As president and founder of West Des Moines, Iowa-based The KataLYST Team, Jared Husmann knows the multifamily market in and around Des Moines. He says that this sector continues to face challenges stemming from higher interest rates, steeper materials costs and the soaring cost of labor.
It’s all led to a slight slowdown in multifamily sales in the Des Moines market.
But this slowdown? It’s not all bad. It’s transformed the local multifamily market here into a more normalized one, with investment sales activity looking more like it did in 2017 and 2018 than it did during the unsustainable pandemic boom years of 2020 and 2021.
What does the future hold for the Des Moines apartment market? Does a year or more of stable interest rates mean a boost in investment sales? We spoke to Hussman about this and other multifamily topics. Here is some of what he had to say.
Now that the Federal Reserve Board has stopped boosting its benchmark interest rate, are you seeing more interest in multifamily investment sales in the Des Moines market?
Jared Husmann: Yes and no. There is still a lot of interest in commercial assets overall in the Midwest. And multifamily is a good sector for investors. Des Moines has seen a lot of growth in the last several years, too, so that story of growth inspires out-of-state buyers.
But our investment sales numbers have been down from our peak years. As of the first quarter of 2024, we are at about $63 million in sales volume in the multifamily sector. Right around 11 different transactions took place in the quarter. Those transactions were at an average CAP rate of 7.54%, up from the 7.25% CAP rate we saw in the fourth quarter.
Apartment buildings sold for $58,581 a unit and 1,076 units traded hands in the first quarter. One of the differences we have seen is that in the fourth quarter of last year, a lot of products built in the 1970s sold. Those buildings have a smaller square footage. In the first quarter of this year, we saw a lot of newer assets trading. That is partly why we saw an increase in the square footage of investment sales in the first quarter compared to the fourth.
But even though activity was up from the fourth quarter of last year, if you look at the first quarter of this year compared to our overall figures from last year, our price per square foot and price per unit are down 8% and 12%, respectively. Last year’s average CAP rate was at 6.75%. Now we are at a 7.5% CAP rate. As of right now, the prices we are seeing from apartment sales are about 10% lower than where we were last year.
What about rental growth?
Husmann: We have seen slowing rental growth in the Des Moines marketplace. There has been some rent growth, but it has definitely slowed. This is especially true in the downtown market. Downtown is seeing some struggles as Millennials push out into the suburbs, moving into townhomes and larger-sized units in the suburban markets.
Does it seem like the Des Moines apartment market is cooling down, then, from those busy pandemic years?
Husmann: Last year we saw $150 million to $180 million in sales volume for apartments. This first quarter, we’ve seen $63 million in sales volume. That puts us on pace for about $240 million. Last year was the lowest multifamily sales volume in Des Moines since 2017. This year, our sales volume will be more on pace with what we saw in 2018 and 2019. But we won’t get to 2020 or 2021 levels. Back then, we saw $400 million to $500 million in multifamily sales volume. We are still off from those highs.
I think we are getting back to a more normalized market. I would say that $150 million to $240 million in multifamily sales is probably the new norm in the Des Moines market.
Des Moines has been a strong market for multifamily sales and leasing activity in recent years. What led to this?
Husmann: We have had strong population growth for several years. But there are more factors. Back in 2008 and 2009 we had the Great Recession. Everyone could find deals left and right. From 2012 through about 2015, everyone was absorbing those good deals. Then in 2015 to 2017, people started searching for yield in tertiary markets. When that happened, Des Moines popped up on the radar of a lot of investors.
Also around 2016, we saw a lot of Millennials graduate from college. They needed to rent apartments. That resulted in a boost to the apartment market, too. Couple the growth of Millennials who started renting with investors searching for yield in tertiary markets, and that led to a boom in apartment investment in all tertiary markets around 2016 and 2017. That happened here in Des Moines, too.
The demand for rentals only increased in 2020. Most people tend to forget that we were all expecting a recession and economic slowdown in 2020. We started to see interest rates creep up. Then COVID happened and rates dropped through the floor. That spurred on the economy. Then there was the money that the government gave out in 2020 and 2021. That boosted the economy and the apartment market, too. Now we are seeing a bit of the slowdown that we probably should have seen four years ago.
Do you expect to see much new multifamily development activity throughout the rest of 2024 and into next year?
Husmann: Yes and no. The developers that are active are either very well-capitalized or they are legacy ownership groups or family-operated groups. We are not seeing a lot of true multifamily developers in the Des Moines market. The cost to build is simply too high right now.
However, because of the growth of the Des Moines market, developers do see the value here long-term.
Are you seeing any signs of relief from the high costs of building?
Husmann: From my perspective, it seems that the cost of materials has evened out. But we still see higher costs in the labor force. Labor is still very expensive. At the same time, we seem to be pulling labor from a smaller pool of people, which only increases the cost of labor further.
Labor is the X factor in development. Materials cost the same, generally, if you are in Philadelphia or Des Moines. There is not a lot of variety in materials costs across the country, for the most part. But labor, though, is a challenge that can vary depending on your market.
What kind of amenities are renters looking for in newer Des Moines-area apartment buildings?
Husmann: I have been hearing that more renters are looking for that one-bedroom-plus-den or two-bedroom-plus-den layout. People want a little more space, especially with so many working from home.
Chicago is an outlier, but in most of the Midwest, the Class-A developments seeing the most success are fairly light on their amenity packages. Beyond the typical pool, workout facility and maybe a dog park, they don’t offer much more. In the Midwest, we are a little more price conscious. The top two drivers of success in an A-class development in the Midwest are bigger units and lower rent. The developments that I’ve seen succeed in this market offer more space at a more affordable monthly rent.
As we see more people renting in the suburbs, they don’t care as much about the in-building amenities. They are used to driving everywhere. They don’t need all the bike racks. They are instead looking for more of a backyard area for young children or their pets.
What do you more in the long-term for the rental market?
Husmann: I think in the Midwest, or anywhere where land is cheaper, we will see a push more toward ownership. People want more space. The interest is growing for townhomes and build-to-rent homes. Because of this, there might be less development of new multifamily buildings in the future. I don’t think we’ll see apartment development at the rate at which we have seen it in the last several years.
