Tracy Cross & Associates, Inc. Analysis of the Market Potential for Residential Development of Muscatine, Iowa as of November 2, 2000

Introduction
Conslusions & Recommendations
Background to the Market

INTRODUCTION

At the request of the Muscatine Housing Steering Committee, and on behalf of the City of Muscatine, Tracy Cross & Associates, Inc. performed selected research services to determine the market potential for various forms of residential development within Muscatine, Muscatine County, Iowa. Specifically focusing upon future residential potentials within the city of Muscatine, this analysis provides an overview of localized economic and competitive market conditions as they may impact the city’s comprehensive development plans over the near term, and establishes the following:

• An assessment of Muscatine’s overall residential growth potential over the next five years based upon economic, demographic, and household formation forecasts developed for Muscatine County as a whole, and the city of Muscatine in particular.
• Conclusions regarding the marketability of various single family, townhome, condominium and/or apartment housing forms which could be successfully developed within the Muscatine area based upon economic, demographic and residential construction trends in the defined market area, socio-economic profiles of the existing resident population base, the character and proximity of major employment concentrations, and the alignment of existing residential programs.
• General development guidelines which would position potential builders competitively within the marketplace in terms of single family, duplex, townhome, condominium and/or apartment development opportunities based upon the outlook for residential development within the market area, current competitive alignments, product offerings, and various socio-economic factors.
• Conclusions regarding the absorption potential of these various product forms, detailing by generic housing form, price level, unit size, and features necessary to attain strong levels of consumer acceptance.
• A forecast of the annual demand for single family detached and multi-family for sale housing forms in the Muscatine market area, and their respective share by price range and product type.

METHODOLOGY

In order to meet the objectives of this analysis, the following methodology was utilized:

• A comprehensive analysis of secondary employment, demographic, and socio-economic trends within the Muscatine market area, including long-term employment trends, distribution of employment by industry sector, population and household trends, including age, income and wealth characteristics, and residential permit trends.
• An assessment of the supply and demand relationship of for sale residential development within the Muscatine area through the year 2005.
• A qualitative and quantitative distribution of demand by price range within the Muscatine market area through the year 2005.
• A comprehensive audit of residential development throughout the Muscatine market area. This analysis details, by generic housing form, geographic orientation, development size, models offered, price(rent)/value positioning, sales histories/vacancy characteristics, and capture rates relative to overall absorption potentials within the Muscatine market area.

THE REPORT

This report is divided into three primary sections, together with an Appendix which integrates statistical economic and competitive data. Of particular importance is Section 1 which establishes conclusions and recommendations for future development. Not to be dismissed, however, are the other two sections which can be simply described as fundamentals. Section 2, for instance, provides a perspective of the overall condition of the Muscatine region by exploring all demand-related variables, while Section 3 analyzes the residential environment in Muscatine.

GENERAL LIMITING CONDITIONS

Tracy Cross & Associates, Inc. has made extensive efforts to confirm the accuracy and timeliness of the information contained in this study. Such information was compiled from a variety of sources, including interviews with developers and their agents, government officials, and other third parties. Although Tracy Cross & Associates, Inc. believes all information in this study is correct, it does not warrant the accuracy of such information and assumes no responsibility for inaccuracies in the information provided by third parties.

CERTIFICATION AND SIGNATURE

This analysis represents our objective and independent opinion regarding the market potential of residential development within the city of Muscatine as certified below:

TRACY CROSS & ASSOCIATES, INC.

An Illinois Corporation

By: _______________________________	By:_______________________________
G. Tracy Cross, CRE	Erik A. Doersching,
Its: President	Its: Vice President
Date: October 10, 2000	Date: October 10, 2000

1. CONCLUSIONS AND RECOMMENDATIONS

The City of Muscatine, as depicted in Exhibit 1.1, is located in the southeastern quadrant of Muscatine County, Iowa, approximately 30.0 miles southwest of the Quad Cities. Muscatine currently supports a population base of 22,875 persons distributed among 8,775 households. Over the last ten years, population and households in Muscatine have remained virtually unchanged as any growth has merely replaced the loss of persons and households moving outside of the city limits. Comparatively, Muscatine County has witnessed the addition of 134 persons and 54 households annually since 1990.

