Optimal resource allocation with an objective of maximizing the system capacity is an NP-hard problem in multihop cellular networks. Hence, different heuristic algorithms have been developed over the years that would improve the network system capacity. In this paper, a novel cluster-based architecture is proposed for a two-hop cellular network whereby the transmission distance between any communicating pair is restricted to half the cell radius. In this design, a given radio resource is used by two simultaneously communicating pairs in every hexagonal cell, but for only half the time slot period. The characteristic feature of this cluster-based design is that it enables a frequency reuse ratio of one. The proposed hierarchical system is analyzed and tested under realistic propagation conditions including lognormal shadowing. It has been observed that the system capacity of a cluster-based design is 2.5 times that obtained from the single-hop cellular system with no relaying. In addition, the cluster-based design achieves higher capacity compared to state-of-the-art two-hop algorithms. This is an important finding since the hierarchical cluster-based approach has fewer degrees of freedom in the selection of the routing path for the end-to-end connection. Practical routing algorithms should be able to benefit from this.