kaufmans’ 1-year-old, 30-suite apartment development adjoining their Brothers Printing Co. shop has been at 93% occupancy or higher since last October. Their property manager is starting to collect $200 deposits for people going on a waiting list.

“The rental market is so strong,” David Kaufman said, “that the brothers are asking their lender for permission to rent the project’s six condos, which haven’t sold in the sour housing market.” The argument, Mr. Kaufman said, is that “nothing beats cash flow”.

Real estate developers throughout Northeast Ohio are ramping up to start building apartments, from Green in Summit County to North Ridgeville in Lorain County.

Ari Maron, a partner in family-owned MRN Inc., which is constructing the 102-suite Uptown Apartments on Euclid Avenue near Mayfield Road in the city’s University Circle neighborhood, said the drive for creating residential rentals is simple.

“There is huge apartment demand in the city now,” Mr. Maron said.

A combination of factors is awakening local apartment development despite the region’s stagnant population and low rents compared with other markets two issues that historically have dogged the Northeast Ohio construction industry.

First, occupancy is at its highest point in more than a decade.

The Northeast Ohio Apartment Association’s monthly vacancy survey of 20,000 suites owned or managed by participating members fell to 3.4% the first week of March, the latest period available, a statistic unrivaled since a 3.8% vacancy rate in June 2000. The current rate is well below the 11% vacancy peak in January 2003, when low interest rates and easy mortgage terms were turning renters into homeowners, at least for a time.

Likewise, concessions by property owners are down. Jordan Goldberg, senior vice president of Beachwood-based Goldberg Cos., said the free rent for a month or two that was a common inducement for renters in 2009 almost has disappeared. The company’s 9,000-unit portfolio is 96% occupied, compared with 94% two years ago.

The upscale offerings on which Goldberg prides itself, with amenities such as pools, fitness centers and social centers, have regained their luster as the recession eased and renters became more secure and willing to pay higher rents. The Marcus & Millichap real estate brokerage estimates rental concessions will drop below the 10-year average this year and that average rents in the Cleveland-Akron area will rise 2.2% in 2011 to $699 monthly.

Mr. Goldberg said his company is in the hunt for new apartment sites in the region, and is weighing asking local municipalities to rezone attractive sites to multifamily use from office. The company hopes to add more than 300 suites this year at sites Mr. Goldberg isn’t ready to disclose because it has not yet sought government approvals for them.

Like other large, established apartment owners, Goldberg is picking up the pace of development at home while it has been building apartments out of town.

 

Product development

With better rental fundamentals, lenders also are willing to lend for new apartment developments by strong developers. Unlike for-sale housing, which is tough to finance, David Swindell, vice president and partner in WXZ Development Co. of Fairview Park, said apartment construction lending is available.

Mr. Swindell said lenders will lend money for well-conceived projects with 15% equity from developers, although others see 30% down payment requirements. Both percentages are far less than the equity required for other types of commercial development.

WXZ is in final negotiations for a ground lease with University Circle Inc., the nonprofit development group for the East Side neighborhood that’s home to academic, cultural and health care institutions, to build 59 rental units on Hazel Drive in a $10 million project.

“There is not a lot of new rental product out there,” said Mr. Swindell, who sees University Circle as a strong submarket. Competing rentals in nearby suburbs are older, and newer product is usually on the periphery of the area.

At the opposite end of the spectrum from pricey projects on scarce urban sites are new rentals by Beachwood-based Redwood Capital Management. Redwood builds and rents single-story, two-bedroom apartment homes with attached garages that passersby might mistake for condominiums.

“We don’t have pools or party centers and our residents do not have to pay for them,” said Steve Kimmelman, Redwood’s owner. “We think it’s very attractive for people to rent without someone above them or below them”.

The single-story design makes the rental properties fit areas that have had recent new-home growth and are glutted with unsold home sites. Mr. Kimmelman has won rezoning to multifamily in such cases in Green and Olmsted Falls.

 

New growth for Redwood

Redwood has contracted for Pride One Construction of Medina to build units in new rental complexes in Cuyahoga Falls and North Ridgeville as well as additional units on a site adjoining its just-completed, 100-unit Emerald Ridge Luxury Apartments in Green. Projects in Pickerington and Oregon, Ohio, also are afoot.

Redwood likes to build units in no more than 50-suite phases because that reduces equity requirements, which eases the ability to win construction and permanent financing, Mr. Kimmelman said. The approach also allows Redwood to stop construction immediately if leasing slows. All told, Redwood plans to add a total of 300 suites in five locations over the next 12 months, surpassing 100 units in 2009.

Ralph McGreevy, executive vice president of the Northeast Ohio Apartment Association, said his members believe they have weathered the storm of the dour real estate market and see the worst behind them. Many more owners, from out of town as well as locally, are looking to build in the region, he said.

In a sign of the shift from the American dream of home ownership, Mr. McGreevy noted that regional apartment owners reduced their vacancy levels over last winter, which traditionally has been a lost period for renting units.

“We’re looking at a new paradigm in this industry,” he said.