Like the 1980s fashion hallmarks of big shoulders, fingerless gloves and neon colors, the Commercial Real Estate Deal Maker Forum has come full circle.
Just as in the first forum in 2000, Charles Ratner, president and CEO of Forest City Enterprises Inc., will give this year’s keynote address, which will look at commercial real estate development during the past decade and predict future happenings.
During a telephone interview, Ratner jokes that he was hoping
Inside Business could help him come up with some ideas for the speech. Still, he has a good idea of what he’ll touch on.
“The lessons to be learned during the past decade are very obvious,” he says. “These are lessons of excess and appropriate risk underwriting. That’s not just true of commercial real estate, but true in general.
“That includes recognizing the perils of sprawl,” he adds, “and the necessity to invest in cities.”
Demographic trends will prove that, he contends. Population will continue to grow on the coasts while the Midwest and Northeast Ohio will struggle to keep its people from leaving. “All of us here in the Midwest now are in the fight of our lives to get to get any sort of growth in the commercial real estate business,” he says. “It will only happen through jobs.”
Likewise, past years’ topics, such as the debate over casino gambling in Ohio and a convention center in Cleveland, are again making news.
So the choice of Ratner, who talked about the importance of public-private partnerships in his first address, to be the 10th annual speaker did not happen by chance, says Bill J. Gagliano, partner and chairman of the real estate practice at law firm Ulmer & Berne LLP in Cleveland, an organizer of the event.
“We felt it would be good to go back and bring back our original speaker,” Gagliano says. “At a time here in Cleveland when we’re still talking about the importance of public-private partnerships in development, we feel it’s still an important issue.”
Back in 2000, Ratner told
Inside Business that when dealing with this sort of development, it’s important for city leaders to have an open mind.
“[Community leaders] can’t go into the relationship and say, ‘I have the right to kill the deal,’” Ratner said. “You have to say instead, ‘I’m going to forget that I have the right to kill the deal, and I’ll stay at the table until I can make it happen.’”
As for what’s happened since he made those comments, Ratner says he is happy to see movement in the development of the East Bank of the Flats, but disappointed that his company lost out on its plan to put a convention center behind Tower City.
Asked if he feels Northeast Ohio officials have heeded the advice he gave 10 years ago, Ratner says: “We’re in worse shape now than we were a decade ago. … We’ve lost jobs, not gained. We’ve lost college graduates [to other markets], not gained. It’s not a pretty picture. The good news is: It’s not over.”
The Year: 2000
The Topic: Public-private Partnerships
What We Said Then: Effective public-private partnerships lifted Cleveland out of the economic doldrums of the 1970s and led to development of Gateway, Cleveland Browns Stadium, the Warehouse District and more. Still, Ratner warned at the time that the city must not rest. “In a city in which there are so many people whose disparate needs aren’t being met, in a city in which the public schools have so far to go despite progress, in a city in which so many more jobs are needed — you can’t consider the renaissance complete,” Ratner said. “You can, at best, consider it as having a significant amount of momentum. We must continue to invest in it and nurture it.”
What We’re Saying Now: The economic downturn has stalled many development projects, including public-private ventures. But Ratner remains optimistic about the future. “Everything is stopped, but that doesn’t mean you won’t ever start again. The trick is to be a player and partner and to be part of that story.”
What’s Next: Ratner believes public-private development will play a significant role in Cleveland’s future. “The only way this country reinvests in cities and in its urban core is through public-private partnerships,” he says.
The Year: 2001
The Topic: Cleveland’s Ring Bearers: The Inner-Ring Suburbs Battle to Rebuild the Urban Core
What We Said Then: With no room left to expand, inner-ring suburbs such as Euclid, Shaker Heights and Lakewood were faced with the daunting prospect of redeveloping existing retail space. “[In America] we are so good at building brand-new real estate on a farm — converting a farm into a shopping mall or anything,” said Tom Bier, director of the Housing Policy Research Program at the Maxine Goodman Levin College of Urban Affairs at Cleveland State University. “We throw that stuff up overnight. But when it comes to maintaining and redevelopment, we are in the Dark Ages.”
