Apartment vacancy rates soar
New construction, slow absorption and low long-term mortgage interest rates luring first-time home buyers away from rental units are responsible for the highest vacancy rates recorded in the 34-year history of one Greater Des Moines apartment survey.
The overall apartment vacancy rate in Greater Des Moines is 9.5 percent, up from 7.4 percent last year, according to the Metro Des Moines Apartment Survey prepared by Carlson, McClure & Associates Inc., a real estate appraisal and consulting firm. But the development of west suburban projects, including Jordan Creek Town Center and the new Wells Fargo office complex, is expected to improve those figures in 2005 and 2006.
Those and other findings were revealed at the 2004 CB Richard Ellis/Hubbell Commercial Real Estate and Apartment Market Survey held March 4 at the Holiday Inn University Park in West Des Moines before a crowd of hundreds of government and business leaders. The apartment survey, which covered a sample of nearly 20,000 apartment units located in 234 projects throughout Greater Des Moines, was added to the commercial real estate broker’s survey for the first time in its seven-year history.
“It is important for decision-makers to look at the entire real estate picture when evaluating the condition of the market,” said Rick Tollakson, president and chief operating officer of CB Richard Ellis/Hubbell Commercial. “By adding apartment information to this year’s event, we will be offering a complete snapshot of the condition of the commercial real estate market in the Greater Des Moines area.”
Tom DeWaay, a sales associate who specializes in multifamily real estate, said apartment owners have not lowered their rents, opting instead to offer tenants incentives such as free TV sets and laptop computers, or one to two months free rent. “Renters can really take advantage of the soft market and get some good deals,” he said.
The highest vacancy rates occurred on Des Moines’ East Side (12.9 percent), the west “close-in” area (12.4 percent), Altoona (10.7 percent) and in the western suburbs (10 percent). DeWaay said the highest average rents were found in the western suburbs and at high-rise complexes. By comparison, the lowest average rents by unit type were in Ankeny ($399 – efficiency), Indianola ($432 – one-bedroom), east Des Moines ($551 – two-bedroom) and west side of Des Moines ($695 – three-bedroom).
Vacancy rates would have been higher had the approximately 600 apartment units under construction in the metro area in December been counted in the survey. They were not included because they were not available for occupancy then, officials said.
DeWaay, however, was optimistic that vacancy rates will decline in the next two years as interest rates rise. “As the cost of money increases, we’ll see vacancy rates drop off,” he said.
OFFICE
The competitive office market, a segment of the office market that includes buildings considered by the market to be competing for tenants, was introduced to the company’s office market survey for the first time this year. A total of 555 buildings encompassing more than 12.7 million square feet of rentable space are currently classified as competitive office space in Greater Des Moines. That accounts for 54.1 percent of the entire office market space. Stanbrough Cos., R&R Realty Group and K.C. Holdings are among the developers that have completed or are constructing competitive office buildings in the western suburbs. Heath Bullock, a senior broker associate, said the overall office market is moving from a recession cycle to a recovery cycle. He said new developments and the absorption of large blocks of space are positive signs that the market is strengthening, as is the fact that mid- to-large-size users are fueling the pace of new owner-occupied construction and speculative office development.
“Occupancy rates continue to increase as occupants construct new facilities,” he said. “Expect space demand to remain stagnant and in 2005, office space should level off and recovery will begin.”
Vacancy rates for office space rose last year and are expected to climb again, a result of the economy’s slowdown and low interest rates. More than 23.5 million square feet of office space is currently available in the metro area, and large companies like Wells Fargo Home Mortgage Inc. and Allied Insurance are adding to the surplus rates as they build new offices and abandon their old ones.
Still, the survey notes, signs of recovery can be found in Greater Des Moines. Class A office occupancy increased or remained steady in all sub-markets and occupancy in the central business district core sub-market held steady despite an increase in inventory due to the completion of the Allied/Nationwide building. Large users of Class A space downtown, which pay at least $17 per square foot, continued to provide stability to the entire office market, but created a potential for greater changes in vacancy, officials said.
INDUSTRIAL
Though large properties vacated by Bridgestone/Firestone Inc., SuperValu Inc. and R.R. Donnelley & Sons Co. adversely affected the occupancy rates for Greater Des Moines’ industrial market, Larry Cedarstrom, a senior broker associate, said the vacant properties could attract large companies to the metro area.
“The bright spot is that for the first time in our history, we have several large properties, allowing us to compete with large cities for large users,” he said. “Before, they would make an inquiry in Des Moines but we didn’t have the space.”
Cedarstrom said Des Moines’ stable economy could help attract large users.
