A house is no longer a place to rest your head, unless, of course, the house manages in some fanciful way to fluff the pillow.

Housing as a service is all the rage these days, it seems, a way to lure millennials and empty nesters and relieve them of the serve-the-house mentality that has reigned over homeownership for many a decade.

“That’s going to be a growing trend,” said Jared Husmann, associate director at KW Commercial. “Housing is being seen more as a service now, not just an everyday sort of roof over their heads.”

That service model serves a variety of purposes. For one thing, it is a way to make housing more affordable, whether it’s an apartment or a single-family house, Karie Kading Ramsey, CEO of Kading Properties, said.

That issue of affordable housing continues to gnaw at the market, though Dan Knoup, executive officer of the Home Builders Association of Greater Des Moines, pointed out that a few of the builders he represents are taking a whack at the issue.

You can expect homebuilders and multifamily developers to continue searching for ways to provide more affordable housing, providing local regulations don’t get in the way.

On the multifamily front, coming out of several years in which supply has suddenly outpaced demand, Kris Saddoris, vice president of development for Hubbell Realty Co., expects some equilibrium to return to the market.

“I think this year we’re starting to kind of prove out what we’ve all believed,” Saddoris said. That belief, echoed by all of the panel, is that the Greater Des Moines market is lively enough to balance out the supply-demand equation.

Other issues are afoot. The area’s low unemployment rate could slow the pace of economic development; a big push is underway to convince young people, their parents and their teachers that a job in the trades could trump a career behind a desk.

That tug and pull between a lack of skilled trades workers and its effect on the local economy generated a brief discussion and a little disagreement on whether it might be a blessing in disguise, especially for developers wanting to slow the appearance of rental units on the market as vacancy rates balance out.

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

Housing as a service

Many homeowners would say they service their home. What is housing as a service?

Jared Husmann: And that’s exactly the point. The millennial generation wants to have services; we always want to have experiences. What happened was that everybody saw their home as an asset, and then 2008 hit, ‘09 hit, and we saw a lot of people lose properties. They had to put money back into them. 

And what you’re realizing, then, is that maybe owning a home isn’t what it used to be. I’m not saying owning a home in the suburbs is not ideal for someone who may want that, but the idea of saying I need to go spend $2,000 to replace a furnace or I need to call my landlord and they’re going to come fix that for me, or help me with that, as well, is one thing. The service can also be the environment of downtown — the environment of having a restaurant right below and going downstairs and having food, walking back up to your apartment.

Karie Kading Ramsey: “[At Kading Properties], our best amenity is a front door with no common hallways and little land area. Then also having the convenience of pushing snow for them, mowing yards, taking care of anything that breaks down in the unit — kind of that convenience piece. 
 
Kris Saddoris: It’s still going to be a good fit for some people to own homes. It really comes down to some people are trending towards more of a convenient lifestyle. 

Dan Knoup: We still look at, and talk about, homeownership being the American dream. I think it’s just generationally shifted a little bit or changed a little bit. It’s not as important. But when we look at the debt that the millennial generation is coming out into the world with, and they’re entering the marketplace later, they still have a lot more debt than we had as a generation when we first started buying. So I think it’s a little bit of a shift in priorities. 

But I still think people largely want to own a home, and that is still part of that dream.

Would the association neighborhood be an example of what we’re talking about as a service where some of those things that traditionally come with homeownership you don’t have to worry about?

Knoup: Somewhat, yes, the houses are smaller. There’s less maintenance, there’s less upkeep, there’s less wow factor to them. They still want the amenities. But they look at it as a steppingstone more so than we did. When we started buying homes, for the last couple generations, we went to Beaverdale, we went to the older parts of West Des Moines or Urbandale, and we moved our way up. They definitely want to have something nice immediately. So that entry point that they want to go into still wants to have granite and stainless steel. 

But they’re willing to give up some space, and some of the yard, the lawn. The driveways in front yards are smaller, the houses are closer together. So there is less maintenance and less upkeep. But then they want to turn that probably in a shorter time frame, so then they can move up. And that may not be to the same thing that we feel like is a move up now. So we’ll see in another couple years what this next generation is looking for as their second or third home.

Husmann: The service that that provides is affordability. That is exactly what we’re talking about. It’s not the same service in the sense of I’m going to have a doorman or I’m going to have all these amenities, but the service is the affordability factor, which we are having a huge issue of right now, across the nation, not just in Des Moines.

Is downsizing also the trend in the multifamily market?

