By Scott Olson, Skogman Commercial
On Aug. 10, 2020, eastern Iowa was hit with a derecho. This is the Spanish word for a widespread, long-lived, straight-line windstorm that is associated with a fast-moving group of several thunderstorms. Winds in southwest Cedar Rapids were estimated to be 140 miles per hour with the entire city of 75 square miles sustaining major damage.
The statistics are staggering:
• Cedar Rapids lost 669,000 mature trees, about 70 percent of its urban canopy. The storm left at least 4.5 million cubic yards of debris. Stacked 35 feet tall and wide, it would extend a whopping 24 miles.
• 6,000 homes and properties were damaged. As repairs and reconstruction got underway, the city issued 25,000 building permits in fiscal-year 2021, more than double the number in a typical year.
Scott Olson, Skogman Commercial
• City government buildings suffered $20 million in damage, while the business community reported losses totaling $170 million. About $70 million of that was the result of derecho-related shutdowns or power outages.
• The state cumulatively sustained $11.5 billion in damage, according to the National Oceanic and Atmospheric Administration, which calls the Aug. 10 derecho “the costliest thunderstorm in U.S. history.”
However, as evidenced in the 2008 and 2016 historic floods, plus the response to the COVID-19 pandemic challenges faced by the city and its citizens, the city’s economic growth has been resilient despite responding to a derecho.
Area unemployment is below the national average at 4.48 percent. In the last four fiscal years, 55,280 building permits have been issued with total construction value of $1.46 billion. Approximately 12,000 permits with estimated valuation of $200 million were related to the derecho. The national rankings for the city continue to remain strong, including:
• 13th best city in the U.S. for first-time homebuyers (WalletHub, 2021)
• Top 10 LGBTQ-friendly travel destination in the world due to diversity and inclusion (Million Mile Secrets, 2021)
• Second best rental housing market in the U.S. (WalletHub, 2021)
• Named a “mini megacity” to watch for most up-and-coming U.S. market for commercial construction (Construction Dive, 2020)
• Iowa tied as the No. 1 state to retire in the U.S. (MoneyRates, 2021)
Despite the pandemic and a derecho, Cedar Rapids maintained its Aa.1 bond rating plus had the reserves to fund the costs for recovery while waiting for FEMA and insurance claims to be received. The city jump-started recovery efforts to replant trees in the city right of way and its 97 parks with a ReLeaf Cedar Rapids Program of $1 million per year for the next decade. Plus, the city joined with nonprofit Trees Forever to provide residents with discounted trees for their properties. Over 7,200 trees have been planted with these programs already.
Several major developments need to be highlighted that confirm the city’s ability to grow while recovering from a major disaster. FedEx announced the construction of a 479,000-square-foot warehouse and distribution facility with a capital investment of $108.6 million, which will create 434 full- and part-time jobs. Timpte Industries is constructing an $8 million, 36,000-square-foot light industrial building, which will create 24 new jobs. Rexco Equipment is creating a new 36,000-square-foot, $15.5 million headquarters facility in southwest Cedar Rapids.
Trevero, a subsidiary of Alliant Energy, is nearing completion on a 259,000-square-foot building in the 101-acre Logistics Park to provide companies with warehousing and a place to transfer freight between rail service and trucking. Not to be left out of this logistics explosion, UPS just opened its new 53,800-square-foot cargo facility at the Eastern Iowa Airport. This $18 million project is expected to employ 100 people.
The growth in the distribution industry is followed closely by a series of major mixed-use developments and major housing projects of all types. Ahmann Cos. is converting the former Terex Industries complex to three buildings with 186 apartment units with commercial and first-floor parking space, totaling $32.6 million of capital investment. KC Land Holdings demolished three former Zimmerman Ford buildings on eight acres to invest $17 million to create a Tommy’s Car Wash, Hy-Vee Fresh Market convenience store and a 104-unit, multi-building apartment complex.
Big Ben Development in southwest Cedar Rapids is initiating a 35-acre mixed housing and office/retail development that will be a $40 million project. The Annex Group is building a $29 million, 180-unit affordable housing project with all units at 60 percent of area median income rental rates.
Finally, a major downtown housing project is planned to start late this year by TWG Housing named the Banjo Block next to Green Square Park and the Cedar Rapids Public Library. This $52 million project will feature 211 one- and two-bedroom units, along with a small commercial area, 147 parking stalls and amenities such as a rooftop patio.