In many ways, the city of Muscatine typifies many smaller to mid-size Midwestern communities, with both its agricultural heritage and industrial growth fostered by its location aligning the Mississippi River. Residentially, Muscatine has seen little new construction housing in recent years as building permit volumes have averaged only 47 units yearly since 1988, and only 38 units annually if 1996 is excluded when over 100 units were permitted for low-income rental housing. Over the last 12 years, Muscatine has accounted for 43.5 percent of all residential construction activity in the county as a whole, as Muscatine County has averaged 108 annual building permits since 1988.

Without any alteration to area housing products over the next few years, both the city of Muscatine and Muscatine County could expect to function much like they have in the past several years. With employment in Muscatine County likely to increase by 350 new workers annually through 2004, residential construction levels county-wide would move at an annual pace of 115 units yearly. Of this total, the city of Muscatine could account for as much as 50.0 percent of aggregate activity, or 57-58 units yearly.

Given this expected level of growth, which is substantiated in detail in the body of this report, it would appear, on the surface, that Muscatine will receive little enhanced residential demand support over the near term. However, after a detailed investigation of the area’s housing market, which too is outlined thoroughly in the later sections of this report, there are clearly opportunities for the city of Muscatine to better satisfy the existing demand base and possibly increase potentials over the next few years. These opportunities, which are concentrated in the for sale sector of the market become quite apparent through our investigation of demand and supply in the local area, as highlighted below:

• Focusing upon Muscatine County as a whole because it represents the overall market area from which current and future residents of the city of Muscatine can choose various housing alternatives, there is a dramatic difference between what most people can afford in terms of new construction housing and what is available in the market. For example, as outlined in Exhibit 1.2, the qualitative distribution of demand (as determined on the basis of area incomes) does not correspond to where housing is currently priced in the market. In fact, the differentiation is so dramatic, that many local households in Muscatine can’t even consider new construction housing alternatives, but rather have only the resale sector of the market to choose from.
• One of the major reasons why new construction housing prices have moved outside the threshold of the demand curve is because of the character of the housing product. In both the city of Muscatine and elsewhere in the county, single family detached alternatives primarily consist of semi-custom/custom home/lot sale development where prices are typically concentrated in the $150,000-$250,000 range, well outside the threshold of income-driven demand. In the attached sector, only two developments exist, both of which are specialty-use type of programs supporting prices in excess of $200,000 (on average).

The disparity between localized housing product/prices and the qualitative components of demand is further illustrated when the performance of individual developments is examined. Among the 18 single family detached programs actively marketing in Muscatine County, the average subdivision is selling homes at a pace of only 0.5 units per month, a level considerably below “like” projects nationwide where the typical program generates closer to 2.0 units per month. In the townhome sector, sales velocities represent an even worse scenario as the average project in the Muscatine County Market Area is generating less than 0.2 sales monthly.

In addition, the gap between housing prices found in the resale sector of the market and those noted among new construction alternatives is abnormally wide. For example, the average single family detached home price offered among active programs in Muscatine County stands at $208,533. In the resale sector, the average price of a detached unit sold last year was less than $100,000. The variance shown in the new construction single family sector in Muscatine is more than double that of the resale sector with a normal differential being closer to 20.0 or 30.0 percent in favor of new construction.

In light of the above market realities, the primary objective of the city of Muscatine over the next several years should be to bridge the gap in terms of local householder income and new construction for sale housing product. In this regard, the following paragraphs and tables provide the necessary direction for achieving this goal:

SINGLE FAMILY DEVELOPMENT POTENTIALS

In the single family detached sector of the market, the highest and best alternative for maximizing demand potentials over the near term lies in Muscatine’s ability to support housing product priced generally in the $100,000 - $125,000 category. At this level, single family offerings would reflect the proper increment above competitive counterparts in the resale sector of the market, and would fall directly within the threshold of the demand curve determined through incomes. With the median age of the housing stock in Muscatine over 40 years old, the recommended price range’s 20.0 to 30.0 percent differential compared to this housing stock is equivalent to what renovation costs would be to bring resale units to a comparable “new construction” level.

