Developers plan high-rise apartment tower in University Circle, on children's museum site
Posted April 10, 2014 in Articles
Author: Michelle Jarboe McFee
A towering apartment building - standing 25 to 28 stories tall - could rise in Cleveland's University Circle neighborhood if a recent development deal bears fruit.
First Interstate Properties and Petros Development Corp. have signed an agreement with University Circle Inc., a nonprofit neighborhood group, to explore the feasibility of a high-rise residential project at Euclid Avenue and Stearns Road. The 280-unit apartment building would replace the Children's Museum of Cleveland, which has been looking to leave its outdated facility for a new home.
Stretching to 260 feet or more, the One University Circle tower could be the city's tallest all-residential building. It would redefine the skyline and create a new western gateway for University Circle, a district populated by schools, hospitals, museums and other cultural institutions. And - if the developers succeed - it would act as a testament to the strength of Cleveland's rental market and broader trends toward urban living and apartment dwelling.
Buoyed by high occupancies and rising rents, the city and some suburbs are seeing new apartment construction - and, in certain neighborhoods, a decreasing reliance on public subsidies to make projects work. But developers still struggle to fill the gap between what tenants will pay and what it costs to build something from the ground-up. And expenses mount as buildings get taller and more opulent.
That's one reason plans for One University Circle are likely to encounter some skepticism. Another reason: First Interstate and Petros are experienced developers, but neither company has tackled a high-rise apartment project.
That doesn't faze Chris Ronayne, the president of University Circle Inc., which owns the land. His staff and board vetted Petros and First Interstate, who separately approached the nonprofit before joining forces.
"If you find someone with the vision and you find someone with the capacity and you know they have the ability to get things done, go with the horse," Ronayne said of the developers.
"I've never sat down with a newspaper reporter and talked about a project that hasn't come to fruition," said Mitchell Schneider, First Interstate's president. "Barring unforeseen circumstances, this is a very real project. We are spending real dollars on our due diligence and homework at this time, and we already have done so."
A second-generation builder-developer based in Broadview Heights, Sam Petros focuses on subdivisions and single-family homes in the suburbs. In the 1980s, he did have a hand in high-rise, mixed-use projects in Singapore. First Interstate, headquartered in Lyndhurst, is best known for retail developments including Legacy Village and Steelyard Commons.
Through a separate private-equity business, though, Schneider has invested in apartments. He also sits on the investment committee for National Real Estate Advisors, a company that handles real estate deals for a major electrical-workers union pension fund and other clients. National owns more than 50 percent of Legacy Village and has a stake in high-rise apartment projects in cities ranging from Boston to San Francisco.
Jeffrey Kanne, National's chief executive officer, said the company is playing the role of consultant on the University Circle project.
"Cleveland definitely needs a high-rise, high-end luxury apartment project," Kanne said. "You haven't had a new high-rise for about 20 years. In the past 20 years, technology and design of apartments have changed radically.
"It's not Manhattan. It's not San Francisco. It's not L.A.," he acknowledged. "So it's going to have less demand. It wouldn't surprise me if this were the only high-rise in this area for a long time. But it's not necessarily true that you need a dense urban environment to support high-rise construction."
Developers aim for 2017 opening
At this early stage, there are no renderings. First Interstate and Petros are vetting architects, studying the site and honing their floor plans. Still, the developers are willing to share some basic details.
The site spans 1.9 acres bounded by Euclid, Stearns, Stokes Boulevard and Deering Avenue. It includes the children's museum building, a former Howard Johnson's restaurant with a tent tacked on one side.
Schneider and Petros expect to build apartments atop a parking garage, with a ground-floor restaurant and, possibly, a cafe. The building would hold a mix of one-, two- and three-bedroom units, ranging in price from $1,500 to more than $10,000 a month. Rents would depend not only on an apartment's size but also on the views - of University Circle landmarks, downtown Cleveland and Lake Erie.
The building also would offer concierge services, a fitness center, and an indoor swimming pool. Construction could start in August or September of 2015 and wrap up two years later.
"It's going back to what Euclid Avenue was: high density," Ronayne said. "You've got almost New York City density, without New York City neighbors."
