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Commercial Real Estate Weekly | March 7, 2018
'Des Moines has been discovered' in national CRE market
By Kent Darr | Senior Staff Writer

For owners of apartment buildings and office and retail spaces in Greater Des Moines, it’s time to get creative, and sure enough, some have already heard the message, according to the folks at CBRE|Hubbell Commercial.

There is a caveat: Don’t interpret the message to mean it’s time to fret those markets, according to CBRE|Hubbell Commercial representatives who recently discussed the firm’s annual survey of the commercial real estate market.

"The common theme is the fundamentals are strong," said Kyle Gamble, managing broker at CBRE|Hubbell Commercial. "Population growth and job growth lead other markets in their class; that trickles down to our real estate sector in a very positive way. You are seeing activity in all sectors."

The report quantified what many had predicted. With an estimated 3,230 apartment units landing on the market last year, vacancies have risen to 6.7 percent across the meto and were up nearly 10 percent in downtown Des Moines. Another 3,061 are under construction, according to the survey, which was compiled by the West Des Moines-based brokerage Frandson & Associates.

As a result, rent increases will stabilize and development of new apartments will slow before the market tightens again, possibly in the next two to three years.

The effect of an increase in the vacancy rates has been a boom in incentives for renters, an effort to increase the amenity packages found in new apartments — that’s the creative thinking at work — and a rethinking on the part of some developers for the delivery date of new projects.

Hubbell Realty Co. President and CEO Rick Tollakson has said his company is not fretting the delivery of apartments this year, provided they are available in the spring.

Kris Saddoris, the company’s vice president of development, and Alexander Grgurich, a partner with Nelson Construction & Development, said during interviews earlier this year with the Business Record that the increase in vacancies downtown is a plus, providing choice for renters who once turned to the suburbs after finding apartments downtown full the day they opened.

It should be noted that CBRE|Hubbell Commercial released its market report on Tuesday, the same day Hubbell Realty unveiled plans for a mix of for-sale units in the company’s Gray’s Station development. The goal is to keep renters downtown when they decide to become owners.

Amenities could come in the form of reducing apartment footprints and increasing the size and variety of common areas. Linda Gibbs, CBRE|Hubbell Commercial senior vice president for investment properties, said that in some markets apartments are reduced to a bedroom and bathroom with common kitchens and living areas.

Developers have looked at the glut of apartments and sought alternatives for some of their projects. The development team that brought a new parking ramp in the East Village near Des Moines City Hall had the option to bring some mix of residential, office and retail to a building that will be the first of two that will flank the ramp. They opted for office and retail in a unique building that will bring heavy timber construction back to the city and state for the first time in 100 years.

The construction materials — laminated lumber for the superstructure and charred wood cladding — will help entice tenants, especially "tech-driven" companies, said Tyler Dingel, senior vice president for CBRE|Hubbell Commercial. "I have a client who would move in today, but the building is a year out" from delivery, he said.

Nelson Construction & Development has altered its initial plans for an apartment building at a redevelopment parcel at Seventh Street and Grand Avenue to include an office building first, followed by construction of an apartment building.

Those office buildings will enter a market "where the demand for office space remains strong" and has led to the construction of speculative office buildings and renewal of older offices.

The report characterized 2017 as the "year of shifting," with tenants moving out of older space to new space, often in buildings that have been renovated to the renters’ expectations.

Dingel sees a change in the tendency to shift.

"I’m starting to see companies that are growing in size or bringing in new lines of business or expanding lines of business," he said. Office users are "slowly taking up space at an Iowa pace, slow and steady."

Landlords need to be prepared to freshen up their older buildings to provide a good first impression for prospective tenants, Gamble said. That renewal includes lobbies and other common areas.

"The office side has been a landlord’s market," said Bill Wright, a CBRE|Hubbell Commercial senior vice president and managing director. "I see that changing in 2018, 2019."

Tenants, from those needing 4,000 square feet to larger users wanting 25,000 square feet or more, are going to have more options, especially with the freeing up of large amounts of space as big users move to newer buildings.

"That is going to lead to more competition from a landlord perspective and probably a better deal for the tenant," Wright said. "All of these markets cycle, and I think we’re at that point in the cycle. We have more options."

Owners of second-generation office buildings in the suburbs will have to compete with downtown offices by offering what "millennials are looking for," Gibbs said. What they are looking for is walkability, healthy food options, fitness centers, an "experiential" work environment.

And that experiential environment is what office and retail have in common. Greater Des Moines experienced a decline in retail vacancies among big-box retailers — stores of 25,000 square feet or more — and neighborhood shopping centers, with a total of 380,000 square feet of retail space filling up last year, according to the report.