What We’re Saying Now: Communities during the past eight years have done a decent job at “in-fill” development, or repurposing, for example, an industrial building for retail, says Mark Jablonski, president of retail development and consulting firm CenterMark Development in Cleveland. But the paralyzed credit market brought a temporary halt to that activity. “Unfortunately, because capital has been hard to come by and certain sectors are not expanding, these types of projects are stalling out.”
What’s Next: Jablonski does not expect in-fill development to be permanently stalled. As the credit market thaws, inner-ring redevelopment in places such as South Euclid, which is redeveloping the northern end of the Cedar Center shopping strip, should continue. “You’re going to see it rev up again and take off,” he says.
The Year: 2002
The Topic: The University’s Role in Regional Economic Development
What We Said Then: With an eye on student and faculty retention, college campuses throughout Northeast Ohio were embarking on big projects to improve their campuses as well as their surrounding residential and commercial zones. “We discovered that potential students decide whether your campus will be in the running within the first 15 to 20 minutes of visiting,” said Ted Curtis, vice president of capital planning and facilities management at the University of Akron.
What We’re Saying Now: Campus development is just as important now as it was in 2002, says Dora Pruce, director of government and community relations for John Carroll University. She says the university finished major upgrades to campus early this decade, including the 265,000-square-foot Dolan Science Center, and is now busy working on smaller renovations, such as improvements to fire and security systems at campus buildings. The University of Akron recently completed a $300 million project that included a student center and dorms. The university has its sights set on building a parking garage, another dorm and an academic building.
What’s Next: Cleveland State, which has been transforming its campus to open itself to downtown and attract more residential students, kicked off a $65 million project this fall that eventually could include five dorms and a 300-car parking garage at East 24th Street, between Euclid and Prospect avenues. An even larger development with more housing and a baseball park is also in the works at CSU.
The Year: 2003
The Topic: The Renaissance of Cleveland Retail: Why Cleveland, Why Now?
What We Said Then: With Legacy Village in Lyndhurst days from opening, and other so-called “lifestyle” retail centers in the region under construction, Cleveland’s retail real estate scene was put under the microscope. The boom in the development of these upscale shopping centers was attributed, in part, to Cleveland being “under-retailed” when it came to upper-scale shopping. “We want more than the Targets, the Wal-Marts, the Kohlses,” said Randy Goodman, president of Goodman Real Estate Services Group.
What We’re Saying Now: Demand for high-end specialty retailers has taken a nose dive, says Jablonski. With consumers pinching pennies, these higher-priced outlets will be hard-pressed to survive, much less expand. “Specialty high-end retail is going to continue to see the fallout,” he says. “Consumers now more than ever will be price-conscious.”
What’s Next: In the midst of the economic slump, consumers have become more sensitive to pricing, says Jablonski. Discount grocers and discount retailers will be more in demand by consumers, and this demand is allowing these companies to expand. “Expansion in retail is limited to convenience and value,” Jablonski says. “Those are the buzzwords today.”
The Year: 2004
The Topic: Convention Centers: Do They Work?
What We Said Then: The debate over whether a convention center would be a “magic bullet” to cure all of Cleveland’s woes was in full swing with questions about how the city and county would pay for such a structure and where it would be placed. “It doesn’t really answer the problems of the city,” said Norman Krumholz, professor of urban affairs at Cleveland State University. “A convention center is not a magic bullet ... and the people promoting it would promote any development downtown.”
What We’re Saying Now: Cuyahoga County commissioners in April signed papers with Chicago-based developer MMPI to build a downtown convention center and medical mart. The commissioners later bought the existing convention center site, with plans to place the new convention center at former site. Forest City, meanwhile, lost out on its proposal to place the medical mart on a site behind Tower City. “On the convention center, we were losers, not winners,” Ratner says. “So far it has not gained much momentum.”
What’s Next: Because of his involvement with the project, Ratner declines to talk in detail about the future of the convention center. “It would be good for the city,” Ratner says.
The Year: 2005
The Topic: Chicago as a Model for Cleveland
What We Said Then: Chicago’s success at revitalizing its downtown and surrounding neighborhoods was held as an example of what could also be achieved at its neighboring Midwestern city, and, some could say, miniature version of the Windy City: Cleveland. “Our interest in hearing Mayor Daley is to learn from some of Chicago’s successes in areas that we still need to focus on,” said David Browning, managing director of Cleveland commercial real estate brokerage CB Richard Ellis.
