Information contributed by Charlie Armstrong, SIOR, Richard Schaefer and Alex Kelly of NAI Ruhl Commercial Company

Overview
The Greater Quad Cities region is home to many Fortune 500 industrial companies including John Deere Corporate headquarters and manufacturing plants, HNI / HON Company, Arconic, Tyson Fresh Meats, Kraft Heinz, ADM, Exelon, 3M, Nestle Purina, LyondellBasell and Illinois Tool Works along with the Rock Island Arsenal, a major U.S. military installation.

The Quad Cities industrial market totals approximately 50 million square feet while the regional submarkets add nearly 10 million additional square feet of industrial space. Manufacturing facilities represent approximately 40% of this total and warehouse/distribution properties make up the remaining 60%. Almost 62% of the industrial properties are located in the Iowa Quad Cities and 38% are located in the Illinois Quad Cities.

The Quad Cities has nine main industrial parks along with other scattered pockets of industrial-zoned areas. Additionally, each of the smaller submarkets around the Quad Cities has their own dedicated industrial parks. The Eastern Iowa Industrial Center in Davenport had an extremely successful 2016 with the construction start of the $203 million, 300,000 SF Kraft Heinz plant and the recent Sterilite announcement of a new 2,500,000 SF manufacturing and distribution center on 160 acres costing $73M and creating 500 jobs. This was the largest economic development project in the state of Iowa in the past year.

Market Activity
The total dollar volume of industrial transactions and gross absorption by square feet were up for the greater Quad Cities in 2016 while the number of transactions was down. In 2016, there was a significant 39.9% increase in industrial real estate transaction volume compared to 2015 with total industrial volume at $23,540,536 compared to $16,828,466 the prior year.

Gross absorption by square feet improved 8.9% from 1,134,128 SF to 1,234,485 SF in 2016. However, the number of industrial transactions fell by 20.8% from 53 transactions in 2015 to only 42 transactions in 2016. This discrepancy of higher dollar volume and gross SF absorption with fewer transactions is primarily the result of two factors; higher quality industrial real estate transacted in 2016 commanding higher prices and longer term leases resulting in higher lease values.

In 2015, industrial sale transactions represented $14,072,955 in volume and 818,395 square feet sold for an aggregate sale price of $17.20 per square foot.

In 2016, industrial sale transactions represented $13,632,750 in volume with 665,209 square feet sold for an aggregate sale price of $20.49 per square foot, an increase of almost 20%. While the sales transaction dollar volume was slightly down, lease transaction volume was up 260% from $2,755,511 to $9,907,786 in 2016 as a result of higher quality buildings and longer lease terms, as previously mentioned.

Of the 42 industrial transactions completed this year, the split between sales and leases was exactly 50%. There were 28 transactions or 67% in Iowa, and 14 transactions or 33% in Illinois. While there were a smaller number of transactions in the Illinois Quad Cities, those 14 transactions were for larger deals and accounted for approximately $12.8 million, or 54% of the total market volume, and 675,608 square feet, or 55% of the total space absorbed in the market.

In 2016, 71% of the industrial transactions were 30,000 square feet or less versus 79% in 2015. Of those, 22 were in Iowa and only 8 in Illinois. This is explained by the fact that Iowa has a much larger number of smaller single-user properties than Illinois. Overall, there were 12 transactions over 30,000 SF with 6 of those in Illinois and 6 in Iowa.

In summary, the Greater Quad Cities industrial market enjoyed a 39.6% increase in dollar volume for sales and leases and an 8.9% increase in gross absorption by square feet while the actual number of transactions fell by 20.8%. The bulk of this activity was for smaller properties in Iowa while Illinois had the majority of the dollar volume and space absorbed.

Vacancy
The industrial vacancy rate is tracked annually for all multi-tenant industrial buildings over 50,000 SF along with single tenant industrial buildings over 50,000 SF that are on the market for sale or lease. For 2016, the vacancy rate for this specially defined sample was 4% lower than 2015.

If the vacancy figure from this representative sample of industrial properties is applied to the total Quad Cities industrial market for all buildings over 50,000 SF, the actual vacancy for the Quad Cities in 2016 would be 5.1% vs. 6.1% in 2015, a 1% decrease. However, this vacancy rate does not apply to smaller single occupant properties which continue to be in high demand and short supply and would indicate a much lower vacancy rate.

