Maybe you’ve already glanced at CBRE|Hubbell Commerical’s Marketview report while plunging into this issue of the Annual Real Estate Magazine. If so, you’ve come across reports on three sectors — multifamily, office and retail — that are facing some headwinds. 

Our panel of land development experts tilted slightly toward the cautious side when it met in late January. Let’s be clear, the yellow flags aren’t even halfway up the mast, but the experts are keeping an eye on themes that temper full-blown optimism for the coming year.

A spike in interest rates would be the first area. Yet, as Nick Halfhill, president of Landmark Development Services, said, developers react to the concerns of their end users, whether that end user is a family moving into a new home or a business looking for office space.

“We’re still coming out of a real strong session with real estate,” Halfhill said. “Over the past  probably six or eight months, we’ve noticed a little bit of slowdown. But it’s nothing that we’re reacting to. So at this point, it’s somewhat business as usual.”

Aimee Staudt, vice president of development for Knapp Properties, agreed, and said it is difficult to pinpoint the exact interest rate level that would trigger deep concern.
 “We’re doing a lot of really great things throughout our city. You’re continuing to see the secondary markets be very desirable from an investment perspective for institutions. So I feel those are all things working in our favor,” she said.

Curtis Brown, assistant city manager and director of economic development for the city of Urbandale, sees another year of “high-quality, market-sensitive development.”

“I think we’re seeing developers and businesses read the market and look at the opportunities that the public sector’s putting out there,” he said.

Dennis Reynolds noted that much of the “low-hanging fruit” has been picked and processed as Greater Des Moines came out of a “really difficult time and … stabilized.”

“So now where do we go next in a very thoughtful and intentional way that helps the city of Des Moines continue to have the success that it’s had in the past 10 years?” he said.

Watch the roundtable video in its entirety here. Watch the other four videos at businessrecord.com/arem.

Catching a wave, or not 

Greater Des Moines is kind of an economy of ripples. We don’t get smacked down by the big waves, but what could happen on the national scene or international scene that would send that big wave our direction?

Dennis Reynolds: I think the easy one’s interest rates. I think that’s something we all kind of keep our eye on. And that’s probably where cautious attitudes come from. We’ve got to make sure stuff in the pipeline can survive a little bump in the interest rates.

Aimee Staudt: I don’t know if there’s necessarily a threshold [for rates]. I just know for a single-family development there’s always this triangle. So your pool of buyers that can afford a home, it’s just like a triangle. If you’re at this price point, everybody can afford it. If you’re at this price point, you’re starting to narrow your market. And so, obviously, interest rates play a factor into all of that. We haven’t really seen a ton; we’ve seen some movement on lot sizes and maybe house square footage, where people are willing to sacrifice quality and maybe go to a little bit smaller footprint. Homebuyers worry. Even apartment dwellers really want to scale back on their finishes and amenities and some of those things. And so you’re kind of in that sort of Catch-22 of, “We’re trying to bring home prices down and apartment rents down but people aren’t wanting to sacrifice some of the things that maybe that would take.” And so interest rates just add another layer to that.

Nick Halfhill: From our development performance, they’re obviously very reactive to interest rates. That’s part of the equation, but probably as fast as we react to that issue, homeowners or buyers, business owners are reacting to that issue a little faster than we need to. So the market is going be affected as quick as we can kind of figure out what we’re doing with aggressive planning. 

We all react to the end users. And the end users are trying to figure out what they can get for $1 and whatever version of that dollar. For the last 15 years around the Des Moines metro, we’ve been trying to figure out what that next paradigm is, and I don’t know that we’re there yet. But we’re getting there. We’re getting into the 55-foot-wide lot being a little more normal, where 65 was the standard for the better part of 40 years.
So what that does is that it makes the land more attainable for that house. But you think about how much infrastructure is in front of that lot, and that’s really … it’s not the square foot of the dirt, it’s how much road you have in front. That 10 more feet of road, you have more feet of sewer, of water, another hydrant. 

So when we’re talking about obtaining a value of a house, that’s really what we’re all chasing. Whether it’s $201,000 at one point, now it’s $250,000. It’s trying to figure out how to knock $10,000 or $20,000, or 5 or 10 percent out of that home.

