116 3rd St SE
Cedar Rapids, Iowa 52401
Cedar Rapids metro’s office market challenges persist in 2023, report says
GLD: Industrial activity leveling off, multifamily demand remains high
CEDAR RAPIDS — The widespread adoption of remote work prompted by COVID-19 persists in the Cedar Rapids metro and continues to disrupt the office market, while industrial activity levels off and multifamily development still sees high demand, according to a commercial real estate report released today.
“Cedar Rapids continues to be a great market to do commercial real estate in, and although we're working through some challenges — in the office market specifically — we'll get there,” said Angie Glick-Martin, principal of GLD.
The third annual report from GLD Commercial was compiled using data from the Cedar Rapids Association of Realtors and the Cedar Rapids and Linn County assessors. The full report is available at gldcommercial.com.
The report tracks 2023 occupancy and rents for the city’s central business office district, suburban offices, the industrial market, retail and service properties, and multifamily and mixed-used facilities.
Industrial demand leveling off
A pandemic-induced e-commerce boom, as well as company facility upgrades to maximize efficiency amid labor shortages, fueled 2022 activity, but was expected to level off in 2023.
That turned out to be the case as demand stabilized with less new construction. The vacancy rate of the 13.2 million square feet of industrial space available rose slightly from 1.2 percent to 1.25 percent as new construction options came online.
The city of Cedar Rapids in recent years has awarded financial incentives to build massive industrial facilities in the southwest quadrant. Kitchen appliance company SubZero’s $140.6 million light manufacturing building is underway, while FedEx’s new $108.6 million distribution center and BAE Systems’ $139 million classified defense aerospace facility that employs 800 are operational.
The industrial category encompasses existing and in-progress warehouse, flex, commercial and small shop properties, but not owner-occupied, special-purpose manufacturing sites.
“We had such a long period of rapid growth that I think the supply and demand is coming into balance,” Glick-Martin said.
Companies can better predict what they need for inventory than when COVID-19 first hit, she said. Plus, economic conditions such as GDP growth and low unemployment rates drive consumer spending, which influences industrial demand. Declining industrial tenant demand and less new construction will allow the vacancy rate to stabilize in 2024, according to the report.
Among the 2024 activity is Brown NationaLease’s new 11,000-square-foot truck and trailer leasing facility on 76th Avenue SW, a $4 million investment, and Lil’ Drug Store’s expansion at 9300 Earhart Lane SW with a 45,000-square-foot addition to its existing 105,000-square-foot facility.
Downtown office vacancies persist
Many downtown office spaces have been transformed into housing, but remote work continues to impact office vacancy rates.
The approximately 3.4 million square feet of office space in the Central Business District ended 2023 with a vacancy rate of 15.53 percent — up from 14.03 percent at the beginning of 2023.
More conversion of office space into other uses is on the horizon, likely for multifamily, educational and medical uses.
The Cedar Rapids Metro Economic Alliance office repurposed its first floor as City View magnet high school.
The urban core lost electric transmission company ITC Midwest — which is relocating its headquarters from a leased space downtown to a purchased facility at 3165 Edgewood Parkway SW — as well as the branch banking services of U.S. Bank.
But the downtown is seeing an expansion of Cedar Rapids Bank & Trust, and the former Gazette building is being transformed into a new space for law firm Shuttleworth & Ingersoll.
The former Guaranty Bank block will see about 100 market-rate apartments and a 10,000-square-foot fitness facility come online after local developer Steve Emerson purchased the property.
Emerson also is planning to convert the former Principal office building into multifamily housing. That would add to his portfolio of recent downtown office conversions into multifamily units that includes:
- 40 units in the upper floors of the Iowa Building, 211 Fourth Ave. SE (still underway).
- 40 units in the former Skogman real estate office at 411 First Ave. SE.
- 24 units at the Dows Building, 200 Second St. SE.
Without investors or property owners repurposing buildings downtown to residential, the vacancy rate would be substantially higher, Glick-Martin said. She was unsure what an ideal mix of uses would be but said a limit for residential demand may be approaching.
“We're going to have to pivot directions at some point here. Especially with us continuing to do residential projects downtown, I'm not sure that there's going to continue to be a need for more housing units,” Glick-Martin said. “ … We're going to need some more services like the grocery stores and the retail services that we’re not seeing right now.”
