Hope and change
After a tumultuous year, CR’s commercial real estate industry is cautiously optimistic about 2021
By Richard Pratt
Tiffany Earl Williams was all set to provide an overview of the Cedar Rapids area’s commercial real estate market and potential market trends going into the new year, when she was forced to postpone.
Though the CBJ eventually caught up with her, Ms. Williams has been pretty busy lately.
“I had five closings last week and three this week. That’s why I couldn’t take your call,” said Ms. Williams, a commercial Realtor with Skogman Realty. “The phone’s been ringing since 8:30 this morning.”
It’s a familiar refrain. Despite the imposing challenges presented by the COVID-19 pandemic, an April hailstorm, the August derecho and a heated election cycle, local agents and developers say they’ve seen strong commercial real estate activity in 2020 – and they’re overwhelmingly optimistic about the prospects for 2021.
The consensus: Strong activity in the industrial and warehouse sector in 2020 will continue through the new year; commercial and retail activity may be poised for a comeback after a year of stagnation; and employees gradually returning to the workplace will fuel a resurgence in office development.
In general, the commercial real estate market in Cedar Rapids is as strong as any area in the Midwest or around the country, said Scott Olson, a Realtor and developer with Skogman Commercial.
“Our commercial market is active,” Mr. Olson said, “but certain segments are going to change dramatically in the future, if they haven’t already.”
Adam Gibbs, vice president of GLD Commercial and a member of the Society of Industrial and Office Realtors, agreed.
“In spite of everything that’s occurred in 2020 … we’ve had a surprisingly robust year from an activity standpoint,” Mr. Gibbs said, adding that despite some hiccups, GLD ended the year close to a record for transaction volume. “If that’s a gauge of the local real estate market, I would say that’s pretty healthy.”
That was also the case for Ms. Williams, whose team at Skogman set a record for brokerage volume in 2020, besting the team’s previous record from 2019.
“I really haven’t seen a lull, honestly,” she said.
Joe Ahmann, owner and president of the Ahmann Companies in Cedar Rapids, also said he saw strong performance in the industrial and warehouse sectors. But he acknowledged 2020 was beset with a host of challenges in other areas.
“It’s been obviously a roller-coaster ride through the year,” Mr. Ahmann said. “One thing you never plan for is what if everything falls off the face of the earth at one time? That’s how I characterized COVID for the real estate world, specifically commercial … What if there’s an event that affects, if not all your tenants, at least 95% of them in a couple day to a week period, saying ‘We need to talk because we’ve got a problem.’ Who can plan for that? Nobody.”
Industrial stands strong
With a couple of major industrial developments leading the way – BAE Systems’ 278,000-square-foot aerospace defense facility in southwest Cedar Rapids and Travero’s 259,000-square-foot transportation and warehouse facility in Fairfax, both under construction and set for completion in 2021 – there’s been virtually unchecked expansion in the industrial and warehouse development sector in the past year.
Jim Angstman, a commercial Realtor with Coldwell Banker Hedges, said that an already strong year for industrial and warehouse growth, fueled largely by the pandemic, became even stronger after the derecho. That led to high demand and low inventory for available space, particularly warehouse spaces with larger overhead doors and a small office.
“All of us in this industry got a lot of phone calls immediately after (the derecho) from people from out of town, out of state, that were looking for small to medium sized spaces to lease, probably for a year or more,” Mr. Angstman noted. “So that took a lot of the available second– and third–generation type space.”
Mr. Olson has seen more vacant land being purchased for industrial development over the past two or three years than in a decade, with major growth in and around Fairfax, The Eastern Iowa Airport, and in Hiawatha and Marion.
Industrial firms have greater distribution needs than before, Mr. Olson said, and many are expanding or moving to newer buildings as older industrial spaces, with low-bay doors and narrow interior column spacing grow obsolete.
Newer industrial building designs feature high-bay doors with 25-30–foot ceiling heights to accommodate more racking and broader column spacing for forklift maneuverability in an era of high technology and quick-demand ecommerce.
Most industrial spaces still on the market are in older buildings not near Interstate 380 or Highway 30, Mr. Olson said. Those buildings will be harder to lease because of difficult access for trucks, so older companies and startups will be using those spaces: “They’ll want to find a landlord that has 20,000 square feet but is willing to start them at 5,000 in hopes they can grow into the full 20,000.”