What We’re Saying Now: Four years later, Cleveland is still trying to mimic what Chicago has done, says Browning. “We’re continuing to emulate Chicago by trying to promote residential development,” he says. “The more people we have living in and around downtown, the more it is a 24-hour sustainable neighborhood.” The opening of the Park Building condos in February marked the first time in more than a century that Clevelanders have lived on Public Square. And townhouses and condos have sold well in the Avenue District.
What’s Next: Though some residential projects have been delayed, perhaps most notably the development of the East Bank of the Flats, Browning is confident Cleveland will be successful in building up its downtown residential neighborhoods and also see additional condominium conversions. “I think you’ll see residential development that will happen,” he says, adding that he foresees residential development on the East Bank within the next five years.
The Year: 2006
The Topic: Gaming in Ohio: Should Cleveland Take a Gamble?
What We Said Then: Should we keep a portion of the money Ohio residents gamble in the state or should we keep casinos, and the perceived high crime rate they are associated with out of Ohio? That was the question posed during the 2006 Deal Maker Forum, which featured representation from both sides of the gaming debate. “It’s not like Ohio doesn’t have gambling,” said 2006 speaker Frank J. Fahrenkopf, president and CEO of the American Gaming Association. “I said [to then Gov. George Voinovich on Face the Nation in 1996], ‘Governor, you actually sit as the head of one of the biggest gaming activities in the country — the Ohio Lottery.’ ”
What We’re Saying Now: Despite several attempts, casino gaming has not gained a foothold in Ohio. The pro-casino camp, led by Cavs owner Dan Gilbert, has another ballot issue ready that would legalize casino gambling in Cleveland, Cincinnati, Toledo and Columbus. Gilbert has plans for a $600 million gambling resort with table games, restaurants and concert venues along the Cuyahoga River in downtown Cleveland. Though it’s being challenged, Ohio recently legalized up to 17,500 electronic slot machines at the state’s seven horse-racing tracks. “What part of ‘No,’ does someone not understand,” says Tom Grey, field director for Stop Predatory Gambling and a co-speaker at the 2006 Deal Maker forum. “All they have to do is hit once. They see referendums as investments.”
What’s Next: Though Ohio has consistently shot down casino ballot issues, Grey says the economic downturn might play a large role this time around. He says voters who said no earlier might vote for the issue this time as a way to jump-start Ohio’s economy. “What I’m concerned about is that these economic times, and these are painful times, might [cause] people to say, ‘Well, let’s listen to this.’ ”
The Year: 2007
The Topic: Revitalizing the Great Lakes Region
What We Said Then: Cleveland has a big opportunity to take advantage of its location in the Great Lakes region and its historical resources in an effort to bolster its economic standing. These resources have the potential of drawing workers from other areas, which would contribute to Cleveland becoming a more vibrant city. “A city like Cleveland needs to capitalize on its assets, such as its low cost of living, great cultural institutions and temperate climate in order to compete head-on with other parts of the country in attracting and retaining young, talented professionals,” said Bill J. Gagliano, chair of the real estate group at Ulmer & Berne LLP.
What We’re Saying Now: Gagliano says what is helping make Cleveland competitive with other Midwestern cities is its health care and biotech industries. “Cleveland is continuing to evolve into more of the service industry and high-tech, biotech and health care than traditional manufacturing, even though this has always been a manufacturing city and probably always will be a manufacturing community,” he says.
What’s Next: When you see construction cranes in Cleveland, it likely has something to do with a health-care-related project, Gagliano says. “Cleveland will continue to evolve into one of the region’s key cities when it comes to health care and biotech,” he says.
The Year: 2008
The Topic: The Rise of China: What It Means to the U.S.