Medical services expand in suburban areas
Suburban office space saw more vacancies than the Central Business District in 2023 without reuse projects to buoy the rate.
The approximately 5.7 million square feet of suburban office space in the Cedar Rapids metro saw the vacancy rate climb to 20.32 percent in 2023 from 17.57 percent the year before.
Over the next year, emergency medical, dental and therapeutic services will expand in the suburban areas. Particularly after the pandemic, more therapists are coming to the market and trying to address mental health issues, Glick-Martin said.
For example, a medical user has leased 14,540 square feet for a medical office at 3900 Fountains Blvd. NE, No. 202. The former Collins Community Credit Union space at 1755 First Ave. SE was sold to be demolished and become the site of a new 4,000-square-foot dental office — a $2.39 million investment.
In Marion, UnityPoint Health-St. Luke’s has leased a 10,000-square-foot space at 3301 Armar Dr. for emergency care and Mercy Medical Center is building an emergency care facility at 999 35th Street.
“Several metro headquarters have listed excess space for lease while others began calling workers back to the office, at least part-time,” according to the report. “Suburban office space continues to be in a period of transition following the pandemic, which catapulted many companies into a fully remote-work environment.”
Westdale, First & First, fuel retail activity
Big Grove Brewery and Pickle Palace opening in the heart of the city at First Street and First Avenue West, as well as the race to finish the Westdale redevelopment in southwest Cedar Rapids, drove retail/service activity last year.
While retail strip center demand is strong, the appetite for big box retail remains diminished, leaving larger vacancies in the Lindale Mall area.
Cedar Rapids’ retail/service market, made up of about 9.3 million square feet, saw a small increase in vacancies from 6.03 percent to 7.60 percent in 2023, according to the report.
Frew Development Group for the past 10 years has worked to transform Westdale Mall into a mixed-use development with housing, hotels, retail and restaurants.
With that, several retail strip centers there are leased to full capacity. There’s a new Boulder Tap House and Take 5 Oil Change in the Westdale area. JCPenney signed a lease extension on its 68,432-square-foot space through October 2029, and Michaels signed a long-term lease for 16,000 square feet, opening in mid-2024.
Meanwhile, the Lindale area has vacancies to fill with the closures of Bed Bath & Beyond, Tuesday Morning and David’s Bridal.
When national retailers look at a tertiary market like Cedar Rapids, Glick-Martin said, they want to be located near other retailers. Glick-Martin said to expect more activity in the Lindale area, given that the Kohan Retail Investment Group bought the 732,666-square-foot mall for $28.5 million last March.
Sears, built as one of Lindale’s anchors, recently sold to Dallas-based Reserve Development, but its future use has not been disclosed.
“Although it's kind of been stagnant for a little bit, I think we're starting to see some movement there and hopefully the new owners of the property will bring some new things to light,” Glick-Martin said.
Housing demand still with us
Low housing stock and high interest rates challenge prospective homebuyers, meaning interest remained high in multifamily and mixed-use investment in 2023 because renting remains the most economical option for many, according to the report.
Of the 11 multifamily buildings sold in the metro area in 2023, not including mixed-use properties, 10 were built between 1965 and 1978.
“What we’re starting to see more of is a lot of the tenants that are in these older properties are starting to transition into these newer buildings that have a lot of amenities in them,” Glick-Martin said. “The reality is these older multifamily buildings are a lot more labor-intensive, so we’re starting to see some of those owners sell those properties off or having to change their rental strategy a bit to keep them occupied.”
The average vacancy rate for the buildings that sold ranged from 3 percent to 5 percent, which Glick-Martin said is typical for the market. The low vacancy rate and steady growth in rents should continue to interest investors in multifamily housing in 2024.
Multifamily projects — particularly integrated into mixed-use properties — continue with about 900 units nearing completion, under construction or proposed for 2024.
In addition to the Guaranty Bank block redevelopment, LTRI, the development team led by Chad Pelley, broke ground last year on a mixed-use project from 1218 to 1310 Third St. SE that will add 34 market-rate rental units. Local developer Darryl High's Vesnice project will add more than 80 units across two buildings on city-owned property at 116 16th Ave. SE.
Comments: (319) 398-8494; marissa.payne@thegazette.com
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