Reynolds: To me, it puts a premium on the design aspect. When you’ve got a smaller lot and you’ve got this high expectation for quality that’s not expressed in just sort of big simple square footage. It’s expressed in quality of the spaces. The quality of a light, the finishes, all those experiences that it provides. So as we get smaller and more efficient, which I think is smart, it also means we have to be smarter about how we design these neighborhoods.

Before businesses look for land or infill sites or anything, are they asking you about workforce? 

Curtis Brown: It’s hand in hand. It really is. I think the advantage that the Des Moines metro has is this is a great place to live and work. And so, business has to have confidence in the ability to attract the people that they need. I suppose you could give away land and buildings all around, but if you don’t have the people that they need to work in those spaces, you’re missing half the equation. I’d be curious, what you all think of that?

Halfhill: I don’t think any of us at any one given point know the answer. I think I mentioned earlier about the Partnership speaker who had some very good information about the statistics and where people are coming from. Folks come from any number of small towns around Iowa; we all kind of know that. But the infill that we see from Chicago or Omaha or Kansas City and why are they coming. Well, a lot of that is this recipe we’re talking about. It’s workforce versus available jobs. It’s when the available jobs are created versus that workforce. And we have this really good machine working right now, with the strong nucleus downtown, which allows everything to really function well.

We’re creating homes, ultimately, for places to live and neighborhoods. Where are those people coming from, how often are they going to come? And so it’s reacting to global numbers, but we have an anomaly here that isn’t what you get in every midsized town around the Midwest or around the country, for that matter. So it’s talked often about — how do we keep that going? Which is what we’re all up to … I think it’s interesting to watch.

Iowa nice 

Are companies shopping for incentives?

Brown: That phrase, I think, might imply something more negative than what might actually be happening. I think that businesses are making, and have the right to make, wise economic decisions. And so is there incentive shopping? I think there is definitely comparison of what comes with each site. But ultimately, I don’t know. I think the incentives are part of the equation, but only a part. There are the location, the access to workforce, the land or building being the right fit for the personality of the company. All of those things have to be in place, and then the incentive becomes a way to move the project forward.

Because here’s the thing. And I wanted to ask the panel this, and I hope we’ll get to there. But what’s different this time from the years leading up to 2008? It seems like this time, companies are making conservative and wise economic decisions about their investments. And the incentives, right, should be part of that consideration. But I think around the metro, companies are honorable and reasonable.

Reynolds: That’s one of those intangibles; that’s an Iowa strength, right. We’re not reckless, we save our money and we’re resourceful.

Brown: Absolutely. The principles are there. We incent good jobs. We don’t release something we didn’t have. We share the benefit of investment with the companies making those investments. 

The managers and owners of the businesses here are honorable and reasonable, because they live here too. I would say that our city peers are as well. People in economic development, we take that fair play agreement seriously. And the key principle is that we don’t steal. And so I think we all recognize, being in economic development, that businesses have a right to make sound economic decisions. And so that means that they can compare sites and buildings and incentives. And I think we have an obligation to provide that information and be even-handed about it as well. The truth is, it’s a good environment to work here. I hope to do business and I know from practicing local economic development that it definitely is. It’s more than about incentive, it’s more than about the price too. 

Halfhill: The most unique thing that we’re dealing with is just steady urban planning. You try to figure out how people react. Well, we have this anomaly of these huge economic impacts that bring the infrastructure. And that’s outside of what we’ve learned to try to react to people. So now we’re looking at, OK, we have a physical model that’s expanding. And not necessarily organically, and how are organics going to fit into it? We have a nucleus, and a very strong nucleus, downtown. But now with the infrastructure in the northeast quadrant, a lot of infrastructure on the south, definitely the southwest bigger than it once was. And then, now directly west with Apple out there. A lot of that is going to happen organically no matter what. But all of a sudden we have this ability to kind of infill those areas. So it’s more observation of, well, let’s see what happens and how that kind of influences areas between all of these big spots now.

Next up for development 

What do some of the next prime development spots look like?

Reynolds: Good planning says you don’t consume sites, you create sites. So as you develop a site, it now makes two other sites suddenly prime. And those two sites get developed and they create four good sites. Hopefully we’re being smart about what we’re doing. I think we’ve got some good riverfront sites still, and riverfronts are always attractive for lots of good reasons. There are still lots of creative infill sites. They just need the right numbers to make them work. I’m not worried about us running out of key sites.

You say make the numbers work. Is that the cost of the land?

