Forecast hints at real estate upswing
Officials at Grubb & Ellis/Mid-America Pacific say though there is no general agreement on how quickly the economy will rebound or how strong the recovery will be, many signs point to improving real estate markets in 2004, including the Des Moines market.
Last week, Grubb & Ellis and Knight Frank released their annual commercial real estate forecast for the Great Plains territory, which includes Des Moines, Kansas City, Omaha, St. Louis and Wichita. The report illustrates how each market is affected by the national economy and how the Midwest markets are nearly parallel. In each of the five markets, “retail leads the way with vast growth and limited ramifications of the economic downturn.
“However, the question remains whether or not retail can sustain the same rate of growth for much longer. Meanwhile, office and industrial are making a comeback in most cities after enduring a two-year slowdown,” according to the report.
In Des Moines, Grubb & Ellis officials expect modest growth for industrial and office sectors in 2004, before improving in 2005. Retail is expected to maintain its current pace before declining next year while activity in investment real estate will continue to be active.
“In general, interest rates are still extremely attractive and we don’t see that changing before the election,” said Kurt Mumm, managing director for Grubb & Ellis/Mid-America Pacific. “That helps when it comes to building new facilities, but it also creates a backspace that needs to be filled. So landlords continue to get creative in attracting new tenants, particularly in the office sector.”
Mumm said business has increased as tenants fear the potential of increasing interest rates.
“We’re seeing more activity in the industrial and office markets because a lot of people were probably hesitant to make decisions last year and now they are in a position where they have to make a move,” he said. “On the other side of the coin, there is still a lot of space out there and it’s going to take two to three years of normal absorption to get back to the point of what we consider to be a strong market.”
Grubb & Ellis’ national forecast calls for a 2004 economy that will include a creation of jobs, which would boost totals in all commercial real estate sectors, particularly office, industrial and multi-housing. Though Des Moines is the smallest of the five markets reviewed, its strong financial services industry, combined with a high concentration of insurance companies, has buoyed Des Moines’ economy during the recent recession.
“We’re confident the economy will recover, it’s just a matter of when it happens,” Mumm said. “In Des Moines, we see moderate job growth this year with all the jobs being created by Wells Fargo and Jordan Creek Town Center. Of course, our financial institutions insulate us from downturns other markets have because they have not been hit as hard as other industries have. I think things are better here because we have an industry that is very strong and is experiencing some growth.”
The following is an overview of Grubb & Ellis’ forecast for each commercial real estate sector in Greater Des Moines for 2004: OFFICE
Des Moines’ office sector is outperforming retail and industrial and the forecast calls for more growth in this sector in 2004 with an emphasis on financial services, medical and small build-to-suit opportunities in the suburbs. Wells Fargo could potentially have the largest impact as its mortgage division builds a 800,000-square-foot campus in West Des Moines and Wells Fargo Financial expands its presence downtown. Additionally, Iowa Health Systems and Mercy Medical Center are planning major medical facilities in the western suburbs.
Low interest rates, Grubb & Ellis officials say, led to a limited amount of speculative office space built in 2003. They predict that will increase in 2004 with new construction office rental rates hovering between $12 and $14 per square foot and medical submarket rates ranging between $18 and $20 per square foot.
A handful of large properties such as the former SuperValu, R.R. Donnelly and Firestone Agricultural Tire facilities contribute to spiraling industrial vacancy rates in Des Moines as they leave vacant space in the wake of building new facilities or move their operations. The report indicates that little, if any, relief is in sight for 2004 as leasing activity is expected to remain soft.
While oversupply is the theme for 2004, rental rates will continue to drop as newer bulk products compete with older properties, officials say. As a result, landlords are offering free rent, moving allowances and expense caps to lure tenants.
The report says that no speculative development is foreseen in 2004, but “the strength in activity persists in the northwest submarket, as the surplus and variety of product coupled with interstate access remain dominant factors.”
Low interest rates are attracting premier retailers and restaurants in the Greater Des Moines market, particularly in the western suburbs, as the northeast and southeast markets are affected by big-box vacancies and increasing landlord concessions. In addition to the enormous growth potential in the area surrounding Jordan Creek, other developments, like West Glen, are also attracting national retailers there. The report says that both landlords and tenants can expect rental rates to rise in the western suburbs in 2004 and “limited concessions to be the status quo.”
Ankeny continues to be one of the metro’s strongest retail corridors, and officials say that won’t change in 2004. National retailers such as Kohl’s, Dress Barn, Michael’s, Petco and Pier 1 opened stores there in 2003 and Sportsman’s Warehouse will open its first metro store in Ankeny this year.
Low interest rats continue to spur investment activity in all sectors of the commercial real estate industry in Des Moines, particularly office investments. “The office investment market, normally a small portion of the investment number, experienced steady activity in 2003, while the sale of Westlake Apartments last fall brought multi-housing to the top of the chart,” the report states.
Jordan Creek continues to prove to be an epicenter of activity and officials predict that land speculation around Jordan Creek “is gearing up for some long-awaited closings, which could test local price per square foot records.”
Though a moderate oversupply of office and industrial space in anticipated for 2004, officials say, overall, buyers continue to outpace sellers in the investment sector, “so capitalization rates should hold steady at or near current lows.”