Westdale Mall Market Analysis AECOM Economics October 2013
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Westdale Mall Market Analysis AECOM Economics October 2013 Executive Summary Beginning in February of 2013, AECOM Economics (formerly ERA) • Retail sales in Cedar Rapids have been recovering at rates equal was engaged by Frew Development to assess real estate market to or above state averages since 2010, which is significant, given a conditions in the Cedar Rapids Metropolitan Area (MSA), focused on slower pace of job growth locally. the Westdale Mall. Our analysis includes study of broader economic • Two competitive retail projects were identified; The Fountains, as metrics for the Cedar Rapids area, as well as study of retail, office, well as a proposal to expand the Lindale Mall. The Fountains has hotel, residential and senior housing markets. The effort also builds secured City incentives and appears ready to move forward. from a prior 2007 market study for Westdale Mall completed by ERA at the request of the City of Cedar Rapids. The 2007 effort included a • Rents paid by national chains appear to be approaching $15 / demographic assessment of Cedar Rapids, identification of target square foot NNN, with a small number of centers at $20 / SF. markets that would be supportive of mall revitalization, and case • The US retail industry is still recovery mode, and retailers are just studies of shopping center projects and mixed use communities. beginning to focus on new (albeit generally smaller stores), even as Having completed the analysis, our core findings include: the internet continues to alter many retailer business plans. Economic and Demographic Context • The analysis showed that the SW side appears under served in apparel, shoes, jewelry, & accessories, electronics, miscellaneous, • Cedar Rapids MSA employment growth compare favorably with book stores, and food & beverage. statewide benchmarks, and unemployment rates are enviably below Midwestern peers. • Between 1990 and 2009, the Cedar Rapids region added about 250,000 SF of retail space per year, linked with big box stores. • Although the recession did not hit Cedar Rapids with the same Presuming that the market can sustain population growth of 0.9% intensity, the region’s pace of job recovery since 2010 is lagging and income growth of 3.5%, average annual growth in retail space compared to other Iowa metros. Returning to pre-recession growth of about 140,000 SF per year is anticipated. However, for the short- rates would suggest an increase to 1,900 new jobs/year, versus the term, it is not clear that sufficient national chain tenants exist to meet current pace of about 900-1,000 jobs/year. this demand. • The expectation is for the Cedar Rapids market to return to historic • From a tenanting standpoint, health care tenants are seen as more form, i.e. steady growth, anchored by manufacturing and health likely in the future. care. Evolving economic linkage between Iowa City and Cedar Rapids broadens trade area potentials for Westdale. Prognosis: For the defined trade areas around Westdale, the analysis identified incremental potential spending support between 2013 and Retail Market 2017 for up to about 260,000 square feet of retail space tied to defined • Estimated “competitive” retail vacancy for the SW side is about 3%, primary and secondary markets. Reflecting a conservative approach, compared to national retail vacancy over 12% (Q4 2012 CBRE). the analysis did not expressly presume capture from tertiary markets across Cedar Rapids or Iowa City. With the proper tenant mix, • Cedar Rapids MSA pull factors are modestly positive, suggesting competition for regional lifestyle oriented retail and entertainment that existing retail offerings largely serve local residents. should be an expectation. • The Lindale Mall area supports a majority of regional retail space, albeit with a preponderance of older (>15-year old) retail buildings, with limited sites available for new larger scale retail projects. Page 2 Executive Summary Hotel Market a small share of units built since 2000. Analysis of a core set of competitive hotels revealed a reasonably • While the overall senior market appears strong, the historic trend is attractive market, with growth in room demand and high occupancies the majority of seniors choose to age in place. With a significant (69%), offset by reduced (but still positive) growth in average daily rate. share of boomers now entering retirement, how this trend may shift Although the reopening of the convention hotel will increase supply, the will be critical. combined new hotel and convention venue will allow the region to support larger events. There are a number of brands not yet in the local Prognosis: “Reasonable” Solid population growth expectations are market, including Hilton Garden Inn and Drury. in place for the regional market, which align with a competitive Westdale site, suitable in our view for residents who work in either Prognosis: “Positive but Tight” The market is positioned to support Cedar Rapids or Iowa City. Although overall residential unit values are additional