In achieving the overall objective, Muscatine should adhere to the following guidelines:

• Designated residential property should be allocated to support 6,000-7,200 square foot single family homesites in order to keep per unit land costs at a minimum. Where possible, subordinating the cost of the land would help ensure levels of affordability.
• A builder, either local or outside the immediate area, should be selected who is capable of building value-oriented, value-engineered product. In this regard, a great deal of discipline must be applied as it relates to the construction efficiencies of each home, again in an effort to keep costs at a minimum.
• The level of features and inclusions in each home should be modest. This will allow the product to meet the necessary affordability levels of most area consumers, while not compromising the overall number of inclusions. If a consumer wants more in the home, it will simply be his/her choice to add features or upgrades through options.

For a general script of the product line capable of adhering to the above criteria, and one that would target the bulk of the market (i.e. first-time/second-time home buying families), refer to the following text table:

At the prices outlined above, a sales pace of 2.5 units monthly would likely occur, a rate five times greater than the average velocity currently being attained by local single family developments.

RANCH VILLA DUPLEXES

In most other smaller to mid-size Midwestern communities, single-level attached duplexes (ranch villas) have been met with a strong degree of consumer acceptance. This particular product idiom, which consists of side-by-side ranch-type units, can yield a density allocation of 6.0+ units per acre, and given its generic product form, is efficient to build.

Serving to occupy a position in the market for first-time home buyers (primarily childless singles and couples), as well as empty-nesters, the ranch villa duplex program should maintain a price differential approximately 10.0 percent below new value-oriented detached development. For this product line’s general criteria, consult the following text table:

Like the single family detached program suggested, this development alternative would too be capable of generating 2.5 sales monthly.

The key to bringing both of the recommended for sale housing products to market at the established price points lies in controlling costs. In fact, there may be those who will argue that the suggested prices are unrealistic on the basis of localized construction/land costs, etc.. However, if similar housing alternatives can be made available at comparable prices in “like” communities throughout the Midwest, this obstacle can be overcome in Muscatine through a disciplined approach. In fact, Muscatine’s supply deficiency can be partly attributed to the character of the local builder community as smaller-volume builders tend to maximize price points because strong sales rates are not necessarily a critical component of profitability. In other areas around the country, builders like The Zale Group in Kenosha, Wisconsin, United Homes in Kalamazoo, Michigan, Hearthside Homes in Omaha, Nebraska, and Three Hammer Construction in Rockford, Illinois, recognized a void in the market for properly priced product within the threshold of the demand curve, and addressed this void through efficient, cost-effective plan designs, and other volume building efficiencies. This strategy produced sales velocities up to six times greater than other developments in the market. All of these builders were able to produce product at similar price per square foot levels to what has been recommended for Muscatine, and many times even lower.

OTHER SEGMENTS OF THE MARKET

While the most significant void in Muscatine’s housing market is characterized by the lack of for sale housing product priced below $120,000, as clearly outlined in the previous narrative, the rental market (including market rate, low-income and senior projects) shows levels of opportunity as well. For example, among eight selected income-restricted rental properties in Muscatine containing a total of 444 units, some of which are also age-restricted, not a single unit was available for rent at the time of our survey. This 100.0 percent occupancy characteristic clearly points to tight market conditions, as a normal or balanced market typically maintains a 5.0 percent vacancy factor to allow for filtering.

In addition, there has been no new “market rate” apartment construction (of scale) in Muscatine since 1976. As a result, there is currently not even a traditional apartment market from which to gauge market opportunity, yet with nearly 30.0 percent of all households in Muscatine comprised of renters, demand clearly exists for this form of housing to some extent.

In conclusion, and of course additive to the already heightened level of for sale housing opportunity in Muscatine, the city should continue to promote the introduction of rental units locally with a focus on both market rate and affordable units. Specifically, approximately 30-40 units of various forms of rental product could be absorbed annually in the overall area without creating market weakness.

CLOSING REMARKS

In virtually all self-contained markets around the country where the supply of housing corresponds directly with the qualitative distribution of demand, two new jobs created will foster the need for one new housing unit. In Muscatine County, the ratio currently stands at three jobs for every one new housing unit, thus indicating a shortfall on the supply side. As outlined in the previous paragraphs, this shortfall is a direct result of the lack of properly positioned product in relationship to income-derived demand. As a result, our recommendations serve to bring the proper balance back to the market and enhance annual demand potentials by at least 50.0 percent.

