Incentives, interest rates top concerns for commercial real estate industry

The commercial real estate industry is facing challenges from rising interest rates, making incentives for attracting economic development projects all the more crucial, according to industry experts at the CBJ’s Commercial Real Estate Symposium on Tuesday, March 5. About 350 people packed a conference room at The Hotel at Kirkwood Center to hear keynote speaker Adam Bruns, editor-in-chief of Site Selection Magazine, and several panelists weigh in on current trends and solutions in the real estate industry. Key topics from the symposium included:

• National and regional rankings in economic development and logistics projects
• Workforce, infrastructure and sustainability in site selection
• Real estate market trends and investment opportunities
• Economic development strategies for Midwestern regions
• Commercial real estate development and investment in Iowa and the Corridor

Panelists included Joe Ahmann, president of Ahmann Companies; Kelly Hayworth, city administrator for the city of Coralville; Matt Mulligan, president and COO of Conlon Construction; Jon Westercamp, state certified general appraiser with Appraisal Associates Company; and Tiffany Earl Williams, real estate broker with Skogman Companies. James Klein, president of Cedar Rapids Bank & Trust, moderated the panel.

Tax policies, workforce top contenders for site selection

In surveying national and global site selection consultants, Mr. Bruns found that workforce was the number one concern of site developers, followed by tax policies, incentives and quality of life.

“If a company invests in your community, take credit for it…you deserve it,” said Mr. Bruns. Site Selection uses Conway Projects data, a global database of corporate facility expansion projects, to look at projects that meet one of three criteria, which is construction. “We're after projects that are at least a million dollars invested, at least 20 new jobs created, or at least 20,000 new square feet of space,” said Mr. Bruns. “It does not count speculative, public sector infrastructure or education or health care.” Among the top contenders for projects was Texas, with 1,254 projects from 2022-2023; and South Dakota, which took first place for projects per capita with 40. Cities with strong industries included Auburn-Opelika, Alabama, with a strong automotive profile, and Hinesville, Georgia, which has a die metal plant. The best manufacturing workforce states included Texas, Indiana, South Carolina, North Carolina and Georgia. In Corridor news, Cedar Rapids recently announced a $576 million agreement for a data center project on the city’s southwest side near the intersection of 76th Avenue and Edgewood Road SW. According to Mr. Bruns, the most important location factors include:

• State and local tax policy
• Quality of life
• Incentives
• Workforce

Labor shortages, affordable housing and childcare were some of the biggest workforce challenges facing companies, according to the data collected.

Appraisal values vs. cost

Mr. Westercamp said development costs are still increasing, making the need for incentives such as TIF all the more crucial to increase the feasibility of such projects, bridging necessary gaps.

“Developers need the economic incentives to make the projects work, otherwise they just can't afford it,” he said. Mr. Ahmann said he’s seen interest rates jump anywhere from 2.75% to 7.75% on infrastructure loans in a short time span. “That’s real life,” he said, noting that low rates aren’t a given, and the company has implemented stress tests on past long-term projects. Development costs affect deal negotiation with tenants, both with rental and maintenance costs. “It's just very challenging. You have to be very creative,” he said. Skogman Companies has adjusted to these cost rate challenges by investing more equity into deals to obtain their yield mark. “It’s what makes the debt service coverage ratio pencil out for the lender,” said Ms. Earl Williams, who said she has seen a decrease in competition both regionally and nationally because there are less investors capable or willing to invest a lot of equity on a deal to get to their yield mark. The hope is that rates decrease, enabling real estate brokers to capitalize on the downward momentum. “The benefit is, now we are seeing adjustment in price because the more time that goes by, sellers either have a pressure of a refinance,” said Ms. Earl Williams. “Or there's less buyers in the market, and the inventory builds up, that is finally having an impact on price. So what we're seeing is some very good deals for high quality assets that are right down the center of our lane.” Low bids are “dying a slow death,” said Mr. Mulligan, who echoed Ms. Earl Williams’ opinion that more cash upfront will help reach yield marks.

Incentives

The panelists all agreed that incentives for development projects should be a given, with the scope of competition that makes some markets more attractive than others. The question was, what kind of incentives and how much? “If you have something that you're very specifically interested in seeing redeveloped, it is going to take incentives, and it's probably going to take more than it ever has in the past,” said Mr. Hayworth, who touched on the years of persistence involved in convincing Trader Joe’s to set up shop in Coralville. “If you don't provide the incentive, the project won't happen and the benefit to the community outweighs the upfront cost,” said Ms. Earl Williams. “Provide an incentive that attracts a project that generates a future tax. Revenue is stability for our city, our community. And it also brings jobs, typically.” The type of proposed project makes a difference in what kind of incentives are offered, said Mr. Ahamnn, pointing out that redevelopment projects are much more costly and complicated. TIF is not necessarily “a magic ATM machine,” he said, noting that the misconception is that the finished development project will create a tax base that justifies the TIF incentive. “TIF doesn't mean you pay your taxes and you get 100% of it back – you get 100% of whatever is in the TIF grant, or the district, or whatever is held back.” The Commercial Real Estate Symposium was sponsored by Cedar Rapids Bank & Trust, Skogman Companies, University of Northern Iowa, Conlon Construction, GreenState Credit Union and Cushman & Wakefield.