By Scott Olson, Skogman Commercial
Despite a derecho, a pandemic, inflation, supply chain issues and a possible recession, Cedar Rapids continues its rapid growth as evidenced by the ranking by “American Growth Project 2023” as a top 15 fastest-growing mid-size U.S. city. But, its other national rankings are just as impressive:
• 23rd-Best Run City in U.S. (wallethub.com, 2023)
• Top 100 Best Places to Live in America (Livability, 2023)
• 23rd-Best Place to Raise a Family (wallethub.com, 2023)
• 13th-Best City to Buy a House (niche.com, 2023)
• Ranked No. 21 of Cities with Lowest Cost of Living (Business Insider, 2023)
• A Cleanest U.S. City by Short-Term Particle Pollution (American Lung Association, 2023)
• Two Nationally Ranked Medical Centers: St. Luke’s Hospital and Mercy Medical Center (PINC Al/Fortune and Newsweek, 2023)
• Top 50 Best City for Jobs in America (wallethub.com, 2023)
• No. 22 Safest City in America (wallethub.com, 2022)
• Best Tasting Drinking Water in Iowa (Iowa Section, American Water Works 2022)
In addition to these rankings, Cedar Rapids is also continuing to make major progress on recovery from previous national disasters:
• 2008/2016 historic floods are resulting in the $750 million flood control system making great progress reaching over one-third complete. With an exciting additional recent award of $131 million from the Army Corp of Engineers and $11 million of ARPA funds from the city, completion will be faster on this largest public works project in city history. Expenditures this year on 14 projects will exceed $50 million.
• 2020 derecho recovery is nearing completion with the ReLeaf Program in its second year of a 10-year endeavor to replace many of the 669,000 matures trees lost. This $37 million plan to replace the decimated tree canopy was just honored with a “Congress for New Urbanism 2023 Chapter Award in the Region, Metropolis and Town Category.”
• The Cedar Rapids Library in November received the 2022 Jerry Kline Community Impact Prize recognizing the public library as a vital community asset in the U.S. This carries a $250,000 prize that will fund its continued close connections with civic leadership and the community. In addition, fundraising is well on its way for a new $18 million Westside library scheduled for a construction start in 2024.
• The unique Paving for Progress program initiated by the voters in 2014 to utilize a 1 cent sales tax dedicated to street maintenance is in its ninth year. To date, street repair expenditures are $178 million on over 300 projects with 40 projects underway, costing $23 million in 2023. Having been renewed last year by an almost 70 percent yes vote, the next 10 years will see over $200 million more of street/utility updates. The best part is the city now pays cash for all street improvements versus selling Go Bonds with interest over 20 years.
• Finally, the rapid growth in Cedar Rapids is evidenced by building permit valuations and permit numbers in fiscal years 2021, 2022 and 2023 that will exceed $1.7 billion. Permits issued in fiscal 2023 will exceed 9,000.
Several recently announced new developments highlight the amazing growth in all sectors of our Cedar Rapids economy. First is the construction on the fourth and final phase of the Eastern Iowa Airport terminal modernization project. This phase is a $68 million project renovating several existing gates plus adding 32,000 square feet with four additional jet bridges, larger exterior patio with food services, administrative functions and many travel amenities.
Even more impressive is the funding sources are state/federal grant and airport reserves, so the airport will remain debt-free and will not use any local taxpayer funds for its continued operation growth.
Other exciting new developments include Wisconsin-based Sub-Zero, an appliance manufacturer that is planning to construct a 400,000-square-foot light manufacturing facility in southwest Cedar Rapids with an investment of $140 million plus creation of 192 new high-paying jobs. Near this facility, Altorfer equipment company is constructing a new 150,000-square-foot headquarters facility with an investment of $40 million while retaining 40 jobs and creating 15 new jobs.
In our tech sector, Collins Aerospace announced a $22 million renovation project to create an 18,850-square-foot microchip production for its aerospace application, which will create 16 new jobs.
The longtime Cedar Rapids company International Paper is adding 20,000 square feet to its cardboard processing facility to create its own steam boiler and water treatment plan with an investment of $105 million.
