A ‘parochial’ market is expanding

The Greater Des Moines warehouse market has been an owner’s dream, with limited space and high occupancies being the rule. Even when more warehouses are built, more tenants move in.

The Business Record hosted a roundtable discussion in March to talk about trends, issues and challenges in the Greater Des Moines industrial market. Developers’ representatives Jason Conway of Minneapolis-based The Opus Group and Jackie Johansen of West Des Moines-based R&R Realty Group joined broker Marcus Pitts of JLL for the discussion.

All three are bullish on the market, and why not. Shippers and online retailers want to be closer to their customers, who have been spoiled by the Amazon.com Inc. model of next-day delivery, 

Both The Opus Group and R&R Realty, as well as Knapp Properties Inc. and DRA Properties LC, have built speculative warehouses in the last year, an indication that demand is robust.

The CBRE|Hubbell Commercial Market Survey that was released in March reported that occupancy of Greater Des Moines warehouses increased to 93.8 percent this year from 93.3 percent in 2015. Users are taking up more space, according to the report. This year, there is 34 million square feet of warehouse space in Greater Des Moines, compared with 32.3 million in 2015.

Some of the new space has been built for clients that are moving as leases expire. However, two warehouses were built in Ankeny last year before tenants were signed to leases, according to the CBRE|Hubbell Commercial report, and another speculative warehouse was built along Northeast 14th Street in Polk County.

Businesses that dillydally when leases on their current warehouse space are expiring might be hard-pressed to find a location. High demand for limited space puts investors at an advantage.

“This is really the first year that we’re seeing the development of speculative product,” Pitts said. “Before, it has been if we find a tenant, we’ll build for them. We are seeing enough pent-up demand now from a user’s standpoint that the speculative product is starting to look good.”

There are several reasons. For one thing, developers know that many warehouse users aren’t allowing enough lead time in building new space or renewing leases that are about to expire.

“We are seeing tenants not give themselves enough time to make decisions to actually build, and if you don’t have spec space up, you’re not going to have an opportunity to engage with a tenant with their particular needs in time to build. They are not giving themselves enough time,” Conway said.

JLL is tracking about 2.2 million square feet that is available or will come on the market this year, Pitts said. Clients needing space in Greater Des Moines probably will find it. That might not be the case in other Iowa markets. Johansen pointed out that users are encountering two forces in the market. Online retailers, for example, have customers who want their goods delivered shortly after they are ordered. In addition, there is a shortage of truck drivers.

“They are about 50,000 short of what the nation needs, and every year, that shortage grows,” she said. “I see that as an opportunity, really, for 
Des Moines and other metros that can serve and recruit and retain these drivers.”

The type of warehouse that is being built in Greater Des Moines is changing, with a move toward higher ceilings that allow tenants to store more items in a smaller footprint at a lower cost per square foot.

“If you talk about industrial in terms of clear height, how high can you stack a product inside a building?” Conway asked. “Des Moines has been at 24 feet. If you go to Chicago, if you go to Columbus, if you go to (Indianapolis) and other large markets, the average has been 32 feet clear for years, and Chicago is moving to 36. In other markets, they’re even doing 40 feet. So just recently, 32-foot clear height has come to Des Moines.”

Johansen said investors are turning to the Greater Des Moines warehouse market because, as with many classes of commercial real estate, it offers better returns on investment than on the coasts.

And Greater Des Moines has a unique quality in that many local developers, such as DRA Properties, Knapp Properties, Hubbell Realty Co. and R&R Realty, are family owned and as such tend to hang on to the warehouses they build, rather than sell them.

“I’m surprised that there are not more sales in the Greater Des Moines market,” Conway said. “For Opus, our model is to develop and sell. Seeing where cap rates are and seeing such demand, it is interesting to me to see that there are not more sales. I think it’s more of a parochial market. You have long-term holders, long-term investors.”


Jason Conway – The Opus Group
Jackie Johansen – R&R Equity Partners
Marcus Pitts – Senior Vice Preseident, JLL


Kent Darr – Senior staff writer, Business Record


In March, the Business Record hosted a roundtable conversation about the Greater Des Moines industrial and warehouse market to discuss the trends, issues and challenges business owners and real estate professionals should be aware of in 2016 and beyond.