Ramsey: Yeah, what we’re seeing is that a lot of the millennials and the elderly people really want the same thing. The average age of the person who lives with us is 42. There’s just a wide variety of people that want different things, and I think that’s different. Affordability is really the key.

Saddoris: It goes back to how they want to spend their capital, too. Do they spend it on big bedrooms and big houses? Making it more affordable, so it is a smaller space. A lot of those social spaces we used to put in the house are now outside the house. Are they in parks, are they in the community? And so you have less of that square footage that’s actually in the house.

Ramsey: Right. And we know today, again, people are looking for those recreational spaces, access to that connectability, walkability. So how do you put that in that kind of experiential place, as opposed to just your typical neighborhoods? But it is smaller square footage, because we have less stuff today. We have as many empty nesters coming down as we do millennials, and they’re shedding it on their way down from the suburbs.

Husmann: I think the idea of the townhomes and the condos is going to be also a trend you’re going to start seeing more and more in the next few years. If you look to our northern brothers, Minneapolis/St. Paul, they’re seeing a lot of discussion about condos and townhomes right now, in their suburbs and in their core. 

Interest rates and housing 

With homebuilders, when do interest rates start making a difference?

Knoup: It already has some, to be truthful. But it’s really going to be driven by the consumer market. If we look at Des Moines as a metro community, and if we’re really going to get to 1 million people by 2040, the consumers are going to drive all of that. If they’re still coming to town, they need a place to live. People ask all the time, where are all these apartments coming from on the west side, and who is moving into them?

If we look at the numbers we have today, in the permits that we’re pulling, we won’t have enough housing for Des Moines to hit that number by 2040.

What’s does the gap look like?

Knoup: Over the last five years, we pull about 2,400 permits a year for apartments, for rent. And we pull about 2,400 single-family home permits per year. So it’s fairly balanced. There are ups and there are downs. Some of those bigger projects take a long time to build up and then they run their course. But we’re between 5,000 and 6,000 residential permits per year on average. So if we tick that out, we’re not going to be anywhere near a million. So I think that’s going to drive more than the interest rates, because people are going to have to have a place to live. If they’re coming to town and they find a job, they’re going to have to, I don’t want to say settle, but they’re going to have to find what they find, and the interest rates are going to be a byproduct or a side product of that, I guess. 

Ramsey: Yeah, and I would agree with that, too, with interest rates, people that are going to buy homes are still going to buy homes. They just might not get as much if the interest rate goes up. Same as it’s always been.

Will interest rates chill the investment market?

Husmann: Well, what we’re seeing in terms of sales is it’s affecting retail the most. But in terms of apartments, there’s still a pent-up demand; a lot of capital is deployed to invest in multifamily across the nation. We’ve seen some uptick in cap rates, but we have not seen a one-to-one ratio in terms of interest rates affecting cap rates in the terms of investment in that. 

The money that’s out there, is that coming from outside of the area?

Husmann: It’s really interesting how, when you look at the macro trends, that people invest into the major cities, New York, Miami, LA. Those investors are then pushed into the secondary markets and tertiary markets. So we’re seeing a lot of investment from Minneapolis, Chicago, Denver because they can’t find deals in their own market. And that’s going to keep our cap rates fairly compressed, even with interest rates rising. They’re going to find value and they’re going to find a way to create that value. 

Ramsey: I think for us it becomes extremely personal, because we invest in all of our properties solely, we don’t have outside investors coming in. Central Iowa is strong. We work with a radius that’s 60 miles outside of Des Moines, and people need housing. That’s where we’re at right now.

The out-of-town dynamic

We hear that it’s difficult to build in the smaller towns, it’s difficult to get contractors to pay attention to the smaller towns. What makes that work for you?

Ramsey: I think for us, we’re really fortunate that we have a lot of subcontractors that stick with us. We’ve had second-generation, third-generation contractors that have been with us, and they just follow us to those communities. They know that we’re a constant contractor for them. When the rest of the market was down in ‘08, ‘09, I mean we put a lot into production in those two years. And I think, for us, it’s just positioning ourselves in a downturn market. A downturn market is when we really go after most of our land.

Knoup: We definitely have members that are traveling further outside the metro than they ever have. The consumers are asking for it, demanding it in some cases. It’s really hard, though, to get the subcontractor base to go with them, because there’s so much work to do right here. So I know some of our members are building beautiful custom homes an hour away from Des Moines, the Storm Lake area, so further than an hour. And they just let the customers know, hey, for our team to travel, this is the cost. We’re not going to gouge you, but we want you to know for my foundation contractor to drive up here, it’s going to cost this much more. 