What We Said Then: China’s rise as a manufacturing giant was a top-of-mind issue during the fall of 2008 — that is, before the global economic meltdown began to dominate the headlines. While the global economy continues its slow climb back from the brink of collapse, Northeast Ohio should keep a close eye on China, since it was the No. 4 export market for the state in 2007, according to the United States-China Business Council. “Unless the world retreats into protectionism, where economic and political walls go up, China is going to be with us for some time to come in the foreseeable future,” said 2008 Deal Maker keynote speaker Jeffrey Bader, who was then the senior fellow and director of the Brookings Institution’s John L. Thornton Center in Washington, D.C. “So we’re going to have to learn how to compete and cooperate with them.”
What We’re Saying Now: In January, Bader joined President Obama’s administration as senior director for Asian affairs on the National Security Council staff. His selection to speak at last year’s forum was an attempt to highlight the rising importance that China and other countries will play in Cleveland’s future, says Craig S. Miller, a partner, member of the real estate group and chairman of the public law practice at Ulmer & Berne. “There’s no question the Chinese have become such an economic powerhouse that their trade with the U.S. is an important topic,” he says.
What’s Next: As time goes on, trade with other countries, such as Germany and France, will become as important as with China. “We need to be reaching out to other markets rather than just doing business as usual,” Miller says. “If we’re successful, that can only be good.”
Waiting Game
Real Estate developers are in a holding pattern for major projects until the economy provides clearance for takeoff.
Forget about grand ideas of expansion and developing pristine new office space. What do you think this is? 2007? Hardly. Most Northeast Ohio companies have made it their mission in recent months to simply survive the current economic downturn, and have put real estate development on the back burner.
That’s bad news for the region’s real estate development companies.
“New product coming online is virtually nonexistent,” says Mark Jablonski, president of retail development and consulting firm CenterMark Development in Cleveland.
Charles Ratner, president and CEO of development company Forest City Enterprises Inc. in Cleveland, agrees. Projects are not getting done, and banks are hesitant to lend. “It’s extend and pray,” he says.
David Browning, managing director of Cleveland real estate brokerage CB Richard Ellis Group Inc., says the industry has taken a hit this year. Retail, industrial, or office space, it doesn’t matter. The business for each of those sectors is down between 20 percent and 60 percent.
“Based on the overall economy, the attitude of many firms is that they are battening down the hatches and focused on getting through this period of time,” Browning says. “It takes time, and costs money in retrofitting a space, and then you have the added cost of distraction [in developing the office space].”
The cost of real estate remains beyond the grasp of most companies, says Jablonski. Paralysis in the credit market and uneasiness on the part of bankers has made it difficult to find a loan for large-scale real estate projects, though smaller deals are still getting done.
“Credit is extremely hard to come by for projects that are of scale,” he says. “If there’s a $35 million shopping center that a developer wants to refinance, it is virtually impossible to do. But a freestanding retail space, that a developer is seeking only $1 million for, there is ample credit for that. It all comes down to risk.”
Despite the frozen real estate market locally, Forest City Enterprises reported improved financial results for its second quarter, which ended Sept. 8. The company cut its net loss from eight cents per share in the second quarter of 2008 to one cent per share for the same quarter this year.
Though the real estate sector is far from recovery, Ratner says his firm has positioned itself well to manage the current slump.
“We have reduced our overhead, taken cost out of the business as other companies have,” he says. “We’re not investing new capital in development projects. We’re keeping very good projects going. … We’re running a more efficient business.”
“Every company is seeking to reduce the cost of their real estate holdings through property tax reductions, lease pass-through analysis and other measures,” says Bill Gagliano, chair of the real estate practice group at Ulmer & Berne. “Our firm is involved in many of those efforts for clients.”
Ratner hears talk of how the economy is moving forward and that the recession officially ended in August. “There’s a lot of talk of recovery,” he says. “I don’t know where that talk is coming from.” He predicts there might be a turnaround in the middle of next year at the earliest.
“We do not see any indication that fundamentals of the real estate business are improving,” he says. “In order for our business to improve, our customers’ business must improve.”
Browning says he expects the broader market won’t turn around any earlier than the start of 2010. Northeast Ohio’s real estate sector might take somewhat longer, he adds.
“We tend to lag the trends of the first-tier markets by 12 to 18 months,” Browning says. “We really only saw the depth of the downturn in the fourth quarter. Other markets saw the downturn earlier.”