The Jordan Creek Town Center area in West Des Moines and Prairie Trail and Delaware Avenue in Ankeny continue to be strong destinations for retailers, with Jordan Creek and Prairie Trail also attracting a fair number of office users.

But any retailer with a street presence needs to provide an experience to get customers in the door and keep them there for more than 10 minutes, Dingel said. Those experiences can include climbing walls, dining, drinking, fitness options, attractions. It isn’t just about shopping.

"The retail shops are saying to the owner, ‘What are you doing to help drive traffic, and how are you going to keep them here?’ "

The report found a growing divide in the retail market between Class A retail locations and second-generation centers.

"The Class A centers are often newer construction and characterized by high visibility, superior co-tenancy, limited supply and higher rental rates. On the other hand, there is a supply of inferior retail space that is often unanchored, located in mature retail corridors with limited growth, flat rental rates and excess supply," according to the report.

To make those second-generation centers viable, owners often fill vacant spaces with nonretail users such as medical tenants or spend a substantial amount of money on renovations.

One example of creative thinking cited was Urban Town Center in Urbandale, a neighborhood center that was renamed after its purchase by Signature Real Estate Services, which also added new facades, landscaping and signage, among other things.

"For those of us who make a living brokering retail space, it’s all about creativity," Wright said.

Rental rates in the western suburbs have risen to the mid-$30s per square foot or higher for Class A centers, whereas retail space can be leased just a few miles away in the $10-$14 range at inferior centers, according to the report.

Industrial space — manufacturing, warehousing, distribution centers, flex space that provides a range of uses — is the darling of investors and possibly the hottest of the commercial real estate sectors.

"In our market, industrial is at the very early stages of satisfying just-in-time delivery," Gamble said. "Industrial will see the impact of omnichannel phenomena," where online retailers have a brick and mortar store. "This market is primed for further growth in the distribution sector."

A separate report from Gibbs and Timothy Sharpe, a CBRE|Hubbell Commercial senior vice president for investment properties, showed that commercial real estate sales in Greater Des Moines increased 38 percent last year to $434 million. National sales dropped 7 percent to $464 billion.

Sales were strong in "every size and category," Gibbs said, with several large multifamily sales helping to drive the overall numbers.

Gibbs said buyers from "all over the country" are eyeing Greater Des Moines.

"Des Moines has been discovered," Sharpe said.

Airport board eyes cuts; new terminal plans in sharper focus
By Perry Beeman | Managing Editor
Rendering courtesy of HNTB of Iowa Inc.
After a new round of cuts and another trip through financing options, Des Moines Airport Authority board member Kerty Levy is bullish on a proposed terminal and related improvements.

"This is the first time it seems like it’s almost a reality. It’s exciting," Levy said after a team of consultants led by HNTB of Iowa Inc. laid out the latest plans.

"It makes it a lot clearer now," said board Chairwoman Liz Ward.

A public meeting on the latest plans is set for 5:30 p.m. March 28 in the Cloud Room at the airport. The board is set to vote April 10 on the latest version.

What once was a $200 million deficit that had grown by $25 million to $50 million has fallen back to $200 million. Consultants said an eventual increase in airport fees (Congress willing), a proposed $65 million state grant from gambling receipts, and additional cuts in costs of perhaps $30 million could balance the project budget.

Other options: bumping up the conservative 2 percent growth figure used, reducing the 20 percent contingency fund, and delaying the $17 million demolition of the old terminal.

Basically, the new plan keeps the same services, but saves space. The terminal would still have 14 gates, with room for four more when passenger counts hit higher levels.

Terminal construction would begin in 2025-26 and would take three years.

With consultants' proposed changes, the new terminal and related changes would cost an estimated $433.9 million, including the demolition costs. It had been $496 million, roughly.

The terminal itself would cost $284 million, down from $334 million.

"The public needs to know that the board is doing everything it can, through cash reserves and reducing costs, to make this a possibility," said Kevin Foley, the airport’s executive director. Consultants stressed that no general tax receipts would be used for the project, which would rely heavily on passenger fees, leases and FAA grants.

The board is considering the project because the present terminal was built in 1948 and won’t be able to handle growing passenger loads, according to consultants who have worked on airports in other cities, including Wichita's, which opened in 2015.

Consultants have proposed lopping off the fourth floor of the proposed Des Moines terminal building that would feature an expandable baggage area, restaurants and shops within view of the security lanes, and a bigger security area than the current terminal has. Rental cars would shift to the south side of the airport grounds, allowing the airport to cut a level off the proposed addition to the parking ramps. That knocked the ramp cost from $31 million to $17 million. It will cost $18 million to move the rental car operation to a new facility.