In the Greater Des Moines industrial market, most of the focus in recent years has been on warehouses. Are they big enough? Are there enough of them to meet demand? What is driving the clamor for warehouse space?

We found out that the warehouse market is changing. New buildings are getting taller, thereby saving users some money. In addition, developers are stepping into the unknown by building warehouses before tenants are lined up. That kind of speculative building is paying off.

Participating in the discussion were Jason Conway of Minneapolis-based The Opus Group, Jackie Johansen of West Des Moines-based R&R Equity Partners and Marcus Pitts, a senior vice president in the Des Moines office of JLL.


Watch the Video
Want to watch the roundtable in its entirety? Go to www.businessrecord.com/AREM.

What’s the big issue this year in the warehouse market?  

KEY POINT: Tick-tock
Speculative warehouse and industrial is being built again due to pent-up demand and because tenants aren’t giving themselves enough time to actually build. Businesses need to plan further in advance as their leases are expiring.

Marcus Pitts: We have reported about 2.2 million square feet of active deals in the Iowa market. A lot of those are looking at the Des Moines market in particular. Available product today, under construction and including the Monsanto building that is 600,000 square feet, you’re probably right around 1.2 million square feet. There is off-market product that will be coming to market in the next six to nine months that will be probably another 1.2 million square feet. There will be some third-party logistics users who will take that. If you’re looking at the deals that are in the pipeline, if you are looking for 100,000- to 150,000-square-foot product and you need to be in it in the next three to four months, you have a couple of options. I think that has been a true statement for the last several years. Just this year, the speculative component has come into play with some of the stuff that Opus is doing. R&R Realty has some speculative product, Knapp and Albaugh (as well), but this is really the first year that we’re seeing the development of that kind of speculative product. Before, it has been if we find a tenant, we’ll build for them. We are seeing enough pent-up demand now from a user’s standpoint that the speculative product is starting to look good.

Jason Conway: Opus is based in Minneapolis, but we have nine offices, primarily in the Midwest and Phoenix, and we’re a developer of office, industrial, retail, multifamily, mixed-use in all of these markets, so we’re busy and diversified geographically by product type. All of that said, in the industrial space, we have about 8.4 million square feet of industrial space, either speculative or build-to-suit coming up in those nine markets. We’re very happy, and we’re very bullish on industrial right now. In our Chicago market alone, we are doing 2 million square feet of spec industrial space. The industrial market has a lot of legs left, as far as we can see, 12 to 18 months, so we feel real good about it. We’re going to continue to invest. We are seeing tenants not give themselves enough time to make decisions to actually build, and if you don’t have spec space up, you’re not going to have an opportunity to engage with a tenant with their particular needs in time to build. They are not giving themselves enough time.

Is that because of demand for their services?

KEY POINT: Truck driver shortage
A nationwide shortage of truck drivers is growing every year, which can hurt a company’s ability to locate distribution centers.

Conway: I wish I knew the answer to that, but you see it more and more. Tenants are not giving themselves enough time. They probably need 13 to 16 months for a deal-making decision, and they are giving themselves nine to 12 months. They might be expanding into new markets, they might be moving, they might have some play on an expansion or a new build, so there are a lot of factors.

Jackie Johansen: I think one of the challenges that the industrial and the distribution center segments have is that they are kind of feeling the one-two punch. They’re getting the consumer expectations to purchase products online and get them faster, so they need more and more distribution centers, and we’re seeing speculative growth across the nation. We’re seeing real estate investment trusts very hungry for this product, so we are seeing a lot of investment coming in, both foreign and local. On the other side of things, you have an employee-based problem. There is a shortage of truck drivers. They are about 50,000 short of what the nation needs, and every year that shortage grows. I see that as an opportunity, really, for Des Moines and other metros that can serve and recruit and retain these drivers. It’s just like the office market, when you have a labor pool that can attract those companies. We talk with business leaders about that; we talk about what Greater Des Moines is doing to build a network of truck drivers.