Available Inventory
There has been a shortage of single occupant industrial buildings available for sale or lease in our market for a  number of years. This is especially true for buildings under 30,000 SF. This is now also true for leased spaces as well making it difficult to match existing inventory with client requirements.

At the same time, available supply of larger single tenant buildings is tight, especially on the Iowa side where there is increased demand. Large blocks of available space can still be found at most, but not all, of the large multi-tenant industrial centers. Much of the available industrial inventory is functionally obsolete and does not offer prospects the higher ceiling heights, increased number of dock doors, newer sprinkler system designs and available electric power supply required. There are approximately 17% fewer active listings in 2016 vs. 2015.

Development
There had been little to no development of industrial buildings in the greater Quad Cities regional market in recent years. By contrast, in 2016 there were a number of new industrial developments started or recently announced as a result of the slowly improving national economy and lack of available local inventory.

Additionally, there is a 50,000 SF multi-tenant speculative industrial facility being planned for Bettendorf's Riverside Development Park off of US Highway 67 with capability for expansion to 250,000 SF.

Industrial Investment Activity
The appetite for real estate investments has increased significantly as a result of investors searching for higher yields. Much like multi-family, office and retail property, investors are attracted to industrial product as well.

In 2016, our market saw three significant industrial sale transactions purchased purely for investment purposes. These properties totaled 211,000 SF and accounted for $12.7 million in volume. At time of sale, each property was 100% occupied by strong credit tenants on long term lease agreements. While lease details were not disclosed, each of these properties sold in the cap rate range of 8 to 8.5%. All three attracted quick attention from the investor market and sold at or close to full asking price.

This level of investment activity suggests investors are now beginning to look at tertiary markets like the Quad Cities where pricing has not reached the levels achieved in primary and secondary markets, thereby offering a higher yield to the investor. Across all market sectors (office, retail, multi-family and industrial) investment inventory in the Quad Cities is very limited in supply and demand is significant. The three key ingredients to a successful industrial investment sale include: long term net lease agreements (10 years plus), credit strength of the tenant and the functional utility of the underlying real estate in the event the tenant leaves.

(Please note that these three investment transactions were not included in the industrial volume, gross absorption and transaction count statistics previously provided in this report.)

Pricing
Sale prices and lease rates for industrial buildings in the Quad Cities have remained steady in spite of the inventory shortage, but we are beginning to see modest price increases in those classes of buildings with higher demand.

Pricing and demand for industrial space varies widely depending upon the location, size, quality, features, and age of the property. Current net rents on a triple-net basis and sales prices per square foot are as follows:

Forecast
With a steadily improving national economy and a new political perspective for increased job growth, tax cuts, lower regulatory burdens and major infrastructure spending, the outlook for the US industrial sector is bullish. The agricultural equipment industry is still forecasting continued weakness in global commodity markets through the end of 2017 and then a return back to normalcy.

This megatrend which affects agricultural related equipment manufacturers and their suppliers, a major economic influence in the Quad Cities, will continue to reduce demand for industrial real estate in our local market but will hopefully be offset by other manufacturing, distribution and industrial service companies in expansion modes, most notably, e-commerce and technological manufacturing.

Longer term, the industrial market and the number of manufacturing workers will drop as automation and robots reduce the need for human workers.

Strategies
We have had two recent interest rate hikes with possibly one to two more scheduled for the balance of the year. Nonetheless, interest rates are still near historic lows and will most probably go up in the near term. There is no better time than now to evaluate your space requirements for the foreseeable future. Has new technology and higher productivity reduced your need for physical space or do you require additional space for expansion? In any event, now would be a good time, while interest rates are still very low, to lock-in financing to purchase or construct a new building.

Due to low available inventory of good industrial buildings, it will continue to be a challenge to find the right building or space for your specific requirements. Start looking for space early, continue to monitor the market for new buildings that become available, and be prepared to make quick decisions. If leasing property, negotiate longer lease terms with flat rates to avoid an inflationary increase and interest rate increases that will raise rents in the future.

All information herein, while not guaranteed, has been secured by sources we deem reliable. All information should be verified prior to sale or lease.