2011 Iowa City Real Estate Recap

The leasing demand in the Iowa City Area has remained modest, yet active since the flood and financial meltdown in 2008 with some qualifications. Larger corporate expansions or relocations have often been put on hold pending perceived stability in the market. Smaller startup, expansion and relocations have been moving ahead albeit at a somewhat tepid pace.

Downtown Iowa City
This sector is the strongest market enjoying proximity to student population and few vacancies. Retail lease rates range from $15 to $25 NNN. The SSMID ( self-supported municipal improvement district) is a contested initiative that would introduce a new tax on downtown businesses, but would provide coordination of downtown development efforts.

Retail Strip
Retail strip space in Iowa City and Coralville is filling slowly but steadily at rates ranging from $12 to $21 NNN. High traffic areas fill first with moderate owner paid concessions. There are several new strip centers in North Liberty Iowa that are filling ahead of standard area absorption rates.

Office space
Second generation office space is at a premium and are filling well. Smaller offices such as 1500 – 2500 foot offices that are built out and serviceable are leasing before first generation office space. An encouraging sign is there are now larger office users (10,000 sq ft) looking for sites in the marketplace.

Investments
From 2008 through much of 2010 the real estate investment market was pretty much dead. The buyer confidence in future value and profitability of income producing real estate was very low, so only those who had to buy were investing. Thankfully for the real estate industry and for the economy, investment sales have returned. There are many investors now actively looking for suitable investments.
In 2007 capitalization rates (CAP rate) were in the 6.5%-7.5% range for commercial properties and lower for residential income properties. Cautious investors have caused this rate to rise and it seems there is market equilibrium at the 7.5% – 9.0% range for commercial properties and slightly lower for residential income properties. CAP rates in the downtown district are less than the general market due to the economic attractiveness and seeming stability of that sector.

Land
Commercial land sales seem to be a leading indicator of market recovery, or at least market confidence and stability. There were few significant land sales after 2008 until 2011. In 2011 there have been several significant land sales in both Coralville and North Liberty indicating both a buyer’s confidence in developing commercial real estate and a lender’s willingness to reenter the commercial banking market. Many of these projects were leased prior to land acquisition, or were user transactions instead of speculative purchases, but it is a welcome trend.

Banking
Commercial lending continues to be a restriction on commercial development, business expansion and business startup. Real estate is always local, but banking is a national phenomenon. Federal regulations implemented to safeguard the public were enacted for the most affected areas of the economy such as Florida, Las Vegas and Phoenix. The Iowa City area is not a blighted area, but must follow the same banking regulations as areas that are. The effect is that higher down payments, shorter terms and higher debt reduction ratios are required than in past years thus restricting business growth. Lending rates, however for low risk borrowers are in the 4.25% to 4.75% range.

Prediction for 2012
Banking will remain a bottleneck for commercial development into 2012, but investment markets will continue to grow and commercial leasing will expand. Growth will be steady as buyer and business owner confidence continues to return.