SBA backs $2.4 million in Central Iowa loans
By Perry Beeman | Managing Editor

The U.S. Small Business Administration backed $2.4 million in private loans for Central Iowa businesses in February, down from $2.96 million the month before.

The businesses that took out loans backed in February promised to create 41 jobs and retain 110.

Among the biggest loans in this batch was $1.2 million for AKA Holdings LLC, an "amusement and recreation" company in Des Moines. That was the only loan over $1 million in this round. JAVI LLC, a Waukee restaurant operation, took out a loan for $279,000, expecting to create 15 jobs. A Johnston beauty salon run by Heemstra Partnership Inc. borrowed $225,000 but didn’t plan to add jobs.

For this purpose, Central Iowa includes Polk, Story, Boone, Dallas, Madison, Warren, Marion, Jasper and Marshall counties.

Statewide, the SBA backed 29 loans for $12.9 million for 21 new and eight existing businesses that together planned to add 70 jobs and retain 290.

See the complete listing of Central Iowa SBA loans. (Insider)

THE INSIDER NOTEBOOK
Housing study gets an icy response from some on D.M. council

BY KENT DARR: The ask was relatively small, as these things go, up to $48,000, and the cause seemed reasonable: Nikki Syverson, director of Capital Crossroads, was seeking the money to round out the funding for an effort to gather some hard data on the need for workforce housing in downtown Des Moines. The study eventually could have benefits for Greater Des Moines. Read more

MORE NOTEBOOK ITEMS: Read more Insider bits and bites of the finer side of Iowa business online.
MEMBERSHIP EXCLUSIVE CONTENT
Fill the frame, someday
Stand around any group of people connected to construction and the various professional and skilled trades sectors that prowl around projects, and it doesn’t take long for the conversation to veer toward the worker shortage. Commercial projects, residential projects, they all suffer. The lack of skilled trades workers in Greater Des Moines is severe enough that several area businesses are funding a Skilled Trades Academy at the Des Moines Public School system’s Central Campus to expose students to the skills needed in construction. Read more
LOCAL NEWS

Historic rehab proposed for East Village building
A development team led by developer Tim Rypma plans a $2.2 million historic renovation of the American Marking Inc. building at 440 E. Grand Ave. in the East Village area of Des Moines. Rypma’s RE3 LLC plans to convert the 7,658-square-foot building for commercial and residential use. He proposes one apartment unit on the upper floor and about 6,200 square feet of commercial space on the ground floor, according to a city staff report to the City Council, which will be asked Thursday to approve continued negotiations on a development agreement offering an estimated $423,000 in declining tax increment finance assistance through the next 15 years. Rypma also is seeking historic tax credits. The building is located on a block where a parking ramp and mixed-use development is being considered for a city-owned surface parking lot that is on the west side of a 118-year-old building that underwent a historic rehab and office conversion in 2003 by Nelson Construction & Development.

CoStar reps will discuss multifamily market at ICREA meeting
Brandon Svec and Todd Galvin with CoStar Group will talk about local and national multifamily markets when the Iowa Commercial Real Estate Association meets at 5 p.m. March 21 at Glen Oaks Country Club. Svec is a market economist and Galvin is a market analyst with CoStar. The meeting is open to anyone with an interest in commercial real estate. The meeting is sponsored by CoStar and attendance is complimentary for ICREA members. Register here or contact Sue Clark at seclark@ccim.net or 222-3191, ext. 201.

BUSINESS RECORD CALENDAR
NEWLY ANNOUNCED EVENTS

March 15: Downtown DIG
About: The Downtown DIG (Development Insights Group) is an event offering insight into Downtown Des Moines development projects.
When: 8 a.m.
Where: VGI Design
Learn more


View our full calendar to see the latest curated business and community events, or suggest an event.

SIGNED LEASE TRANSACTIONS
Want your signed lease transactions published? Submit your transactions.
Have a question about submitted signed lease transactions? Email kentdarr@bpcdm.com.
NATIONAL/REGIONAL NEWS

Landlords appeal to workers to lure corporate tenants
Find your Zo. That’s the invitation Tishman Speyer Properties LP has extended to workers at Rockefeller Center in Manhattan, welcoming them to an app-driven world of health, education and pampering -- and fighting off rival landlords in a battle to woo corporate tenants by appealing to their employees, Bloomberg reported.

DOWNTOWN DEVELOPMENT MAP
Have you seen our downtown development map? Click the map to the right to view it on our website, where you can zoom in and out and click the different icons to learn additional information about the projects. We'll be continuing to update the map with projects in the central business district as they happen.

Have a project or an update that you'd like to see added to the map? Email kentdarr@bpcdm.com with details.

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