“Our local economy is good and getting better,” he said. “We need large users to recognize the benefits of doing business in Des Moines.”
The CB Richard Ellis/Hubbell Commercial survey shows that overall occupancies in warehouse and manufacturing space remain relatively strong. Notable exceptions, it said, include the decrease of occupied warehouse space in the central business district fringe, northwest and northeast sub-markets and manufacturing space in the south sub-market. These decreases in occupancy, however, are primarily due to the vacancy of a single large property.
More than 28.7 million square feet of empty warehouse space can be found in 652 buildings in Greater Des Moines and those figures may increase as large users continue to vacate their properties to build new ones in the metro area, officials said. The survey showed that Ankeny experienced the largest increase in occupied warehouse space, while Des Moines’ downtown fringe area experienced the most significant decrease for the second consecutive year. Also, warehouse absorption in the western suburbs was significant, following two years of negative absorption.
The overall manufacturing space inventory of Greater Des Moines includes 181 buildings containing 12.9 million square feet of space. Aggregate manufacturing absorption decreased for the third consecutive year, but overall manufacturing occupancy remained unchanged. The central business district fringe saw the largest jump in occupancy, officials said. Occupancy rates there jumped 13.9 percent in one year.
FLEX
Flex space has become increasingly popular in Greater Des Moines, but the majority of flex space is located in western suburbs.
Though overall occupancy of flex space throughout the metro area fell only slightly from last year to 85.2 percent, the western suburbs was the only sub-market that showed an increase in occupancy. Those west suburban totals, where the majority of flex space is located, offset significant occupancy decreases in other sub-markets.
A total of 4.7 million square feet of flex space can be found in 131 buildings throughout Greater Des Moines the survey reported. Knapp Properties completed construction of a 33,000-square-foot flex building in Airport Commerce Park West on 61st Street in Des Moines. In Johnston, a third flex building, offering more than 45,000 square feet of space, has been constructed in the Birchwood Crossing Business Park.
RETAIL
Retail sales in the Des Moines metropolitan statistical area grew 19.1 percent from $5.6 billion in 1996 to $6.7 billion in 2003, spurring retailers to enter the market or expand.
“Retail continues to be the growth market in commercial real estate,” said Colleen Johnson, a sales associate.
Occupancy and absorption rates have increased in neighborhood and community centers despite an increase in new construction, Johnson said. The overall neighborhood and community center occupancy increased in the metro area (84.5 percent), following a six-year low last year (83.3 percent). A total of 223 neighborhood and community buildings housing more than 4.8 million square feet of retail space are currently available in Greater Des Moines. They include a bevy of new developments, such as the Birchwood Crossing Plaza, Bridgewood Plaza, Shoppes at Legacy, Westfield Plaza and a third retail building at 128th Street and University Avenue in West Des Moines. Those figures will increase with the completion of newly planned projects including Phase II of Somerfield Village Market, West Glen Town Center, Delaware Centre II and an Ankeny retail center.
Johnson said big-box retail will see explosive growth in the next year. Big-box retail occupancy increased in the metro area to 93 percent, with Ankeny experiencing the largest increase. “Expect to see more Wal-Marts, Targets and other super-center discounters,” she said. Though total mall occupancy in Greater Des Moines remained steady (91.2 percent) among the 387 stores found at Merle Hay, Southridge and Valley West malls, Southridge Mall experienced the largest decline in occupancy.
The $200 million, 200-acre Jordan Creek mall, slated to open Aug. 4, is one of six regional malls being developed across the country, said Johnson, who added that the massive shopping complex will affect retail throughout Central Iowa.
“We’re going to see explosive growth near Jordan Creek, including an increase in upscale retailers,” she said.
STABLE MARKET
Gary Beban, senior executive managing director of corporate services at CB Richard Ellis in Chicago, said last week that Greater Des Moines’ commercial real estate market may not be as golden as he has characterized it the last two years, but it hasn’t lost its luster.
“Compared to the rest of the world, Des Moines is golden,” he told a large audience gathered for the seventh annual Greater Des Moines real estate market survey presented by CB Richard Ellis/Hubbell Commercial. “I’m hesitant to say the rest of the world is as golden as Des Moines is because it’s slowed by a lack of job growth.”
Nationally, Beban said, slow employment growth is hampering the economy’s recovery, as are other market factors such as globalization, inexpensive costs of capital, companies’ continuing reduced occupancy costs and cost-control efforts and productivity gains that reduce the need for workspace.
“Companies continue to drive to reduce the cost of occupancy so we work in smaller or cheaper locations,” he said. “For Des Moines to stay golden, we have to have a good quality of life compared to other markets.”