Overall, the retail sector has been very soft, Mr. Angstman said, with many on hold at the end of 2020, waiting to see who would make it through the Christmas season.
As an example, he pointed to the planned Raising Cane’s restaurant at the former Ryan’s Steakhouse location on Collins Road NE, which decided to delay development until spring 2021.
“I don’t blame them,” he said. “I’m waiting too, looking for things to get better. We all are.”
Mr. Ahmann is seeing some light at the end of the retail tunnel. In the last quarter of 2020, some spaces went vacant, but a surge of leases have been signed to backfill spaces in several retail developments. Among them: Vivian’s Soul Food, Limitless Male and an as-yet-unnamed Mexican restaurant at The Fountains; Re/Max Concepts at the Edgewood Town Centre, near Fleet Farm; and the Breakfast Bar by Saucy and the Paradise Indian Grill (relocating from The Fountains) at Peck’s Landing, all in northeast Cedar Rapids. The moves should help create more retail activity in the area, he said.
“I wasn’t expecting it,” he admitted, “but it was good.”
Ms. Williams, too, is noting an upturn in retail activity. She said she had some larger retail listings that became pending transactions in November.
“You wouldn’t think that would be the case,” she said, “but for a company that is capable of doing something right now, this is a good time … to expand because it’s a little bit of a down time. And when things go back to normal, they will be set up and ready to take advantage.”
Mr. Olson termed the retail market “tough, tough and tougher” throughout 2020. He’s seeing many retail spaces being occupied by physical therapists, advisers, fitness centers, and the like – “not what I would call true retail.” And while many locations have come on the market, there’s been a lack of interest from potential tenants to fill them, with a number of those still open likely receiving special rent packages from their landlords.
Even so, Mr. Olson expects a 2021 retail surge, mainly in areas such as car washes, convenience stores and dollar stores, plus smaller locations for traditional big-box retailers like Hy-Vee and Target.
A nebulous office future
The fate of office real estate is proving difficult to predict. As the pandemic pushed major employment sectors to work from home, the volume of vacant office space climbed dramatically. The question is, how many people now working from home will return full-time to traditional offices or begin working under a hybrid model?
Mr. Angstman said some expect vacant office space to increase 15-18% post-COVID. “I don’t know exactly what that says for Cedar Rapids,” he said, “other than that there was a fairly large office vacancy prior to COVID.”
He said some employers report they’ve been able to maintain productivity even with most staff working from home, while others are saying that they wouldn’t want to maintain a full WFH model long-term. He also pointed out that many office tenants may seek out smaller spaces in the future, pushing larger spaces onto the market.
“I think once we get the vaccine and people calm down a little bit, you’ll see some people go back to work in their offices,” he said, “and some that will say, I didn’t really need this big office and I’m probably going to be looking for a smaller office and looking for a sublease or a subtenant of some sort.”
Mr. Gibbs pointed out that many workplaces will have to embrace a more flexible scheduling model, but that employees will still need a seat when they do come in. Some jobs, like call center workers, will lend themselves more easily to a full WFH future, while others, such as law firms, may need to be in the office to maximize productivity.
“They’ll actually need more space to address social distancing and have people feel comfortable that they have an adequate amount of workspace, to not feel that they’re overlapping with someone else,” he said.
Mr. Ahmann said he feels working from home has lessened workers’ efficiency, in some cases. Phone calls and Zoom meetings, he said, simply can’t replicate the experience of meeting and collaborating in person.
“It loses something in translation,” he said. Furthermore, “We’re missing the social aspect. People are feeling bottled up … I think there are a lot of people out there that are depressed and don’t know it.”
Ms. Williams agreed that the WFH model won’t work for everyone in the long term: “There’s value in the office setting, being able to collaborate with peers and clients in an office environment.”
Mr. Olson noted that a lot of companies don’t yet know how many people will return to the office when the pandemic subsides – or how many will want to. Office space trends had been moving to cubicle-based models, reducing the average space allocated to each employee; returning employees and managers will now require more per-worker square footage due to new social distancing standards.
As a whole, he said, a lot of larger employers will be using less space.
“Companies will be making decisions on how many people they’ll allow to come back versus working from home,” he said. “But there will be a lot of people who are going to refuse to come back.”
The struggle continues for service
Of all the sectors impacted by the trends of 2020, none has been hit harder than the service industry, including bars and restaurants.