Pitts: One comment I’ll make based on Jason’s comment earlier is that a lot of these industrial tenants, the last time they went through the process of securing space, it was a different process. The market was different. We represent a client who is looking for bulk space in the Cedar Rapids market. Cedar Rapids has about 2 percent vacancy in about a 22 million-square-foot market. If you’re looking for 200,000 square feet in that market, it doesn’t exist. In Des Moines as the leases are coming up, you’re starting to see that. There is an education process. The market that existed five years or 10 years ago when you signed your lease, it doesn’t exist today. So being more proactive, getting out, starting to plan that leasing role three to nine months before expiration, you need to be looking a year, year and a half out on these things. The timing and change in the market is something that we have been noticing.

Has development been slow in this area?

Pitts: I just think there is a pent-up demand. Businesses are in a growth mode, and you’re seeing them needing a bigger footprint. A lot of times, if you’re not planning far enough ahead, that footprint might not exist today.

Conway: Des Moines historically has been, if you talk about industrial in terms of clear height, how high can you stack a product inside a building, Des Moines has been at 24 feet. If you go to Chicago, if you go to Columbus, if you go to (Indianapolis) and other large markets, the average has been 32 feet clear for years, and Chicago is moving to 36. In other markets, they’re even doing 40 feet. So just recently 32-foot clear height has come to Des Moines. When a large national user that distributes throughout the country wants to locate here and doesn’t see that there is a 32-foot clear height available, they leave. So anecdotally, the story has been that Des Moines doesn’t need a 32-foot clear because people aren’t asking for it, but if it wasn’t available, then people couldn’t use it as an option. We are now seeing a couple of instances where companies have come to town that want 32 clear. So I think that is going to open an opportunity for Des Moines in terms of industrial development. 

What drives the move to go higher?

Conway: It’s really economics. If you can rent the same amount of space and you can put more in that space, your cost per foot goes down. Instead of a linear square footage equation, it’s a cubic equation, and you can get a lot more product into the same amount of space. It’s just a more efficient use of that space.

How quickly does the demand for space turn? How much does the local economy affect demand for this space?

Pitts: I think Des Moines as a whole is fairly sheltered. You don’t see the highs and lows that you would on the East Coast or the West Coast or some of these other markets. The Midwest as a whole is fairly sheltered from a lot of that. I think there is fairly strong demand. We’re tracking deals across the Midwest, and right now our biggest transaction in 2016 is about 13 million square feet under construction, speculative product, … And with current deals in the pipeline, just that we are aware of, there’s about another 45 million square feet. The existing deals out there would absorb all of the space available, and there would be 1 million square feet that can’t find a home. I think it’s just a real strong market right now. Iowa City is a little bit of an oddity in the industrial market right now. That’s a market of about 5.3 million square feet. They’re experiencing a vacancy of about 36 percent, when the vacancy across the state is about 6 percent. Procter & Gamble Co. had a large contingent there, and they pulled out of probably close to 800,000 square feet and they consolidated that into a new 1.6 million-square-foot distribution center they did in Dayton, Ohio. I think there is going to be a lot of opportunity in Iowa City. Where I was going with that, and this was true of the Maurice’s deal, a lot of these groups are at the point where they follow the Amazon.com Inc. model. Amazon started with a large distribution center in the center of the United States. Amazon now has 57 distribution centers totaling 41 million square feet. I think as these companies are reviewing their logistics of how they are sending out product, or where there is a fulfillment center or a distribution center, a lot of them are pulling to different areas of the market. I think that’s what affected Iowa City. We have had a couple of Des Moines clients leave Greater Des Moines and go east just because it’s a bigger customer base for them. We have people who are pulling out of Memphis and looking at Des Moines. For the most part, from the incoming to the outgoing, Des Moines stays pretty healthy from what I’ve seen.

Is this an indication that the economy is hitting on all cylinders? E-commerce isn’t driving all of this?

KEY POINT: Land abundance
Iowa is attractive to companies seeking large, sprawling warehouse distribution centers because of our plentiful land near major interstates.

Johansen: The United States does about $4.5 trillion in imports and exports, and Iowa touches about 8 percent of that. So I would agree that we are somewhat sheltered. We move about 86 percent of that by truck. It does feel like we’re hitting on all cylinders. I recently spoke with an economist who said we are probably at the bottom of the seventh inning so far as this cycle goes.