The challenge, however, will be on the shoulders of Muscatine in order to meet the pricing requirements of the product. To this end, Muscatine must work with potential builders to ensure proper positioning, and be creative in this endeavor.

2. BACKGROUND TO THE MARKET

An analysis of the market for new housing in any particular locality will be conditioned by the overall economy serving potential residents. For example, a sagging economy will typically be a poor market for housing, whereas new employment opportunities will generally signal a rise in population and households with a simultaneous increase occurring in the demand for housing.

In addition to employment, population and household growth, along with historical residential construction trends play an important role in understanding demand potentials in any given area. In addition, key housing demand indicators in any region also include income and the need for replacement housing caused by demolition or abandonment. As previously illustrated, an increase in employment indicates economic growth, which is likely to result in in-migration of additional workers and population. An increase in population, in turn, results in an increase in households, which precipitates an increase in the demand for housing. Finally, there is income, which identifies how much purchasing power is available for housing, while demolition activity indicates what requirements are necessary for the market to replace formerly occupied housing units with new construction.

Because of the importance of employment, this first section provides a setting for housing demand in the city of Muscatine by analyzing economic factors currently represented in the overall Muscatine County area.

ECONOMIC BASE

Historically, the economy of Muscatine County has been rooted in the manufacturing sector, specifically in lumbering, saw mills, and door factories. However, near the turn of the 20th century, a German immigrant with trade skills in button making arrived in Muscatine and soon discovered that fresh water mussel shells made the ideal button. Utilizing fresh mussel shells from the Mississippi River, Muscatine soon became the world’s largest pearl button manufacturer. During the turn of the century, the pearl button factories employed nearly half of the Muscatine workforce, earning it the name “Pearl Button Capital of the World.” By 1905, over 1.5 billion pearl buttons were made in Muscatine.

Over the years, the success of the pearl button industry paved the way for the entrance of other manufacturing companies in Muscatine. Muscatine is home to several locally-founded companies, including HON Industries and Bandag, Inc, as well as other major manufacturing firms. The fertile soils of Muscatine have also made the area known for producing some of the highest quality agricultural products in the world. For example, H.J. Heinz Company operates the largest canning plant between the Mississippi River and the Rocky Mountains within the city of Muscatine. In addition to canning, major Muscatine County employers are involved in the manufacture of (other) food products, office furniture, corn distillates/feed, herbicides and plastics, tire products, and electric lift trucks, as well as industries such as retail, communications, engineering, and steel. The following text table serves to further emphasize the diversification of the area’s economic base:

Major Employers in Muscatine County
Employer	Product/Service	Employees
HNI Corporation	Office Furniture	2,700
Grain Processing Corporation	Corn distillates/feed	800
Bandag, Inc.	Tire Products	700
HJ Heinz L.P.	Food Processing	640
Unity Health Systems	Health Care	540
Monsanto	Herbicides/Plastics	510
Hy-Vee Food Store	Retail Distribution	400
Wal-Mart Supercenter	Retail Distribution	370
Source: Greater Muscatine Chamber of Commerce & Industry

EMPLOYMENT TRENDS

In 1999, Muscatine County supported an employment base of 22,450 workers, with the largest components by industry sector found in manufacturing and services, at 8,480 and 4,850 workers, respectively, translating into 37.8 percent and 21.6 percent of total employment, respectively, as shown in Exhibit 2.1.

Overall, Muscatine County’s employment base increased by a total of 318 jobs annually during the 1988-1999 period (Exhibit 2.2). During this timeframe, the strongest growth sectors were services, which added 148 workers annually, and retail trade which gained 55 jobs yearly. As shown in Exhibit 2.3, peak growth years included 1998 with 1,340 job additions, followed by 1990 when 650 workers were added.

During the most recent four-year period of 1996-1999, employment growth in the area slightly outpaced long-term trendlines, averaging 355 new jobs annually. However, negative growth patterns began to emerge in mid-1999, with reported monthly job declines beginning in June and continuing through each subsequent month of the year (Exhibit 2.4). In fact, a total of 1,320 jobs were lost during the fourth quarter of the year alone, with Muscatine County netting only 70 new jobs in 1999. This negative growth trend has continued into 2000. Exhibit 2.5 graphically depicts the change in employment, by industry sector, during the first six months 2000 versus the first six months of 1999.

