Commercial Real Estate event: Market strong, but ‘bumps in road’

The Quad Cities commercial real estate market is strong, but there are some “bumps in the road” in the coming months. That was one of the main messages delivered during the Commercial Real Estate Symposium, presented by the Quad Cities Regional Business Journal, on Thursday afternoon, Nov. 2, at the Quad Cities Waterfront Convention Center […]

The Quad Cities commercial real estate market is strong, but there are some “bumps in the road” in the coming months. That was one of the main messages delivered during the Commercial Real Estate Symposium, presented by the Quad Cities Regional Business Journal, on Thursday afternoon, Nov. 2, at the Quad Cities Waterfront Convention Center in Bettendorf. The second annual QCBJ event, which attracted about 200 people from the business community including real estate, construction and banking leaders, outlined some trends, challenges and predictions in the local commercial real estate sector.

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“The market is good. But we have some challenges ahead. There will be some bumps in the road to get back to where we were,” Thad DenHartog, managing broker and principal at Mel Foster Commercial Real Estate Services, told the QCBJ after his keynote address. Mr. DenHartog gave a market overview of the Quad Cities commercial real estate market.  During his presentation that included a mixture of optimism and pessimism, he highlighted some of the major factors impacting the commercial market. Those include interest rates going up – the prime rate has gone from 6.25% in October of 2022 to 8.5% this October. Other factors include: values are contracting, cash flow growth is below average, tax assessed values have increased, insurance rates are on the rise, and total commercial real estate sales volume down 18%. Even with these “bumps in the roads,” Mr. DenHartog added that the regional commercial real estate market has many strengths and the local market remains resilient. During a question-and-answer session, he fielded a question about the impact of the partial collapse of the apartment building in downtown Davenport in May. With that incident in mind, will it impact commercial real estate projects in the region?  Mr. DenHartog’s answer was: “To be determined.” He added investors who were looking at older apartment buildings could now be reconsidering their investments in such projects and there might be a decrease in demand for older apartment buildings. Another question focused on Iowa vs. Illinois when it comes to commercial real estate. Mr. DenHartog said 25 years ago, he equally split his time between the two states on real estate projects. That has changed. Today, about 70% of his time is spent on Iowa projects. “Whether it is true or not, it is perceived that Iowa is a better place to do business. I don’t agree with that, but Illinois is also a great place to do business,” he said. The QCBJ event was presented by these sponsors: Mel Foster Co. Commercial Real Estate Services; Valley Construction/Valley Commercial; Russell; American Bank & Trust; and GreenState Credit Union. In his overview, some of the real estate sectors that Mr. DenHartog focused on included:

• Retail: The vacancy rates are 8% in the Iowa QC and 10% in Illinois. The market rates in the region are $19.50 to $30 per square foot for new construction in Iowa, and $18 to $23 per square foot for newer construction in Illinois. The retail trends  include smaller bay sizes and depth; restaurant turnovers continue; and existing lease rates increasing at lease renewal.
• Industrial:  Mr. DenHartog said “this is still the darling of the industry” with a vacancy rate of 6% and 118 active listings in the area. The Iowa industrial sales are $16 to $102 per square foot (PSF). The Illinois market sales are $18 to $40 PSF, and the Illinois market rents are $2.75 to $4.25 PSF.
• Office space:  Vacancy rates are 13% in Iowa QC, and 21% in Illinois. The trends include: employers are bringing employees back to the office, but at a slower pace than expected. There is a “flight to quality or newer space,” according to information provided by Mr. DenHartog.
• Multi-family units:  Mr. DenHartog also briefly addressed multi-family real projects. There are 29 active sales listings in the area. He pointed out that some of the notable sales this year have included: a 44-unit property at 1902 E 38th St., Davenport, for $3.7 million; a 162-unit property at 3700 Fifth St., Rock Island, for $14.5 million; and a 25-unit property at 2615-2649 Pine St., Davenport, for $1.975 million.

In addition to Mr. DenHartog’s report, Thursday's event included a question-and-answer panel discussion hosted by Paul Rumler, CEO/executive vice president of CCIM Institute. The panel included: Mike Whalen, president and CEO of Heart of America Group;  Caitlin Russell, president of Russell;  Kevin Koellner, manager of Focus Real Estate Development; and Dan Huber, co-owner and CEO of Frontier Hospitality Group. The panel members also presented a mixed bag of gloom – usually focused on interest rates, government regulations, inflation and problems finding workers – and optimism for the future. Most members of the panel said they were fairly optimistic about the future of commercial real estate in the region. Mr. Whalen called the private business sector “robust and strong” even though it has faced some tough challenges from inflation, and has been hurt by what he called poor decisions and policies from the Federal Reserve.  He also praised community banks in the region for being great partners in many projects. One of the challenges that continue to hamper the commercial real estate market is the labor shortage. Panel members said that particular issue does not show signs of improving in the near future. Mr. Koellner told the audience he knows people in the business community who want to expand their businesses to second and third locations, but can’t because they can’t find employees to staff the expansions. Inflation is another big challenge for the region. Mr. Huber said construction costs on hotel projects went up about 30% in three years. But one panel member offered some hope for inflation. Ms. Russell said she believes those construction costs will start to go down next year. Even with those challenges, businesses continue to make a great comeback. For instance, Mr. Huber told the audience to take a look at the hotel industry. “It was annihilated by COVID. … But, we’re seeing a nice rebound,” he said. Mr. Huber’s Frontier Hospitality is building a new hotel at the former Jumer’s Castle Lodge site and has plans for a second hotel at the TBK Bank Sports Complex in Bettendorf.  Mr. Whalen said 2020 was so terrible for the hotel industry that he prefers to forget that year ever happened. But he has also seen a business rebound. In fact, 2022 “was our best year,” even beating pre-COVID business numbers.” “We are optimistic (about the future), but cautiously so,” Mr. Huber added.