Conway: There’s been this historical ebb and flow by large industrial users where their whole logistics organization and their whole supply chain group will go from wanting a bunch of small buildings all over the country so they can get to more of their customers, and then they’ll flip that and say, “You know, we need more of a regional approach, and we need to have instead of 40 small, we’ll have five large and we’ll be able to serve them better,” then it seems they go back to the original model. Either way, we all win. Whether they want smaller facilities or bigger facilities, there always seems to be this ebb and flow. Everyone’s trying to get really smart about logistics and how they can get their product to their client better, faster and cheaper. Everybody is trying to build that better mousetrap in their logistics systems to deliver what they can to beat their competitors.

We just built a building for ConAgra Foods Inc. in Frankfort, Ind., north of Indianapolis, 1.6 million square feet. It’s over a mile to go around the building. You see General Mills Inc. doing the same thing, building 1 million-square-foot buildings, yet you have other people who want smaller facilities, so to have the ability to deliver what the client needs is important.

Johansen: In Iowa, we have so much land; we have Interstate 80, we have Interstate 35, we have plenty of land that has good interstate access. I was speaking to a broker in Seattle (who is with) the largest industrial REIT in the world. He said in 2015 they spent $415 million just in the Seattle market and they have a commitment in ’16 to $750 million, so they are really serious about that metro area. But land cost is such an issue there that they are starting to build like they are building in Japan. They build up; they have what looks like an interstate that goes into the buildings. In Iowa, we can build these sprawling sites, similar to what Microsoft Corp. did for their data centers and some of these distribution centers. We have very healthy land.

Pitts: Land costs are good. I think there still are some opportunities on the northwest side of the market. I know R&R has been active up there. We also have the Corporate Woods Center interchange in Ankeny, 400 or 500 acres of development ground there that is ready to go. So there are some good options there for big users, and we have Gannett Drive in Des Moines. There are plenty of opportunities for land, which is not the norm across all of the markets.

Is there competition for various types of land uses, such as whether to build a warehouse or an apartment building?

Pitts: I do see some of that. Some of these municipalities that we are looking at, their planned land use as they originally intended 10 years ago or five years ago or whenever they looked at it, the multifamily segment of the market might have to look at some of the ground. Corporate Woods, there is some ground there, and Chapman Farm, that was one that went through and was rezoned to light industrial. There’s potential land use competition there, but the market brings what the market brings, and if you have someone who wants to take on 120 acres of industrial and you have to rezone to do it, that’s pretty compelling.

Conway: Another thing we shouldn’t forget about is infill sites. Yes, there’s a lot of land on the outskirts. There are people that say that Urbandale is built out; well, there is old product, there’s old use. You can assemble land that is well-located, and if you needed to tear something down for redevelopment, we do those kinds of deals in other markets all of the time. It doesn’t always have to be greenfield development. There’s redevelopment in great infill locations for something that’s tired and old and ready to be redeveloped.

Johansen: The other thing to look at is who’s buying the land, too. If you take a quick look at the larger land parcels that have sold from 2014 to today, about 54 percent of those are purchased by developers for companies that are out-of-state.

I think the out-of-state, out-of-town, out-of-country capital that is hungry for ownership for real estate, you hear these stories about how they start on the coasts and cap rates get so low that they get tired of competing for product so they move inbound. The capital that is hungry for product in Des Moines far exceeds the supply that is available.

Johansen: If you look at the coasts, you’ll see compressed cap rates of 3 to 4 percent, whereas in Des Moines, you can find probably 7 to 8 percent-plus cap rates.

Pitts: The Toro transaction in Ankeny, which was under a half-million square feet, that cap rate was sub-7, probably closer to 6. So it really depends on the product. We just had an out-of-state broker who thought he could get 5 on a multifamily product. That’s low. The most recent thing on the apartment side was a 6 percent cap rate on an Ankeny property. On the industrial side, you’re starting to see that stuff for the right product get down, but if you’re going to pick up a multitenant with some retenanting costs, then you’re right around that 8 percent cap rate. As capital continues to chase this stuff and product continues to draw from major markets, you’ll see that cap rate compression. 

