June, 1999 through January, 2000 Edited by Darin Garman, CCIM

Specialist Apartments, Cedar Rapids, Iowa

Iowa Realty Commercial is regarded as the leader for real estate market information throughout Iowa. As a service to our clients in the Cedar Rapids and/or Eastern Iowa real estate market, we have formalized our data into a concise publicati on. Iowa Realty Commercial continues its leadership in the Eastern Iowa apartment marketplace. Although we have published data in the past, we are always striving to publish the best information for our clients to take advantage of the apartment marketp lace.

Cedar Rapids apartment market sales overview

Owners continued in late 1999 doing even better than in early 1999 in the Cedar Rapids apartment marketplace. Higher prices are continuing to be paid for apartment projects due to lack of new product competition. A strong number of cash produc ing offers continued to be generated on well-located, well-maintained apartment projects. Owner financing continues to pick up its pace from early 1999 as many owners wishing to not own any more real estate, are taking advantage of the seller's market in selling their properties on an installment basis. Consequently, a tax-deferred exchange to them is not an alternative. Therefore, for beneficial tax treatment, one of the best things they can do is sell their apartments on an installment basis.

Tax deferred exchanges do remain popular, however, with 1999 being a year for apartment investors selling and exchanging their apartment projects into single tenant and/or multi-tenant commercial real estate projects. The benefit to this, obvio usly, is not only savings of capital gains taxes but also savings of time and management and property maintenance as compared to apartment projects.

The market does continue to be driven by strong local economy, good local work ethic and vacancies continue to be low. High demand for apartment projects and low vacancies are driving developers to locate apartment-zoned land on which to build new projects. A couple of newer developments still taking shape are the Landmark Development apartment project development off Rockwell Drive NE. This 178 unit project is approximately 40% completed and is leasing up as quickly as the units are built. Barry Smith Properties continue to construct their 30+ four plex units in Marion, just off the Collins Road extension. Construction of those projects will continue into mid to late 2000.

Additionally, the last half of 1999 saw smaller projects being constructed on an individual basis. In other words, many investors chose to build 4 to 12 unit properties on individual apartment zoned lots. This happened mainly on the west side of Cedar Rapids as well as Hiawatha and Marion. This is significant in that it shows the confidence investors have in the local economy as well as improving rent structure to cash flow these properties.

One sector of apartment projects that was basically non-existent in Cedar Rapids in the last half of 1999 was tax credit projects. While the state of Iowa awarded tax credits in the latter half of 1999, there were no projects awarded in the Ced ar Rapids area.

The market still remains tight for well-managed, well-located, available apartment projects. Investor demand still is high for this type of project; however, since most of these projects are "mom and pop" owned, they do not trade hands and are not available as quickly nor in as good a number as investors would like. This continues to drive prices up on these types of apartment projects.

Investment in lower urban income apartment projects does continue but at a slower pace since early 1999. The attractiveness of lower income projects is the cash flow. Lower income projects typically cash flow anywhere from 10 to 15% more than comparable apartment projects that are located in the outlying urban areas. Part of the reason for the slow down in sales of lower income apartment projects is vacancy. Vacancy of these projects has gone up approximately 7 to 8% over the latter part of 1999, fueling investors concerns of a softening of the lower income market.

As noted before, the urban apartment projects continue to be very popular among investors, driving the demand for these types of projects. Projects anywhere in size from 8 to 80 units are the most popular at the current time, with some investor s (most out of state) opting for 100+ unit projects. Even though these apartment projects do remain popular, buyers are taking more time in analyzing the projects for cash flow, condition, location and long-term profitability. Comparing to 1996 and 1997 , investors are somewhat less aggressive in their approach to purchasing well-located, well-maintained apartment projects in the Cedar Rapids market. This is not to say that they are less interested. There seems to be no sign of a lack of investor inter est in apartment projects through the year 2000; however, it must be noted that investors are being much more methodical in their due diligence and purchase of apartment projects.