And the skilled trades gap plays into that. The fact that rural America is starting to shrink and retract and grow back to the cities is a component of it. And I think we just have to find a way to work through it.

Ramsey: Yeah, and I think it’s probably even a bigger challenge on the one single-family home than it is on a multifamily front.

Will the creation of opportunity zones help those rural communities?

Ramsey: So far I haven’t seen that they really will present much opportunity. The landowners know if their land is in an opportunity zone, and they’re looking for an opportunity themselves.

Knoup: Housing is definitely underserved in those communities, and they’re going to some extreme measures. Giving away lots, giving away guaranteed price points to contractors to come. They’re taking some long strides to try to get contractors and new housing — and communities like Newton and Perry, we’re not talking about long distances.

Ramsey: And several of those outlying communities do have tax abatement. I mean anything from five years 100 percent to 10 years 100 percent tax abatement. I mean if you had a 10-year loan, you would essentially only pay taxes on that for five years. 

Knoup: It seems to be the trend that they’re trying to make it a little more and more onerous to us to try to develop and build and remodel and redevelop in some of these communities. New zoning ordinances that are trying to be put in place in two communities around the metro that will require things that are going to be detrimental to affordable housing. Whether it’s the Keating model or the Habitat model or HOME Inc. model. They all have their niche and they’re helping us to redevelop neighborhoods, and they’re really trying to help those communities.

Saddoris: A lot of them have done well at creating jobs, but they assume we’re all going to be there right behind, and that’s just not true. Those that have the housing in them to support and hold the jobs will be the ones that are successful. And those communities that understand they have to play a role, because that housing will always cost more money there than it does here. It just does, because of the fact that we have to transport not only supplies, but workers there. 

So if they understand it and are progressive about that, they will be the ones that win out.

We get a lot of calls all the time, the jobs have been created or are being created there. Unfortunately the minute they start to create the jobs … you need to be digging the houses right then.

Ramsey: And we can’t field all the calls. I mean the calls that we’re getting to come to rural Iowa is really incredible. 

One thing I will say about the rural communities in Iowa, I do think they’re making a really great effort at encouraging hands-on labor. We’ve donated a couple lots here in the last couple years for the schools to build homes on them and stuff like that. So we’re really seeing that as a helpful solution in those communities. 

What’s the answer to addressing the shortage of affordable housing?

Saddoris: I tell people all the time, it’s math. There’s no science to it, it’s math. When you are subsidizing every market-rate project that’s being built today, and you want lower rents, but you want the outside to look the same, it’s math. All you do is double down on what you’re now. Well, when you do that, but you want twice as many units, it’s math.

Knoup: We’re also one of the most regulated industries in the country. Depending on whose statistics you’re looking at, we look at 25 percent to 30 percent of the cost of every home or every apartment due to regulation. If we’re driving that cost up from the land development side, we’re driving those costs up on the construction side. We’re dragging those out because of the lack of skilled trades. And we add all those components together, it makes it really difficult to try to put together affordable housing.

It’s certainly not a lack of desire or understanding of the need. And I would also say it’s not unique just to Des Moines. So it’s not only our community that’s having a hard time with it. And then when we add the component of the next generation expecting granite and stainless steel, because those are things they grew up with, it really compounds itself quickly. But the burdensome over-regulation is really difficult for us.

Think about a $300,000 house, think about the cost just for the governmental oversight and the things that they’re mandating. And I’m not advocating or saying that all those things are bad. I truly am not. But some of them are definitely an overreach, and we’re constantly trying to combat them. We’re trying to say what’s fair, what’s right, what’s reasonable. 

Calling all (potential) trades workers

What kind of progress are you making on drawing more people into the construction trades?

Knoup: We’re making a lot of traction, having a lot of positive conversations. We’re really having to shift the conversation and the paradigm that parents and educators think in. Because for at least a generation we’ve talked about the fact that every kid should go to college to be successful, you have to have a piece of paper that says I’m successful. And we just know that that’s not true. 

We were talking with the Rasmussen Group this weekend. They said that just in CDL [commercial driver’s license] drivers, there are 3,000 openings in Iowa for truck drivers. So beyond the skilled trades, you know, plumbers, pipe fitters, electricians. Let’s look outside of that, think about mechanics, think about drivers. Every one of our businesses need them, our industries need them. And there’s an enormous shortage there. And the misnomer that our world is not full of educated people is a shame. Because all of our subcontractor bases, every one of them that has a license has continuing education. As the world changes and technology evolves, all of our tradespeople … they shift with it. 