Like other developers building near the Cleveland Clinic, University Hospitals and Case Western Reserve University, Petros and Schneider will target graduate students, wealthy international students, medical residents and researchers. But they're also hoping to lure suburban homeowners into the city as empty nesters and snowbirds downsize or look for low-maintenance living close to attractions and public transportation.
"A big piece of the initial occupancy of this project is going to be people that are coming out of homes in the suburbs, outside of the city, and making their primary Northeast Ohio residence in University Circle," Schneider said.
That demographic includes Petros, who says he and his wife plan to leave behind the flora and fauna of Hinckley for a more urban life. He's built far-flung suburban homes for people who work in University Circle but who couldn't find what they were looking for in Cleveland, where many apartment buildings are older and many projects involve retrofits of old warehouses or historic office buildings.
"I'm really simple about this," Petros said. "But it's really clear to me. Jobs drive housing, and housing drives retail. It's not hard to look around and see where the cranes are and where the jobs are. ... I've been desirous of doing a deal here for 10 years."
Experts are intrigued, skeptical
One University Place would be a $125 million to $130 million project, drawing the bulk of its funding from private sources. Schneider said the developers don't plan to ask for public incentives beyond property-tax abatement, which Cleveland routinely grants for residential projects. Under an abatement agreement, the property owner pays taxes based on the pre-development value of the real estate. New construction abatement deals typically last 15 years.
The project also might require some zoning changes, including a variance related to the building height. The site's current zoning allows for structures of up to 260 feet, but the developers say they might need more wiggle room - to allow for construction closer to 300 feet tall.
Apartment experts responded to the proposal with interest, and some reservations.
"Is it outside, a bit, of the norm these days in a market like that to do a tower?" asked Ryan Severino, a senior economist at the Reis Inc. real estate research firm in New York. "Sure it is. But it's not totally out of left field."
Reis's data places apartment occupancy in Greater Cleveland at 97 percent - one percentage point above the national average, based on properties with at least 40 units. Severino said a 280-unit project, with many one- and two-bedroom apartments, doesn't seem unreasonable. At the high end, though, he questioned whether anyone might be willing to pay $10,000 a month for a penthouse.
"Wow!" he said. "That figure strikes me as a little rich. ... There aren't too many projects out there where rents are that high. That would have to be like the greatest apartment in the history of the known universe."
Jeffrey Friedman, the chief executive at Associated Estates Realty Corp. in Richmond Heights, noted that migration back into cities and consumers' increased willingness to rent instead of buy is boosting urban rental markets like Cleveland. Still, there are major challenges associated with high-rise projects.
"The costs associated with building in an urban location, where you're building a high-rise and you need structured parking, are significant," said Friedman, who runs a publicly traded real estate investment trust focused on apartments. "It's my opinion that the current rents that can be obtained in downtown Cleveland and in urban areas of Cleveland, that would include areas of University Circle, are going to be difficult to justify a new construction high-rise."
Friedman, who described First Interstate as "astute, savvy investors," said he'd love to see the project succeed.
"I'm pulling for this to work, and we would do anything we could to help make it happen," he added. "If they can make it make sense, this would be terrific for the community."
University Circle Inc. signed its initial deal with First Interstate and Petros on March 31. That agreement - similar to a lease option - gives the developers access to the site and nine months to conduct research, pull together drawings and assemble a financing plan. That process will lead to a 99-year land lease, giving the developers long-term control but ensuring steady cash for the neighborhood nonprofit.
Ronayne would not discuss terms of the lease deal, beyond saying that University Circle Inc. isn't offering the developers any concessions.
Based on the proposed project schedule, the children's museum would have 15 months to find a new home. The museum, which draws more than 100,000 visitors a year from across the region, has looked at a handful of sites including the old Stager-Beckwith mansion on Euclid, in Cleveland's Midtown neighborhood. Leaders believe a new facility will allow the museum to install new exhibits and attract more families.
"We knew this was a possibility," Maria Campanelli, the museum's executive director, said of the redevelopment of the University Circle site. "But we also know that picking up and moving a museum does require a lot of time. ... We remain committed to staying in the city of Cleveland and, wherever we land, we want to bring an impact to that neighborhood."