Reynolds: Yeah, the cost of the land. We’ve chewed through most of the inexpensive brick warehouses from the 1920s and ’30s and converted those. So you go to the next level. What’s the next type of building type or site? The Bridge District, I think, maybe opened our eyes and says light industrial stuff from the 1970s could be redeveloped in a really strong way. So I think we continue to be creative. … My dad always said, he was a golfer, “You win the match on the first tee.” And that means the bet that you make, how many strokes do I have to give you, is going to determine if I’m going to win or not. So the terms that you set at the very beginning helps decide if it’s going to be successful. And that goes for development too. You’ve got to get the land at the right price to make the pro forma work.

I can think of three other projects around Greater Des Moines. One is the 100th Street bridge and the Iowa Highway 141 flyover in Urbandale. The other two are the proposed Microsoft Data Center in Madison and Warren counties in West Des Moines and … the Apple project in Waukee. The 100th Street bridge is working out pretty well for Urbandale, but do those big projects, such as the super big data center projects, are they just out there on their own, or do they have additional benefit that may not be as immediately apparent?

Staudt: I think the benefit that really comes from it is all the infrastructure that goes with it. And I think that’s particularly apparent from our perspective for the Microsoft Data Center that helped with the funding of the bridge over Raccoon River and the extension of Veterans Parkway and eventually the future interchange on Interstate 35. And so, I mean that, for just us alone, opened up 1,800 acres of land that you would have to go through four counties — and literally four counties. And it would take you 30 minutes to drive on a combination of gravel and pavement to where now you are literally, I don’t know, five minutes from, say, the Glen Oaks area of West Des Moines. So that’s just a huge game changer for us, and that’s just the land we own. There’s tens of thousands of acres that opened up for West Des Moines and Warren County.

I think the same thing with Apple, from an infrastructure standpoint and all the different sewer and water improvements that were made because of that. And then in that particular deal, it also spills over into funding that goes to help Waukee with amenities and park land and some of those things.

Brown: We cheer them on, because all of these projects accrue to the benefit of our entire region. When the Greater Des Moines Partnership or any of us selling the metro can say, “Look who’s invested here.” I mean those are names that bring immediate attention. It’s like having anchors in the mall. It benefits everyone. And then you asked about whether the infrastructure has any spillover effects. Absolutely. Aimee gave numerous examples of the data centers, but just think of what 100th Street and the flyover, just to think of what all of that infrastructure does for all of the northwest part of the metro, not to mention all of the people from around Central Iowa who are going to work in those buildings that are there, perhaps due in part to the access that’s been created.

Five, seven years ago, many of the development areas currently being filled didn’t exist. Do you think there’ll be additional places where future development will start carving out, or are we in a holding pattern until some of these areas fill in?

Staudt: All it takes is really one of those to land someplace that’s sort of a new area and then, while you have all of the construction jobs that come with it for multiple years, you also have all of the infrastructure that comes with it. And so, while there are not a ton of employee uses that a data center brings, it does bring the infrastructure.

If you lay out what we’re talking about with the data centers creating potentially more spots in the future, what does that ultimately do to land prices? Let’s pretend, to the extreme, then, two or three more bigger type projects were to come online and that would open up new areas. Does that affect pricing at the places currently?

Staudt: I think absolutely, if you look at what Apple paid for however many acres they have out there. I mean if you’re a neighboring landowner, I think that there’s your comp. When Nick or Knapp comes and says, “Hey, we’d like to make you an offer.” They’re like, “Well, $35,000 an acre is what that averaged. So …”

Reynolds: Yeah. And it does create opportunities maybe for other vectors in the metro areas. So the Altoonas and the Norwalks, some of those places that maybe don’t get as much attention, suddenly become viable.

Looking in the rear view mirror 

So, back to Curtis’ question, when you look at 2008 and what led up to that, what is different? In this case, are prices back to that point?

Halfhill: Yeah, the prices aren’t what broke. What broke was, well, a lot of things. But what’s immediately different is, it is far less risky. We’re never going to get rid of the risk. Any business endeavor is a risk, right? But it’s a lot different. And by and large, where some companies, maybe they didn’t change their practices at all, but there were a lot more entities that either don’t exist or were forced to say, “Look, you cannot do it this way.” And land development, by and large, real estate is the easy one to point your finger at because it is inherently risky. So I think people nowadays want to get a little more from land development.