On top of that, two local companies announced major expansions starting construction this summer. Lil’ Drug Store, the No. 1 health and beauty care supplier in the U.S. serving over 100,000 convenience stores and gas stations, is relocating a recently acquired Illinois company into a $10.8 million, 41,300-square-foot distribution warehouse expansion creating 10 new jobs.
Office sector mirrors nation
The pandemic and the evolution to acceptance of hybrid work has had a dramatic impact on our office sector. Vacancy rates are climbing to over 15 percent in downtown with the suburban market even higher.
On top of that, rental rates are dropping in older properties to attract prospects, which are very scarce. The good news is that local developer/architect Steve Emerson is successfully converting class B and C office buildings into apartments in the downtown core.
Over the last three years, three buildings of six to eight stories have been completed totaling over 120 units with three more under construction or in planning. Also, some existing office tenants are moving to vacant spaces from existing downtown buildings to gain a more modern space, downsize or to move to ownership versus leasing.
The scope of this local trend is evident in the latest Multiple Listing Service (MLS) summary of spaces for lease or sale. There were over 400 properties with spaces from 160 to 91,000 square feet. Several major companies with new or multi-story headquarters are putting entire floors on the market mainly due to the impact of hybrid work trends.
One example is a GoDaddy call center that utilized a 73,000-square-foot renovated building in Hiawatha, which was just placed on the market for sale. The company moved operations to downtown Cedar Rapids utilizing a 6,000-square-foot space. Another element that exemplifies our increased office vacancy trends are buildings not included on the MLS that are vacant and in transition.
These include an 81,000-square-foot, former Honeywell building, a 68,000-square-foot Toyota Financial Services building, a two-tower, five-story former Transamerica/Aegon complex over 150,000 square feet, a 10-story former Verizon tower of 94,000 square feet and the 12-story US Bank building of over 110,000 square feet that will be two-thirds vacant early next year. The good news is that two of these six buildings have good potential for conversion to apartments.
Finally, a couple positives for the office sector is that Cedar Rapids Bank & Trust just broke ground on a new 34,000-square-foot office facility across the street from its main office. This $19 million project will allow the bank to grow its administrative functions from 30 full-time employees to potentially 115. Also, ITC Midwest, currently a tenant in a three-story downtown building it has outgrown, just announced the purchase of a 26,000-square-foot, former for-profit college facility in southwest Cedar Rapids. The new corporate facility will enable the company to grow from 80 to 115 employees locally.
Multifamily at record levels
Along with the industrial sector, multifamily is the most active sector in our market. In the downtown core alone, there are 13 housing projects under construction or planned to start late this year. The total number of units that will come on line in 2023 and 2024 will approach 1,000 apartments of all sizes. Outside the core area, there are a similar number of projects spread throughout the city. Add to that the metro area projects in 2023/2024, and it will lead to the largest apartment housing boom in our history.
Despite the inflated construction costs due to the pandemic, rental rates remain reasonable ranging from studios at $900 per month to two-bedroom units at $1,500 per month. There is also a demand for downtown condos, but that construction demand is substantially smaller with existing units coming on the market reselling quickly.
An exciting new project just announced on city-owned land in the new Bohemian/Czech Village area along the river is the Vesnice, an active lifestyle community. The design is believed to be the first in the state. The Tower employs two-story “skip-stop” units that wrap a common corri-dor every three levels, eliminating the need for a corridor at each level. The Tower rises six stories above the river offering stunning views of the water, future park area, historic Czech Village and active NewBo District.
The Rowhouses are equally unique, provide individual entry to a two-story unit along 2nd Street and an upper two-story unit off the garden terrace, ensuring activity and usage of the garden terrace year-round. The materials comprise a mix of terracotta, architectural metal panels and expansive glazing. The Tower takes an innovative approach to unit layout, utilizing a historic model pioneered by legendary architect Le Corbusier in the 1950s.
This $23.7 million investment creates 63 units in a six-story building with the four-story building offering 22 Rowhouse units that surround a 12,000-square-foot elevated terrace. Amenities include commercial incubator spaces and indoor parking, plus a 2,000-square-foot rooftop terrace with great river views.
