Steady and resilient. Those are the words that panelists used during the second annual Des Moines State of the Market summit held Aug. 25 by Midwest Real Estate News and REjournals.
Just think of how participants would have described this key Iowa market if it, like all major cities across the country, wasn’t fighting through an economic slowdown caused by the COVID-19 pandemic.
As 2020 started, the commercial real estate market in Des Moines was strong, with deal velocity rising, vacancies falling and rents soaring. Then the pandemic hit, and that all came to a halt.
Participants in Tuesday’s State of the Market event, held virtually because of the pandemic, were quick to point to that strong start of the year when explaining why Des Moines was poised to recover quickly once life returns to a state of at least semi-normalcy.
“We are still bullish on Des Moines,” said Kris Saddoris, vice president of development with Hubbell Realty Company. “Our fundamentals haven’t changed because of the pandemic. All the things we have put in place are still here. We are poised to come of this very, very strong. We haven’t had widespread devastation here. Yes, the economy has been pushed down. But all the pieces that make Des Moines a strong economy are still there.”
Jared Husmann, president of the Katalyst Team at KW Commercial, pointed to Des Moines’ multifamily market as an example. This sector remains strong, with rent collections still high and vacancy rates law, he said.
Husmann said that Des Moines will get back to normal life eventually. He emphasized the word “normal” here, saying that he wasn’t looking for a “new normal” or “next normal.” No, Husmann is expecting the old normal, one in which Des Moines’ economy is again strong and commercial real estate deals and developments resume the rise he saw at the end of 2019 and beginning of 2020.
“The longer we go, the closer we are to getting back to normal,” Husmann said. “In Des Moines, you can still go out to restaurants. You are still seeing people moving about. We didn’t lock down like everyone else. You do see masks. But I see us continuing to move forward. We are getting back to normal.”
This doesn’t mean that Des Moines doesn’t face challenges. Levi Franzen, senior real estate relationship manager with U.S. Bank, said that he expects rents in the multifamily space to be flat or slightly declining in the near future.
Franzen did say, though, that apartment owners have started to back off on offering concessions to potential tenants. The reason? These owners have settled on slightly lower rents for their apartment units, rents that tenants are willing to pay without needing the enticement of concessions.
When deciding whether to lend today, Franzen said, U.S. Bank is performing stress tests to vet the health of projects and owners
“We are looking at the operator’s and property’s performance,” Franzen said. “We look at how they’ve performed historically. We then look at whether they can withstand any additional stress going forward.”
Franzen said that banks are still active, even with the pandemic.
“There is lending out there,” Franzen said. “Lenders are looking for well-capitalized projects or well-capitalized borrowers. It will depend on the lenders you are talking to, their comfort level.”
While the multifamily market has performed well during the pandemic in Des Moines and its surrounding communities, there are fears that even this sector will start to suffer now that the federal government’s enhanced unemployment benefits have disappeared.
Husmann said that this is a real fear. But he also said that Des Moines’ apartment sector is strong enough to withstand this new stress.
“Most of the tenants who were having trouble paying pre-COVID are the same ones having trouble now,” Husmann said. “Most of the tenants, though, are still paying their rents. It all comes down to the hierarchy of needs: food, water and shelter. People need shelter. They are paying on time if they can.”
Franzen said that the end of the enhanced unemployment benefits could have one positive effect: Restaurants and hotels had been struggling to get their workers back while these employees were collecting their enhanced unemployment benefits. Many were earning more on unemployment than they would have had they returned to work.
With the end of the higher unemployment checks, many of these employees might return to work.
“They needed that desire and drive to get back to work,” Franzen said. “We are seeing our unemployment numbers coming down.”
Des Moines CRE professionals said, too, that the pandemic will bring changes to the multifamily market, some long-lasting.
Saddoris said that more people might seek out housing with lower density. Instead of seeking vertical multifamily properties – the ones most common in urban areas – buyers might instead move toward horizontal communities, ones that offer more room and more space for social distancing.
People might continue working from home, too, long after the pandemic fades, Saddoris said. This might change the way new apartment properties are developed and designed.
“It’s all about understanding what people are going to want,” Saddoris said. “What does work from home look like? People working in the multifamily industry have to understand that a living space might also become a workspace now.”
Husmann said that he had already seen a trend toward townhome development before COVID hit. This trend should only accelerate now, he said. He also said that he is seeing a move toward the suburbs and away from denser urban areas.
Of course, multifamily isn’t the only sector performing well in the pandemic. The industrial sector is thriving, too.
And Jason Conway, director of real estate development with Opus Development Company, said that this sector will soar even higher once the pandemic fades away.
“If you liked industrial during COVID, you’ll love it post-COVID,” Conway said.
The retail sector, though, does face challenges. Brick-and-mortar retail was already struggling with the threat of online shopping. Richie Hurd, vice president with Hurd Real Estate, said that not all retail markets are created equal.
Hurd pointed to the difference between a market like Des Moines and one like Phoenix. The retail vacancy rate in Des Moines is about 4 percent. In markets such as Phoenix, though, where developers built quickly and often, the vacancy rate in this sector is far higher.
“We never overbuilt like Phoenix,” Hurd said. “Phoenix is a boom or bust town. When retail was hot in the ‘90s, with strip centers and retail centers everywhere, developers overbuilt. Now Phoenix is overbuilt or under-demolished, depending on how you look at it. In Des Moines, as you drive around the retail corridors you see vacancies getting backfilled.”
Hurd said several of Des Moines’ key retail destinations, such as the Jordan Creek Town Center, are healthy and active.
“If you have a good retail location, regardless of what is going on in the market, you will still have people wanting to be there,” Hurd said. “Des Moines is a good retail market and will continue to be strong after this is over.”
David Maahs, executive vice president of economic development with the Greater Des Moines Partnership, agreed that the future looks strong for Des Moines. He said that the city’s fundamentals are strong. That will help Des Moines’ economy and real estate market get through the pandemic.
Des Moines, though, has not been immune to the economic drag of the pandemic and the resulting slowdowns in business. Maahs said that the Des Moines market is down about 30,000 jobs today. That is better than many markets, but a bit worse than markets such as Kansas City and Omaha, he said. But most other Midwest markets do have a higher unemployment rate today than does Des Moines.
“We are doing well,” Maahs said. “We will do better than most metro areas in coming out of the COVID recession.”
The office sector in Des Moines, as it does throughout the rest of the country, faces plenty of uncertainty. The big questions center around when workers will feel comfortable returning to the office and how much space companies will require in a post-COVID world.
Adam Kaduce, vice president with R&R Realty Group, said that despite the uncertainty, he remains optimistic about the future of the office market in Des Moines.
“The office is that place where business leaders and teams go to innovate, collaborate and solve the biggest challenges of the day,” Kaduce said.
Kaduce said many local companies have already brought back a good portion of their employees to their Des Moines offices. The larger national users, though, have been slower to make this move, he said. Kaduce predicted that larger companies will keep most of their employees home until at least 2021.
Much of the delay in workers returning to the office space is related to the challenges cities and suburbs face in reopening schools during the pandemic. If students are learning remotely, and not physically in their classrooms, this makes it more difficult for their parents to return to their offices.
Kaduce said that he is encouraged by the number of companies in the Des Moines market today that are right sizing. They might be downsizing the amount of office space they need, but they are making plans to upgrade their work areas. Many are buying new furniture and changing office layouts or considering moves to buildings with more amenities. Others are hammering out more flexible schedules for their employees, allowing them to work from home unless they need to meet with clients or collaborate on projects with their peers.
“This is encouraging,” Kaduce said. “Employers are granting their workers more flexibility.”