Projects that changed hands in the latter part of 1999 did not include any of 100 units or more. As a matter of fact, no projects of over 40 units changed hands in the latter part of 1999 in the Cedar Rapids marketplace. The only exceptions are the Briarwood project, which is 72 units located on the northeast side and Gateway Gardens which is 300 units located on the southwest side. Both projects were sold in a stock swap from Insignia Real Estate Group to Apartment Management Company. Both en tities are real estate investment trusts who are active in the Cedar Rapids marketplace. Most projects changing hands in latter 1999 were in the neighborhood of 4 to 38 units.

Average prices per unit for a typical two bedroom, 780 square foot unit have been approximately $30,000 per unit. Average price for a typical one-bedroom unit of 660 square feet has been in the $23,000 to $24,000 price range per unit.

Capitalization rates remain stable for "B" projects and are still around 10%. Cap rates for "B+" to "A-" projects have been around the 9 % range with cap rates for "C" projects averaging around 11 %. The cap rates have remained the same for "B" and "C" projects, but "A" projects have come down just a little bit from the previous 6 months. The main reason for this is not due to available apartment product, but rather increase in interest rates. The capitalization rates, however, in the latt er part of 1999 remain consistent with what has been transpiring in the Cedar Rapids marketplace over the last year to year and a half.

Tenants are continuing to rent available apartments; however, have been running into projects that are fully occupied or close to capacity. Even though rental rates remain strong and demand for apartment renters does remain brisk, owners have b een reluctant to raise their rental rates. Rental rates as a whole have increased over last year at about 1.2% across the board in the Cedar Rapids area which indicates many owners and managers are afraid to let go of a good thing by taking the risk of r aising their rents and incurring some vacancy as the result of those rent raises.

There still remains demand by developers and investors to build new apartment projects. The largest project going up in the latter part of 1999 is by High Development which is constructing a 100+ unit project off Edgewood Road NW. This project is being built on retail scale and is not tax credit project. Still, the lack of apartment ground, together with some government complacency on the development of apartment projects has made available apartment zoned ground very expensive and sometimes even selling in the $5,000 to $9,000 per unit range.

The local Cedar Rapids economy does appear poised to remain strong through the year 2000. The market appears to be driven by high trade sectors and intermediate employment gains and production at Rockwell Collins, continued expansion of McLeod Technology, Cedar River Paper, Gazette Companies as well as the addition to the General Electric Service Center which will be located in southwest Cedar Rapids.

Vacancy rate in Cedar Rapids in the latter part of 1999 has remained at 5.1% and occupancy has been between 94 and 96% for most apartment complex owners. We're still seeing a modest rise in rental rates. The total number of units sold in the C edar Rapids marketplace in the last 6 months was 268 with a total sale volume of $4,732,700. The majority of these sales were on smaller projects of less than 40 units, as noted before. Local banks still tend to be the most sought after lenders in our m arketplace; however, interest rates have increased approximately 1% since this time one-year ago. That being the case, local banks are still the number 1 choice for local investors for loans up to $1.5 million.

A trend that has leveled off in the latter part of 1999 is loan to value. In late 1998 to early 1999 we saw some loan to value over 80% with debt coverage ratios as low as 1.0. Over the last 6 months, lenders have buckled down quite a bit in their loan value, wanting at least a 75% loan to value and debt coverages of at least 1. 1 to 1.15. Non recourse money is still a possibility, however, in projects that require at least $1,000,000 in financing.

As of January 1, 2000 there were a little over 21,200 rental units available in Cedar Rapids. As of January 1, 2000 Cedar Rapids rental rates averaged the following: One bedroom - $380, Two bedroom - $515, Three bedroom - $681

For further information on the Cedar Rapids apartment investment marketplace, please Darin Garman, CCIM, Apartment Specialist.

Darin Garman, CCIM

100 1st Ave. NE Suite 115
Cedar Rapids, Iowa 52401
319.365.9833 FAX
E-mail: Darin_Garman@msn.com

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