But we’re making a lot of progress. We’re making a lot of progress in our skilled trades academy. Across the state of Iowa, in a larger sense, we’re doing these build my future events, and our national association is supporting them in a way that we’ve never seen before, but we have a long way to go still. We have to find a way to fund it. We know that education funding in Iowa and across the country is underserved. But our Legislature can only do so much. We know that the private sector is not a long-term viable option for us to fund it. So we have to find a way to make it more acceptable so more people say, “Yeah, my Johnny and Sally are OK to go do that as a career.” And then we have to find a way to reintegrate that into our educational system, because when they pulled shop classes out, they created a void that we don’t think we’re ever going to be able to refill.

What we’re hearing from the Department of Education is that they’re looking to create regional centers. So Fort Dodge may have one, and Marshalltown may have one, but they may be different. So the students may go to Marshalltown for shop, but they may go to a neighboring community for FFA and they may go somewhere else to learn how to weld, instead of each having each of those classes. So we have a lot of lifting still to do.

Saddoris: It’s critical that it happen in the high school. What people have to appreciate, it has to be at the high school level, so when they graduate, what’s critical is they graduate with no debt. Because what we just talked about, the millennials and this college education, is that they strapped on this debt load. Well, this way they can come out of high school right into whatever that position is without any debt. 

Knoup: We send a tremendous amount of students to college every year in Iowa. We’re very proud of that. What we don’t talk about is that each year 25 percent of them don’t come back. So the amount of kids that are coming out of school with debt and no foreseeable path out of it is staggering. And it should shock all of us, but we don’t talk about it. So let’s talk about it could be a way to pay for college, could be a way to know what you want to do after college and become an entrepreneur. Or it could be a way to get to provide a path instead of college. We need to talk about it more, and get to a point where it’s definitely more acceptable in our worlds. 

What would pay look like for somebody like that? Would you have to have gone through training in order to get hired someplace right out of high school? Or are you going to be hiring somebody right away?

Knoup: Well, both scenarios actually exist. But the program specifically that we’re talking about, they’re going to go into an apprenticeship. That could be a union-based apprenticeship, it could be non-union-based. During high school we’re trying to get accreditation, so that way the programs start to feed into those systems. In that same conversation with the Rasmussen Group, they said that their average truck driver makes up to $60,000 a year. But their highest paid driver driving a cement truck almost made $100,000 last year. Kids don’t hear that, they don’t understand that. Because the message is not being delivered to them.

The kids that we’re talking to all want to be entrepreneurs. They don’t know what they want to do, but they all want to own their own business. That’s part of the dream, that’s part of the current culture. They don’t understand how to do that and they don’t know what field it’s going to be in, but they all want that. So there’s a piece there — maybe business school, maybe a trade organization. There are a lot of different pieces of how that education comes together. 

Does the lack of trades workers, especially during a time of low unemployment, become a drag on the economy, or has it already?

Knoup: It is. Nationally, our numbers are down because we don’t have enough people to start as many homes as we should be.

Saddoris: The piece that gets lost in the equation is the delivery time, too. Not only is cost going up but times are stretching out because of that. So what used to come on in 90 or 120 days is now 180 or beyond. So you’re seeing them stretch out just because … you used to be able to back trades up, and now you just don’t always have that availability.

The lowest unemployment is the last thing we want. Because we have slowing job growth. 

Knoup: That’s when your cost of money is going to really start to affect things. Because you start to deliver, and then you’re paying utilities and you’re paying taxes sooner. All those things start to compound.

Husmann: The other side of that equation is actually good for multifamily, due to the lag in construction. It’s a terrible thing, but it’s also helping to spread out the deliveries. You’re seeing some of the demand and supply be at equilibrium just because of construction delays.

Ramsey: I would challenge that that’s helpful. 

Knoup: I was having a hard time processing that, too. 

Husmann: From the development chain point, it’s tough, but looking at the market and the consumer, it can be OK. And as an overall market, it’s not always bad to have equilibrium in that. I’m not going to disagree in terms of ownership it’s tough.

Ramsey: The developer is controlling the price point. So it really just changes the price point for the end user.