Are you going to go build 100 lots and hope you sell on it, or are you going to get those 100 deals worked out, or 75 whatever percentage. You’re going to be a little more concerned about that business model. That’s a benefit. And what’s changed is we all have had the opportunity to experience 2008. Before that, I was 7 in 1980, so the farm crisis didn’t hit me the same, it hit my family members. But I didn’t have an economic issue to go through like that. Now we’ve had it, so we have our reasons for reacting the way that we do.

Staudt: Simplistically, I think that, back before 2008, there were a lot of banks, developers, you name it, in the real estate industry that maybe felt like they were taking too much risk but in order to compete and do any business, you had to take that risk, because there was someone else who would’ve done it. And some people didn’t change their practices. I would say the people who maybe resisted that a little bit said, “That’s too much risk for me; I’m gonna try and make the deals work that don’t get me to that risk level” are the ones who survived. And the ones who said, “You know what? Everybody else is doing it. I’m jumping in. I’m gonna make these deals and so far it’s worked out.” Well, then it stopped working out and now, like Nick said, people have lived through that and they understand, and, hey, there were consequences to making those decisions. [They say,] “I’m going to change how I do business because of that.”

What would be an indicator that people are starting to do that again, where they are taking that much risk? Is there something that you’d be looking for?

Staudt: The fundamentals in real estate are not rocket science. You factor in your costs, you factor in your projected revenue and the return you need. You figure out your risks from that. The problems were people saying, “Well, yeah, I’m gonna make no-doc loans and I’m gonna just assume it all works out well.” If you stick with the fundamentals, you’re going to be fine. And people weren’t doing that then.

If you have a sector that struggles — retail, for example ­— does it create a new opportunity, a different development opportunity, or does that upset the balance of those fundamentals?

Reynolds: That’s how I see it. If you were to ask me, “Where do I think the next opportunities lie?” Surely we’ve milked the multifamily market as far as we can. But the failing strip center is an area, and the big-box retailer is just ripe, to me, for rethinking in an innovative way. Des Moines, if it has a weakness, in my perspective, one of them is we’re really limited with our entertainment and shopping choices. We’ve got the East Village, a little bit of something there at Valley Junction. A little bit of something in Beaverdale, and then the big mall experience, and lots of retail spaces that are pretty marginal and need to be reinvented. So how we reinvent those retail spaces —they’re big, simple building forms. How do we reinvent them, and in a multitude of uses?

Looking ahead 

If you’re going to anticipate, looking into the next three to five years, push it out a little bit and think about land prices, what do you think we could expect for the Des Moines market?

Halfhill: I don’t think we’re going to see a lot of fluctuation in land prices. You like to think everything follows the market values, but it’s relative. But in our case, the only place is that one spot down the street downtown. Yeah, that’s going to change because those are getting fewer and fewer.

Is the approach to developing in the suburbs different? Do you focus more on amenities and neighborhood retail stores and that kind of thing? 

Staudt: Well, I think every property or every area we look at is different. I mean, if you’re developing something that is right behind the Hy-Vee in Waukee versus something that’s kind of out in the outer regions of Urbandale versus where we’re looking at the new area for Raccoon River. You’re going to approach all of those a little bit differently. It certainly does come into mind. And one of the things we think about as we’re looking at opening up a new area is: If someone wants to go get a gallon of milk, how far are they going to have to go? And even if it is only five or 10 minutes, some of it can be perceived distance as well.

So then the question is, “OK, well, the area that we’re looking at really doesn’t make a lot of sense for convenience stores.” When you think that next year, they’re going to have the intersection of Grand Prairie Parkway and Veterans Parkway constructed. So that makes more sense. Those are all factors, kind of, that we look at. Parkland, we don’t get to make those decisions unilaterally; the city’s weighing in on that. And a lot of times the trend now is to try to create, maybe have three different landowners contribute and create sort of a larger piece. Because a lot of cities can’t afford to maintain 30 different small parks when they could combine all of those into five larger, regional parks that still provide access to the neighborhoods.

Brown: I’m glad you mentioned that, because I do think cities are trying to meet developers halfway too. So one example is out in northwest Urbandale, we are building one of our streets as a complete street. And some people might look and say, “Well, this isn’t in the dense part.” But we wanted to get started. And part of it is responding to the people who are investing in those neighborhoods, to the developers that are making investments out there and saying we understand that you want a distinct place.