KEY POINT: Outside investing
Since 2014, about 54 percent of the larger land parcel purchases have been made by developers for companies based outside Iowa. Out-of-state investors are seeking the low cap rates of the Midwest.

Are those same investors wanting to buy multifamily?

Conway: I talked to an investor the other day, and their No. 1 was industrial. They said absolutely no multifamily. “We like industrial, we’ll do a little bit of office, we don’t want retail, we want industrial.” It’s investor by investor, what their criteria are. Even in industrial, they might say we want no showroom or we only want 24-foot ceilings. It’s very specialized in what their appetite is because they are trying to hit certain returns for their investors or the dollars they are trying to place. They are trying to get certain returns, so they are very specific. I’m surprised that there are not more sales in the Greater Des Moines market. For Opus, our model is to develop and sell. Seeing where cap rates are and seeing such demand, it is interesting to me to see that there are not more sales. I think it’s more of a parochial market. You have long-term holders, long-term investors.

Pitts: It depends on whether you have an institutional-grade investor. I think Jason’s point on some of this other product, the owners are Hurd, R&R, Hubbell, Knapp; they are family companies. They are based in Des Moines, and they are long-term holders. 

Johansen: And they manage the properties.

Pitts: That’s why some of the developers who have come in from outside the core local group, they’ll find an opportunity and buy it. A lot of it is because they can’t find people who want to sell.

I go back to your question about challenges, challenges as a developer and a construction company. We are very tied into what is going on in the construction world. If you wanted to start building today and you’re going to order precast on an industrial building, even here in Des Moines, and this is true in Chicago, it’s eight months to have that order filled, and normally a lead time would be somewhere between 16 and 20 weeks, so we’re seeing double the delivery time on items like precast because everybody is so busy. If you look at Facebook, Microsoft, the data centers, those are all precast panels. There is so much construction activity that is going on, in and around Iowa, that everybody is busy, which is great, but the challenge is, can we find people who are qualified, that have people who are available and who can get them when they need them and in the numbers that you need them? When you get precast panels on-site, you want to get them up as quickly and as efficiently as possible. Can you find the right crew that can put those panels up when they are available? That’s going to be a real challenge for everybody, at least through the end of this year.

Closing comments?

Jackie: I think things are on the sunny side of life. We live in a metro that is winning awards. We’re right on the crossroads of the interstates. We have investors who are looking. We had a large amount of Canadian capital when the exchange rates were right. I see that continuing. If you look at institutional capital across the United States, in 1995, commercial real estate was about 2.9 percent of those portfolios. Today, we are up to 8.8 percent. We’re seeing more and more investment just in general in commercial real estate, and Des Moines is absorbing some of that as well. Some reports say we will go as high as 10 percent. Des Moines is seeing office investors, industrial investors, a lot of land development. We’re spending on infrastructure, and I think the Iowa Economic Development Authority is doing a great job by going to Austin, Texas, and telling the world what we have to offer.

Conway: Opus as a company is bullish on industrial, not only in Des Moines but throughout the Midwest, and we are kind of putting our money where our mouth is by putting up almost 8 million square feet in the last couple of years — and we certainly think this industrial market has more legs. As everybody has said, the Des Moines market doesn’t have the highs and doesn’t have the lows, and Des Moines is doing a tremendous job of marketing itself, with the Greater Des Moines Partnership and all of the development groups. We’re planning on doing more in the market. We are excited about it. For the foreseeable future, we see good opportunity for our company in Des Moines.

Pitts: I would echo the thoughts of Jackie and Jason. Des Moines is doing a great job and the state of Iowa is doing a great job in marketing the industrial market. The interesting things that I’m tracking with the industrial market, it will be interesting to see what the next year of activity brings in Iowa City and how much of that space gets absorbed. I think the average rents in Iowa City are about $3.50 net, and that’s on the low end of industrial across the state. Other than that, the state averages about $4, and we’re at about $5 in Greater Des Moines. It will be interesting to see how all of this shakes out. The deals that we know of today, where are these going to land? If we have a lease coming up in January 2017, if they haven’t already made a call, once they do, they will be completely searching for space. It will be an interesting year. There is a lot of activity in the industrial market across the state.