Residential Takeaways

Building permits and the election cycle

A quick glance at the CBRE|Hubbell Commercial Marketview report in this issue will show permits for multifamily housing dropped 53 percent in 2018 in Greater Des Moines.

There are many reasons, one being that developers are hoping to fill an oversupply of vacant units over the next couple of years. 

Dan Knoup of the Home Builders Association of Greater Des Moines has watched building permit trends for many years, and he wasn’t all that taken aback by the decline in permits for both apartment buildings and single-family homes. It pays for his group to keep track of trends.

“This was an election year, a midterm year at that. We have a definite cycle and we see that prior to the midterm elections and prior to the general elections, we definitely have some down numbers. This year was no different than that,” Knoup said.

Permitting activity was strong near the end of November and into December, he said.

“We’re starting to see that come around, and it seems to be following that same cycle. So I don’t think that we’re going to see a big impact from that. In fact, I think the statistics and the projections are that we’re probably going to be up anywhere from 8 percent to 10 percent this year,” Knoup said.

Does he expect to see a repeat performance in 2020?

“Maybe not so much multifamily, because of the timing of that. So once they have approval and they’re starting to get pre-leasing, they’re going, but single-family, we definitely see a hiccup every time we’re going to the ballots,” he said. 

Sopping up the vacancies

Some folks might fret over the high vacancy numbers showing up in Greater Des Moines apartments, but Kris Saddors of Hubbell Realty Co. isn’t one of them.

CBRE|Hubbell Commercial’s multifamily report for the first quarter has vacancy rates nipping at 10 percent in downtown Des Moines and in West Des Moines. Those vacancies are pushing concessions and hobbling rent increases in some classes of apartments.

Saddoris said it’s time for the market to show what it’s made of.

“We’re coming off record years of delivery,” she said. “Will our market take it? I’ve always argued yes, it can.”

Housing as a service

Homeowners know the drill: You mow the lawn, you change the furnace filter, unclog the drain, pay the mortgage and the property taxes. You spend a fair amount of time servicing your home. Well, the market is moving beyond that subservient relationship to something called housing as a service.

“I think that’s a growing trend we’re going to continue to see,” said Jared Husmann of KW Commercial.

Few on our panel of experts disagreed. 

“We still look at, and talk about, homeownership being the American dream. I think it’s just generationally shifted a little bit or changed a little bit,” said Dan Knoup of the Home Builders Association of Greater Des Moines. “It’s not as important. But when we look at the debt that the millennial generation is coming out into the world with, and they’re entering the marketplace later, they still have a lot more debt than we had as a generation when we first started buying. So I think it’s a little bit of a shift in priorities.”

Karie Kading Ramsey of Kading Properties said that shift is showing up among empty nesters as well as millennials.

“I think people want those services, they want those convenience things, and they want to be able to pick up and move if they want to, and leasing allows that,” she said.

Aside from having someone else be responsible for maintenance, that housing located downtown near restaurants and bars and entertainment could be all the service necessary, Husmann said.

“It’s still going to be a good fit for some people to own homes. It really comes down to some people are trending towards more of a convenient lifestyle,” said Kris Saddoris of Hubbell Realty Co.

Putting on the ‘game face’

Little question that our panel of housing experts can talk a good game when it comes to promoting Greater Des Moines. Take note of all the national attention our small but growing neck of the woods receives, and it’s easy to understand why.

Hubbell Realty’s Kris Saddoris said that rather than resting on our accolades, it’s essential “to keep our game face on every single day and understand what role we play.”

With a metropolitan unemployment rate of 2.3 percent at the end of December — 2.4 percent for the entire state — it’s easy to be lulled into a false sense of complacency.

Low unemployment “is not a good thing for us,” Saddoris said. “We want to have companies here and grow, so we all have an economic developer role to play. And I think to the extent that we can support efforts in the region to do that, we’re all in the same fight together.”

Hubbell Realty’s experience at its Bridge District development of for-sale townhomes as well as apartment buildings is a case in point.

“We have three buyers at Bridge District that can do what they do anywhere in the nation, and absent their ability to quickly move through the airport, they can locate anywhere,” Saddoris said. So we need to think creatively how we, as a region, support economic development. We all support it differently, affordable housing, all of those things. … We used to be the chaser, now we’re the chasee.”

The panel pointed to projects that can continue to make the area the “chasee,” such as the water trails project, training trades workers, enhancing mass transit and getting behind the expansion of Des Moines International Airport.

“We, as a region, need population growth, so as to support those efforts,” Saddoris said.