According to a report from the National Restaurant Association in early December, more than 110,000 restaurants have either been closed or shut down long-term, and many are not expected to reopen. And as Mr. Olson pointed out, if foot traffic remains low in downtown Cedar Rapids, which once teemed with workers, the future may remain challenging.
“The shame is just watching all these small businesses fall by the wayside, all these restaurants and theaters around the country – and they won’t be coming back,” he said. “Some are closed forever in New York City, places like that. It’s scary in some of those segments.”
Iowa establishments may be better off, Mr. Angstman said, although not necessarily breaking even. Some have focused on takeout to stay afloat, while others implemented outdoor dining and social distancing accommodations.
“In 2021, there will be some restaurants that will be going under, and they’re going to be looking for someone to take over a lease for them, or out and out going to close their doors,” Mr. Olson said. “And that’s sad, definitely.”
Ms. Williams said she hasn’t seen many closings yet, but “I’m sure it’s been very difficult to be profitable and survive.” She said she’s hoping things get back to a normal state quickly enough to keep those businesses around.
“I’ve seen that other Midwestern communities have done things to help those sectors,” she said. “We hopefully don’t have to wait for restaurants to close (to offer that assistance).”
“Iowa has been more liberal in allowing people into bars and restaurants,” Mr. Angstman added, “whereas other states have been completely locked down. But I don’t think we’ve seen the tip of the iceberg, as far as how badly some of them have been hurt.”
Iowa is nothing if not resilient, those interviewed for this story agree. And in many cases, challenging circumstances like those presented in 2020 can open new horizons.
“There are a lot of unknowns,” Ms. Williams affirmed. “But generally, I anticipate it to be a little bit like the tragedy of the flood, where we go through something very traumatic when it comes to the derecho and end up being stronger for it in the end. We’re a resilient community, and you’ll see a lot of investments and a lot of pride of ownership and a lot of opportunities for redevelopment when appropriate.”
Mr. Olson pointed out another new trend – tenants looking to buy properties rather than leasing them. He said he’s encouraging companies now offering properties for lease to include a sale option. He said he’s seen prospects double when that option is offered.
“Seventy-five to 90% of all calls on some properties are to buy, not lease,” he said, pointing to one 6,000-square-foot property recently put on the market that had four tours and three offers within 24 hours – all offering to buy the property outright.
As Mr. Ahmann looked back at the year just completed, he recalled having conversations with tenants back in April to discuss possible options – and focusing on plans that would work across the board.
“For all this to work, we have to have something that will work for all three legs of the stool — not only for the tenant and not just for us, but also for (the lender). And if one of those legs fail, then we’ve got a three-legged stool that’s falling over.
“Good and bad can come out of everything,” he added, “and hopefully there’s more good here. Some threw in the towel early, and I get it, but in the long run, being proactive and reaching out hopefully shows all our tenants that we’re trying as hard as you are to make this work.”
Mr. Gibbs stressed that the repercussions of 2020 will take time to unfold, particularly on the work from home front.
“The wheels turn slowly in our business, with longer sales cycles, and workplace trends happen slowly over time because they’re expensive to implement,” he said. “Knocking down walls and replacing them with cubicles sounds great to some companies who did it 10 years ago, just like building private offices and reducing cubes is probably going to be the desire of a lot of companies here after COVID. But how economically and financially feasible is that for people to either retool their existing space or relocate in order to do that? Those things just take time. They don’t happen overnight.
“It’s going to be a few years before we’ll be able to look back at what the change in the workplace is and has been, at least from a facility standpoint, because of COVID.”
Ms. Williams pointed out to a recent Business Insider survey ranking Cedar Rapids 10th among the best Midwest cities to move to after the pandemic, and Mr. Olson referenced a survey from SmartAsset that ranked Cedar Rapids the second most recession-resistant city in the U.S. for 2020.
Due to a variety of factors – a strong workforce, the diversity of the Cedar Rapids economy, and property values remaining relatively stable — “most companies in this market aren’t super vulnerable,” Ms. Williams noted.
And while the derecho was a tragedy that resulted in substantial property damage, it also drove a lot of construction and filled hotel rooms, vacant warehouses and shop spaces with workers coming to repair the damage. “Those transient workers were probably patronizing businesses struggling the most, so that’s kind of a blessing in disguise,” she said.
Overall, real estate insiders say the course appears set for substantial development in nearly all sectors of Cedar Rapids’ commercial real estate market for 2021.
“Cedar Rapids is still open for business,” Ms. Williams concluded. “That’s for sure.”