Industrial remains strong
The industrial market remains strong, especially in southwest Cedar Rapids by the Eastern Iowa Airport. Aside from the new Altorfer, Sub-Zero new facilities and Lil’ Drug Store expansions that I already highlighted, there are several large industry and warehouse/distribution projects under construction ranging from 50,000 to 100,000 square feet. Also, throughout the city, numerous flex buildings have recently been built to serve the smaller companies needing space to meet their business demand.
Vacancy rates are continuing to climb but are still very low in the 2 to 3 percent range as new buildings come on line in our market with over 100 active listings for lease/sale with spaces ranging from 1,200 to 1.2 million square feet. Most of our second-generation spaces have been sold/repurposed in our metro market, but demand remains high to buy from several companies looking to expand or enter the Cedar Rapids market as existing buildings are substantially lower in cost than new construction.
I anticipate even with strong demand, absorption rates will remain steady as new construction is pushing market rental rates to all-time highs between $6 and $7 per square foot triple net versus $4 to $5 per square foot for second-generation buildings.
In addition, many of our ag-based businesses (Cargill, Red Star Yeast, ADM and General Mills) are expanding/updating their facilities while new and existing small businesses are expanding to service this segment of our economy.
Retail market is evolving
Our trends mirror what is being seen nationwide. Vacancy rates are up (estimated 7 to 8 percent), absorption of available space is down, and rental rates ($12 to $16 per square foot) are up due to construction inflation. Our three major retail areas (Lindale Mall, Westdale Mall and The Fountains) are going through change. The Fountains and Westdale are growing with new development, but even seeing some types of existing businesses vacate space. New tenants consist of personal services, entertainment venues, storage units and apartments/hotels.
Most second-generation strip malls are being filled with medical services, nail salons, mobile phone stores, vape shops, etc. versus traditional retail. Newer strip malls are still being con-structed with most being filled by new national franchises of all types. An example of this is a new development adjacent to Westdale Mall called Wiley Crossing. This $5.4 million, 17,000-square-foot commercial/retail facility replaces a very old strip mall/movie theater with new spaces created for a variety of new franchises entering the market.
Lindale Mall, previously owned by a REIT, was recently sold for over $15 million below its assessed valuation to a private investment group. The mall was struggling with a long-vacant Younkers department store space and a former undeveloped Sears store, owned by another REIT, on the opposite end of the complex.
The local management team was retained to work with the new owner to recreate this important retail center. Several outparcels have recently been developed plus areas adjacent to the mall have also been redeveloped with either new franchises (Raising Cane’s) and a big box space converted to an entertainment venue.
To create more amenities for the city of Cedar Rapids staff/council members, over the last decade, they have been regularly attending the ICSC World Conference in Las Vegas to thank current retailers for being a part of Cedar Rapids while identifying new retailers that would be a good fit for the local retail market. With the help of a city consultant, Retail Coach, 10 prospects were identified this year that have generated serious interest in looking at the metro area.
Also, the city development department has developed a high-quality retail analysis package to make it easier for prospects to evaluate Cedar Rapids as a viable option. A good sign for the future is that almost all restau-rant spaces vacated by businesses that closed because of the pandemic have been re-leased by new businesses or expanding local operators.
Final thoughts
Despite all the national and world events that have impacted every area of commercial real estate, Iowa has remained strong as evidenced by an unemployment rate of 2.7 percent with several thousand high-paying job openings available in all sectors of the economy. In addition, the Midwest has a strong financial base related to the agricultural industry as evidenced by all of our Cedar Rapids national and international ag-based companies that are expanding to serve the food and pharmaceutical needs of the world.
Over 1,000 grain trucks enter our city each day with our local industries milling over 1 million bushels of corn each day, which is more than any other city per capita in the world. But, as you can see from our recently announced new developments and our national rankings, the diversification of our economy has been and still is the key to our city’s future growth. Visit our great city and take advantage of the many opportunities.
Scott Olson, AIA, RCFM, SIOR, is a real estate broker with Skogman Commercial Group at the Penthouse. He is also a retired architect and member of the Cedar Rapids City Council. This article originally appeared in the August 2023 issue of Heartland Real Estate Business magazine.