rooms; timing to market will be important for this segment. very affordable, the market does include several projects (older as well as newer) which are supporting higher rents and attractive Residential Market condominium pricing. Core findings include: Office Market • From a residential standpoint, the Westdale site is viewed as a The local market is reacting to several forces: competitive location for people who currently work in Iowa City, as well as those who work locally. For this reason, our residential 1. Modest net growth in employment for traditional sectors that use approach looked at demand growth in both MSAs. office space, with stronger growth in medical employment. • The Cedar Rapids MSA has an unusually low cost of living index 2. A considerable supply of older and arguably obsolete space in the factor for housing, 25% below the average for all MSAs. In spite of market, with overall Vacancy levels above 20%. this factor, the analysis identified relevant market premiums for recently-built condominiums (1bedroom @ $150/sf), as well as a 3. A small supply of contemporary office space, class A or otherwise. small sample of rental units priced above $1/SF/month. For the 4. Concern over evolving decisions at Rockwell regarding their space rental market, newer units are not priced at a premium to older units, needs. which is significant. Prognosis: “Less than ideal”. A near term market that is going to be • There are very few modern “urban” rental units in the market, and in tenant driven, with gradual recovery toward an average pace of about general, walkability is limited. For boomer age segments in 50,000 SF of new office construction per year within 2-3 years, with particular, sites with walkability will be a differentiator. older but not historic buildings being competitively challenged, which • Senior housing markets are expected grow in the near-term, linked will dampen rent growth. A lack of modern space in the market is one with identified strong growth in 55-64 and 65 to 74 age groups across clear driver of new space. Iowa City and Cedar Rapids. Based on experience, we would More precise Westdale site implications are noted on the following anticipate a gradual shift from condominium and age restricted units page. to projects offering a continuum of care over the next 20 years. From a real estate standpoint, as projects move toward the continuing care model, the business case is increasingly influenced by insurance and payments for services, rather than monthly rent payments. Locally, a sample of about 900 units was identified with several operators, with Page 3 Westdale Site Development Implications Projected Target What The Plan Calls Annual Market Growth Regional Context Project Drivers Project Opportunity Timing Use Range Market For Retail sales growth of 3.4% Project has 250,000 SF of Attractive occupancies, with should drive demand for about anchor space + Retention of Project sustains SW at 40% Primary: rents that are generally Plan of 432,000 sf of $80 to $90 million per year in 50,000 sf in-line tenants. market share. Tenanting success Retail / Cedar Rapids supportive of new retail/restaurant requires 11-35% new retail sales. @ sales of Upsides include new market will link with growth of specific short-term Restaurant Secondary: construction; growth is to the 132,00 sf of incremental $300/SF this could theoretically entrants, chains needing a 2nd store clusters, beginning with Iowa City south, rather than the north. retail over initial 3 years. support about 260,000 SF of store, and tenants relocating restaurants and possibly apparel. SW is underserved. retail space per year. from older space. Further growth in regional health Clinic and outpatient centers link care employment. Gradual shift Good: Regional Plan of 105,000 sf strongly Cedar Rapids Healthcare has become a with demand for doctors offices. Medical / over time from hospital care to demographics are supportive; supported by Market Study 2-10% & Iowa City significant tenanting option in Linkage with retail and residential short-term Medical Office outpatient and clinic based care, Challenge: continued and evidenced by active MSA's retail environments. should be complimentary, with favoring medical office pressure on health care costs early demand of 30,000 sf. deliberate planning. construction Demand growth at 7.6% since Proximity to US 30, airport, Up to 200 rooms. Although Plan incorporates the Cedar Rapids Target set of upper market 2010 versus supply growth at and Univ. of Iowa demand; growing, market is stable but not upper middle market Hotel 2-5% short-term MSA hotels occupancy at 68% 6.8%; revenue growth at generally a supportive use for deep. Hilton Garden Inn is one prototype of a national 8.4% the project. example of the quality expectation chain (136 rooms). Overall market of 8,000 - 10,000 new units through 2017. 55-64 age household growth Initial focus on condominium, Cedar Rapids Primary competition is with While flexible, Plan calls for Urban/walkable share estimated thru 2017: 3,207; 65-74 age with consideration of age Residential 2-10% & Iowa City downtown.