Land Takeaways

‘We need more people’

The scramble to find workers was a common theme of several of our video roundtables. With an unemployment rate just barely above the surface of 2 percent, employers say they are having a tough time filling open jobs. Greater Des Moines finds itself in a bit of a pickle. A strong economy and the jobs it creates could stymie additional growth. Curtis Brown, assistant city manager and director of economic development for the city of Urbandale, remains optimistic. “Workforce is the No. 1 thing we talk about. And in Iowa, we just need more people,” he said. “But we are not seeing a disinvestment in workforce. Companies are working hard to retain their employees. They’re working hard investing in training workers. And so far, we’re seeing continued hiring. And so wealth generation is the engine that keeps this going and allows people to buy houses and reinvest, and I think so long as we’re seeing good opportunities for earning a great wage here in Des Moines, in the area, it seems like that is going to bode well for the rest of this year. If we start to see business slow down on investments or taper off hiring, that would be a concern from my point of view.”

Parks and recreation

Let’s face it, some of the cities in Greater Des Moines are growing like weeds — not the noxious kind, mind you, but they are growing darn fast. Nick Halfhill of Landmark Development Services said Ankeny is likely to hit 100,000 residents much sooner than what would have been projected a decade ago. It’s not alone in that growth spurt.

There isn’t much in the way of local geography to slow growth.

“We don’t have that natural barrier that says it’s wetland so we’re going to jump that area. It’s all sort of developable,” said urban planner and designer Dennis Reynolds.

“Some communities that maybe 20 years ago we all looked at as benchmarks and some of them maybe are having issues with loss of green space, traffic issues,” he said. “I think we really need to be proactive in terms of how we manage these big-picture issues.”

One area that is opening to development sooner than expected is 1,800 acres of land Knapp Properties owns along the Raccoon River. A $1 billion Microsoft data farm is leading to a road system that will cut through four counties, providing routes to malls and highways and cities large and small.

Several years ago, Knapp Properties entered an agreement with the Iowa Natural Heritage Foundation that will preserve forests and wetlands.

“There are a lot of restrictions on what’s happening there,” said Aimee Staudt, vice president of development for Knapp. “In some ways, it does almost create a buffer.”

“Our flood plains are some of the best natural areas that we have in Iowa,” Halfhill said.

How far for a gallon of milk

Developers are trying to squeeze some cost savings out of their projects, especially as they hunt for a magic formula that would make single-family homes more affordable. But they face other issues when planning their projects.

There is the question of just how many convenience stores the metro area can support. It’s more than a matter of numbers.

“One of the things we think about as we’re looking at opening up a new area is: If someone wants to go get a gallon of milk, how far are they going have to go?” said Aimee Staudt of Knapp Properties. “And even if it is only five or 10 minutes, some of it can be perceived distance as well.”

A bridge to parks and paths as a beacon 

The north side of the Raccoon River is going to meet the south bank in downtown Des Moines one day this summer, linking the central business district to Gray’s Lake Park, a rejuvenated Water Works Park and an elaborate trail system.

Nice touch, but what will that mean for a day in the life of the metro?

“We were talking earlier about downtown over the last 25 years or 30 years,” said Nick Halfhill of Landmark Development Services. “Little things like that add up tremendously. Whereas 25 years ago, coming down here on a bicycle on a Sunday might not have been as appetizing as it is now. I live nowhere near downtown Des Moines; however, I find myself down there on a weekend recreating. Not just going to a restaurant, but literally riding a bicycle here from fairly far away, so that’s something.”

It’s helping to put numbers on the scoreboard.

“We have a pretty good idea of what winning looks like right now because we’re seeing a lot of it,” Halfhill said.

The bridge is just part of it, but it serves as a reminder of the kind of thinking and planning that continues to foster growth in Greater Des Moines.

“I think place matters so much,” said the city of Urbandale’s Curtis Brown. “I think we’re moving away from the commoditization of developments, whether it’s residential or commercial or even business parks. There’s got to be some unique aspect of the development, and it’s so interesting now how you hear the development talked about with the employees in mind. How are they going to get here on their bikes? Are they going to be able to walk their dog over the lunch hour? I mean it’s so interesting to see how the employee is thought of in the design.”

Urban planner and designer Dennis Reynolds said he is reminded of another icon of community planning.

“It almost takes you back to Kohler, Wis., at the turn of the century,” Reynolds said. “With a whole community developed around the industry. And likewise, we need to think of our businesses as being a holistic aspect of our lives.”