I could continue with several other major housing projects that involve apartment units, townhouse units, duplexes and of course single-family housing. The residential activity is near record levels, yet as noted earlier in the national rankings highlight, we were ranked as the No. 34 city in the U.S. with the most affordable housing by LendEdu.com in 2020.
On the medical scene, following its announcement in 2020 for a 237-unit senior living complex on 42 acres in the northeast corner of Cedar Rapids, Mercy Medical Center announced plans for a new $50 million cardiovascular care unit next to Mercy’s main hospital facility in the MedQuarter adjacent to downtown Cedar Rapids.
Retail activity increases
After facing a pandemic over the last 16 months followed by a derecho that caused major business operation disruption, this sector of our market has come back to life due to many available vacant spaces and low interest rates. We continue to see many developments like the former Zimmerman Ford site that create mixed commercial and retail activity with a sizeable apartment or housing component. Construction of new convenience stores is continuing. Plus, activity by new business ventures and owners is growing.
Space on the active market has dropped in December 2020 from 1 million square feet to only 601,000 square feet. One developer removed 16,000 square feet from our listings, but the drop is mainly due to 25 recent leases from 1,000 to 5,000 square feet, plus a few larger leases and building sales.
The average rental rate decreased slightly from $13.35 per square foot to $12.89 per square foot as landlords became more competitive in their efforts to fill vacancies. As across the country, new activity would have been even greater as a shortage of workers hindered new and existing businesses’ expansions.
Office sector in hold pattern
We see offices expanding their onsite operations with small users mostly back in-person. Large corporations are still well below 50 percent capacity as hybrid models are allowed to reduce density in pre-COVID space designs. Many companies are waiting out the impact of vaccines plus reconfiguring spaces to determine the percentage of employees that will remain remote versus onsite. This will surely lead to lessening office space needs in the future.
Overall, office space on the active market has remained steady at 867,285 square feet compared with 871,000 square feet in late 2020. We are seeing some new office construction as companies look to expand or reconfigure utilizing ownership versus leasing due to the historic low interest rates. Rental rates have increased slightly from an average of $11.25 per square foot to $11.52 per square foot due to this new construction.
One project not in my space calculations was the recent sale of the former Transamerica/Aegon Insurance complex in northeast Cedar Rapids to a local developer. Listed at $20 million, it included 560,000 square feet of vacant office space on 50-plus acres of land. Only 146,000 square feet of the space was newer office, so the balance of the buildings are being demolished to create new retail/commercial or housing development. This is definitely a sign of what the future holds for the office market.
Industrial activity unabated
The impact of the pandemic driving e-commerce has been the local driver as highlighted earlier in this article with examples like FedEx, UPS and Travero. Add in the $136 million BAE Aerospace complex nearing completion, and this sector is booming in our metro area. This doesn’t include several existing facility expansions and spec spaces under construction in southwest Cedar Rapids near the Eastern Iowa Airport, with several major announcements on the horizon. This sector is the other shining star in our area economy.
In my August 2020 article for Heartland Real Estate Business, just prior to the derecho, we had 1.8 million square feet on the active market. By the end of 2020, that number had grown to an astonishing 4.1 million square feet.
However, to put this in perspective, 62 percent of that space was speculative space yet to be built. Plus, local developers have optioned all of the available land by the airport so they could compete for future developments in this industrial sector. The active space is now at 3.8 million square feet, but over half has yet to be built. Land prices have remained level as have average asking lease rates at $5.51 per square foot.
The Cedar Rapids area still ranks as the state of Iowa’s largest manufacturing employment area plus the leader in air freight through our airport. All I can say is wow.
Final thoughts
Even with the long-run impact of major real estate trends on U.S. total gross domestic product and economy being minimal, the COVID-19 impact will dramatically change consumer behavioral trends. These trends are national and worldwide, thus will definitely impact our local real estate market.
The good news is that Iowa, and more specifically the Cedar Rapids metro area, has a strong economic financial base to survive the 2020 historic year plus what will continue to occur in 2021. The city has faced a devastating 2008 flood, a 2016 flood and now a derecho during a pandemic. I am confident we will show resilience and growth during this time of crisis and reinforce why we were selected as an “All-America” city in 2014 by the National Civic League.
Scott Olson is a broker with Skogman Commercial. This article originally appeared in the August 2021 issue of Heartland Real Estate Business magazine.