Industrial is thriving. Retail is adapting. Demand for multifamily is soaring. And office? Even this sector is showing signs of life. It’s true: This is a good time to work in commercial real estate in the Des Moines, Iowa, market.
But what’s behind the strong CRE activity in Des Moines? We spoke with Adam Kaduce, senior vice president and managing director with West Des Moines, Iowa-based R&R Realty Group, about the big business taking place today in Iowa’s busiest market.
How strong is the commercial real estate market today in Des Moines?
Adam Kaduce: The bright spot in our market is definitely industrial. We are seeing more spec industrial in this market than I’ve ever seen in my career. And we are going to see a fair bit of that spec space pre-leased before it delivers. Industrial space gets gobbled up quickly in Des Moines. A number of developments are multi-building projects or industrial parks. They have kicked off their first buildings, so we will see more development from these projects in the future, too.
What makes the industrial market so strong here?
Kaduce: Our location and access to the interstate system has always helped. We have good access to labor talent. We also benefit from a low cost-of-living. And because our population has a high degree of education, the residents here tend to have disposable income. For the Amazons of the world, Des Moines is a good market to be in.
This is a relatively affordable place in which to develop, too. Our rental rates for industrial have long been in the $3- to $4-a-square-foot range. That has pushed up a bit with construction costs rising and demand increasing. But our industrial rents are still lower than what you’d see in the larger markets. That has continued to make this a good market.
For a long time, local developers dominated the industrial market in Des Moines. In the last two years or so, we’ve seen more institutional players enter our market. Ryan Companies has been developing here. Opus has entered our market. We’ve seen some groups out of Minneapolis and Kansas City that are becoming active in our market.
Why are those institutional players coming into Des Moines now?
Kaduce: Industrial is a low-risk investment. It is more affordable to develop in the industrial space than it is to develop in office. And there is strong demand for industrial real estate here. Developers coming into this market are chasing returns as cap rates have become compressed in other markets. Des Moines is still a place where you can make a sound, lower-risk investment.
Speaking of office, that is one commercial sector that has been struggling across the country. What are you seeing in Des Moines’ office sector?
Kaduce: We like to pride ourselves on not having the high-highs and low-lows that other markets have. It’s been the same story during COVID. We never saw our businesses get totally shut down. Office buildings even during COVID were still occupied. Healthcare businesses that needed to remain open stayed open. We never had lockdowns and stay-at-home orders that were as strict as they were in other markets. That helped keep businesses open.
But we are still seeing higher-than-normal vacancy rates in our office market. Local and regional companies do seem to be bringing their workers back in the office. It is the large national global companies that are still trying to assess what back-to-the-office looks like for them. Companies like Wells Fargo, Nationwide and Principal are starting to bring their employees back to the office.
That is the positive. For a while, everyone released dates for people to come back, but then they’d push them back. Now we are seeing the dates hold. Companies are going back. The large, global companies, though, are going back with a form of hybrid work. Some tell their employees which days to come in. Some are letting their workers choose. You can tell when you are out and about: Tuesdays, Wednesdays and Thursdays you see more activity. Mondays and Fridays seem to be the most popular days for people to work from home.
Are you seeing any differences in the performance of office real estate downtown versus in the suburbs?
Kaduce: Our two largest office markets are the CBD and western suburbs. The suburbs are performing quite a bit better than our downtowns are. That’s partially because a lot of our larger companies are in the CBD. Those larger companies are still working out how they are going to handle the return to work. You can see the difference between the suburbs and CBD when you look at vacancy rates.
That has been the trend we’ve seen throughout COVID. The companies that have autonomy at the local level have generally brought workers back earlier. We have a lot of smaller local and regional companies. We are seeing them bring their workers back to the office.
Have you seen a flight-to-quality, with several companies moving from Class-C and Class-B space to Class-A space today?
Kaduce: We have seen that in the office space. Our rental rates have stayed firm. Not a lot of landlords are dropping their rental rates. But more companies are downsizing the amount of space they need. If they once needed 10,000 square feet, they might now need 5,000. They can then move to a nicer building with better amenities and still spend less. Companies are taking this as an opportunity to upgrade.
People are using the quality of their office space to attract new hires and to attract their existing workers back to the office. Some customers are doing meal deliveries and investing more in outdoor spaces. They are trying to replicate some of the things people like about working from home. It is a perfect storm in terms of promoting a flight to quality. That’s why the suburbs are doing so well: That’s where the newer office product tends to be. Some of our newer office buildings in town have performed the best during COVID.
Companies are doing what they can. They are trying to make coming back to the office a new and different experience. Some tenants are bringing in food trucks. Others have outfitted their outdoor areas with Wi-Fi. Some customers are doing fresh-fruit deliveries. They are doing whatever they can to get employees interested in coming back to the office.
Having workers back to the office will help the retail sector, too, right?
Kaduce: A number of our downtown restaurants stayed open throughout COVID. Some, though, closed or reduced their hours. Fortunately, a number of these have reopened. That has been a positive. When we talk to retailers and restaurateurs, though, they tell us that their biggest challenge is finding enough staff.
Overall, though, the retail scene here is positive. We were not as over-retailed to the extent that some other markets were before COVID. We have seen some new retail construction, mostly in neighborhood centers with five or six tenants. Coffee retailers have been hot. Dry cleaners, nail salons and healthcare retailers have done well. Those are our big drivers on the retail side.
Multifamily has done well across the country. How is this sector performing in Des Moines?
Kaduce: We have seen strong multifamily development in the suburbs and downtown for the last 10 years. The biggest thing that is driving demand for multifamily is the rising cost of housing. Between interest rates and price appreciation, some people have decided to stay put and rent longer. Our new product is also attractive. We are seeing new projects that are highly amenitized. They are what you’d expect from a national multifamily development, with pools, pet spas, fitness centers and yoga studios. Some have office or co-working spaces, too.
You are seeing some of the same flight-to-quality from renters that you see among office users. When their jobs went work-from-home, they made the move to the suburbs. They were no longer commuting to work and they wanted more space. Our downtown apartment market has stayed strong. But we have seen renters moving around a bit, with many going to the suburbs.
Developers are still dealing with longer delivery times for building materials. Are you seeing any signs that this situation is improving?
Kaduce: I can’t tell if it’s getting better or we are just getting used to it. The lead time with steel and concrete seems to have improved a bit. Where we face challenges is with the products we need for our interior constructions for tenant improvements. Getting cabinets and appliances is very challenging. Getting anything with glass is a challenge, too. At least the difficulties have become more consistent. For a while, the products that were hard to get changed on a week-by-week basis. One week it might be paint. The next it would be insulation. Now it is glass and cabinets.
We advise clients on what it takes today to get projects done. We order those materials and supplies right away. We’ve gotten better at advising clients on what it will take to finish projects today. At the very beginning of the supply chain disruptions, clients didn’t believe us in terms of what was happening. Now they realize that this is a real issue. They understand that certain things take longer to get.