The Cleveland metropolitan area is the third largest in Ohio in terms of population and the 50th largest in the United States. With a population of slightly over 2 million, the Cleveland residential market offers a wide range of investment choices both in terms of price ranges, structure types, and locations.
Cleveland city is the center of a large metropolis offering a diverse and high-quality lifestyle in terms of education, culture, entertainment, and sports. It has a sound educational system at all levels of education, a solid health system featuring some of the best medical facilities in the country, below the national average cost of living, and perhaps the best mass transit system in the United States. Cleveland is home to Cleveland Indians, an official Major League Baseball team; Cleveland Cavaliers that won the 2016 NBA championship; and Cleveland Browns that won four NFL Championships.
The advantages of investing in the Cleveland residential market include:
- Considerably lower capital requirements compared to investing in one of the major markets and while still enjoying strong capital gains
- A sufficiently diverse economy reducing long-term investment risk
- A strong and rising rental market
- High-income returns in a low-interest-rate environment
The Cleveland housing market combines low capital requirements with strong and above-average capital returns
The Cleveland housing market has registered strong and consistent long-term capital gains driven by the steadily rising house prices over the past decade. In particular, according to the Federal Housing Finance Agency (FHFA) House Price Index, house prices in the Cleveland metropolitan statistical area (MSA) have been rising consistently since 2012 at rates ranging mostly between 4% and 6%, with the exception of 2020 during which a very strong gain of 14.4% was recorded (see Figure 1). Overall, house prices in the Cleveland MSA increased by 63.1% over the period 2012-2020 delivering high capital gains to residential investors. It should be noted that the FHFA house price index measures changes in prices for the same house quality in order to capture changes in prices that are solely attributable to market forces. As such, it is a better measure of changes in market prices through time than median prices. Nevertheless, it should be noted that according to NAR data, the median house price in the Cleveland residential market registered a 17.4% year-on-year increase in the fourth quarter of 2020.
According to the National Association of Realtors (NAR), the median price for an existing single-family house in the Cleveland MSA in the fourth quarter of 2020 was $187,100, which is considerably lower compared to the respective median prices in major residential investment markets in the United States. Consider for example that during the same period the median price for an existing single-family house in the Los Angeles and New York MSAs were $688,700 and $502,500, respectively. That means that an investor that would need a down payment equal to 25% of the acquisition price, would have to use only $46,775 of his/her own money to acquire the median existing house in Cleveland, while he/she would have to use $172,175 and $125,625 of his/her own money, in order to invest in a similar house in the Los Angeles and New York MSAs, respectively (see Figure 2).
Figure 1 Year-on-Year house price changes in the Cleveland metropolitan area: 2012Q4-2020Q4
Figure 2 Required Capital for a 25% Down Payment for Acquiring a Median-Priced House in Selected Housing Markets
The Cleveland residential market is supported by a diverse and growing economy, which reduces long-term investment risk
The Cleveland metropolitan economy provides jobs to over a million people (1,050,000 to be exact). The area’s major employers include Parker Hannifin, a Fortune 250 global leader in motion and control technologies, Sherwin-Williams, a Fortune 500 company in the general building materials industry, Cleveland Clinic, a health provider that owns and operates its own dedicated hospital, and University Hospitals, one of the nation’s leading health care systems.
Cleveland’s economy is quite diverse with no sector accounting for more than 19% of total employment and with 76.8% of total jobs spread across five sectors (see Figure 3). These sectors include Education and Health Services, Trade, Transportation, and Utilities, Professional and Business Services, Government, and Manufacturing.
This diversity renders Cleveland’s economy less vulnerable to negative developments in any specific economic sector and reduces the long-term risk of investments in the area’s residential market. Despite a slight decrease (1.3%) in the area’s population over the period 2010-2019, its economy (real GDP) grew by a total of 11% and its total employment by 9% over the same period.
This economic growth was one of the key factors that supported rising demand and the over 60% increase in house prices over the decade 2010-2019.
Figure 3 Cleveland MSA employment by economic sector
in December 2020
Cleveland MSA population and demographics
According to the latest estimate published by the Census Bureau, the population of the Cleveland-Elyria MSA in July 2019 was 2,048,449, making it the third-largest metropolitan area in Ohio. The median age of the area’s population is 41.4 years with 43.2% being in the age group of 20-54, which comprises the age groups that are most active in the housing market by renting a house, buying their first home, or upgrading to a better house (see Figure 4). In terms of racial and ethnic composition, 69% were White, 19% Black %, 6% Hispanic, and 2% Asian.
Figure 4 Cleveland MSA population by age group in 2019
In terms of the area’s income characteristics, the per capita income in the Cleveland MSA in 2019 was $34,200 and the median household income $57,228. Furthermore, 64% of the area’s households had an income in excess of $50,000.
Rising income was one of the key drivers of rising housing demand and prices in the Cleveland residential market over the period 2010-2019. In particular during that period the area’s personal income increased by 38.2%, the per capital income by 40% and wages and salaries by 35.2%.
Cleveland has a strong and rising rental market
The Cleveland residential market provides good opportunities for investment acquisitions because it has a strong rental housing market. In particular, in the first quarter of 2021, the percentage of households that were renters in the Cleveland MSA was 39.7%, which is above the national average of 34.4%.
Furthermore, according to data provided by the American Community Survey (ACS), the area’s rental housing vacancy rate has been mostly on a downward trend over the period 2012-2019 (see Figure 4), signifying that demand was rising faster than supply. Due to the relatively low and declining rental vacancy rate, the average gross rent in the Cleveland residential market has been mostly on a rising path over the period 2012-2019 (see Figure 5). In particular, the area’s average gross housing rent increased from $769 in 2012 to $836 in 2019, representing a gain of 8.7%.
Figure 5 Cleveland MSA rental housing vacancy rate: 2012-2019
Figure 6 Cleveland MSA gross housing rent: 2012-2019
The Cleveland residential market offers competitive income returns
According to the Colliers multifamily housing report for the 4th quarter of 2020, the average multifamily cap rate in Ohio was slightly above 6%. This was the average of cap rates in the six largest multifamily housing markets in Ohio including Cleveland as well. By applying also the average annual rent indicated in Figure 5 to the median house price of $159,400 for the same year, the estimated gross rental yield for the Cleveland residential market was 6.3%. That would be equivalent to a cap rate between 4% and 5%, since it is equivalent to the net rental yield. These are attractive income returns, especially in today’s environment of very low interest rates.
Conclusion
As it has been shown throughout this article, the Cleveland economy and residential market provide several advantages when it comes to residential investments, including considerably lower capital requirements while still achieving strong long-term capital gains; moderate investment risk which is mitigated by a diverse economy, as well as rising employment and incomes; a strong and rising rental market; and relatively high income returns that in combination with strong capital gains can provide investors with attractive total returns.