Over the next five years, employment growth in Muscatine County will increase by an average of roughly 350 workers yearly. This employment forecast is equal to an average annual growth rate of 1.5 percent, which is slightly below the average annual growth rate of 1.7 percent established over the past 11 years. The more moderate pace reflects a cooling national economy as well as recent negative growth in Muscatine County which has resulted, in part, by recent lay-offs including some 180 employees at a Bandag plant. However, as HON Industries continues to increase production and employees, and on the heels of expected employment increases at both Heinz and Monsanto, net employment increases will remain positive, and be close to historical gains.

POPULATION, HOUSEHOLDS AND INCOME

Based upon 2000 Census estimates, the population of Muscatine County is estimated to have reached 41,246 persons, representing an average annual increase of 134 persons since 1990. In the city of Muscatine itself, net negative growth in population has been reported since 1980. In terms of household growth, Muscatine County noticed an annual addition of 54 households between 1990 and 2000 (Exhibit 2.6). During the same time period, the city of Muscatine noticed minimal household growth.

Relative to household income levels in 2000, Muscatine County reflects a median income of $47,043, with 41.8 percent of all householders earning between $35,000 and $75,000 annually. Another 21.7 percent (3,326 households) earn in excess of $75,000, while the remaining 36.5 percent of households earn less than $35,000 annually.

The 2000 median household income in the city of Muscatine is $45,395, with the greatest concentration of householders (40.9 percent) earning between $35,000 and $75,000 annually, followed by those with annual earnings under $35,000 (38.6 percent). The remaining 20.5 percent of households earn in excess of $75,000 annually. Refer to Exhibit 2.7 for a household income distribution for the subject areas.

In the city of Muscatine, 48.7 percent of householders aged 25-44 years earn between $35,000 and $75,000 annually, whereas 20.4 percent in the same age group earn in excess of $75,000 annually. Another 46.0 percent of householders aged 45-64 in the city of Muscatine earn between $35,000 and $75,000 annually, yet almost one-third (30.4 percent) in the same age group earn above $75,000 annually.

According to 1990 census figures, owner-occupied units accounted for 66.5 percent of the overall housing units within the county, while renter-occupied units accounted for 25.8 percent. In the city of Muscatine, 64.4 percent of all housing units were owner-occupied while 29.8 percent were renter-occupied.

According to 1990 census figures, 10.0 percent (927 units) of all housing units in the city of Muscatine were built between 1980 and 1990. Another 17.1 percent (1,586 units) of all housing stock was built during the decade of the 1970’s, while 11.6 percent (1,080 units) were built during the decade of the 1960’s. However, the majority of Muscatine’s housing stock (61.3 percent or 5,704 units) pre-dates 1960, as highlighted in Exhibit 2.8.

According to 2000 Census estimates, the city of Muscatine maintains a median housing value of $74,584, with 33.4 percent of all housing units valued between $35,000 and $74,999. As seen in Exhibit 2.9, 23.3 percent of housing units are valued between $75,000 and $99,999, while 26.1 percent of the housing stock is valued above $100,000.

RESIDENTIAL BUILDING PERMIT TRENDS

During the 1988-1999 timeframe, total residential construction volume in Muscatine County averaged 108 units annually. Annual volumes ranged from the low of 43 units in 1988 to the high of 228 units in 1996 (Exhibit 2.10). In comparison, the average annual permit activity during time period 1996-1999 equaled 153 units.

Over the past twelve years, single family permits in Muscatine County averaged 90 units annually, equal to 83.3 percent of overall activity, while multi-family permits averaged 18 units yearly, or 16.7 percent (Exhibit 2.11).

Focusing upon residential building permit activity within the city of Muscatine, the average annual volume for the 1988-1999 period stood at 47 units. Volumes in the city ranged from a low of 18 in 1989 to a high of 137 in 1996, as depicted in Exhibit 2.12. Single family permits within the city averaged 30 units annually for the twelve-year period, accounting for 62.5 percent of overall activity, while multi-family permits averaged 17 units annually and/or 37.5 percent.

HOUSING DEMAND

There are three key factors which enter the equation for housing demand within a particular area including anticipated levels of household formations, the additive component associated with demolitions, and the general vitality of the region’s economy which fosters the growth of new households. These component variables applied to Muscatine County are summarized below: