A robust market
Commercial real estate brokers are busy despite rising interest rates
Friday, October 25, 2013 7:00 AM
The up-and-down ride of interest rates is having little impact on commercial real estate activity in Greater Des Moines.
“There is so much demand for capital; it just keeps coming into the market,” said Richard Hurd, founder of Hurd Real Estate Services Inc. “Values have remained high. The market is very robust.”
He has been buying and developing properties at a rapid pace. A Dick’s Sporting Goods store is nearing completion on Hurd-owned property on the western edge of Jordan Creek Town Center. After he teamed with Dave Hansen of Signature Real Estate Services Inc. to buy the former Wall Street Journal printing plant on Westown Parkway in West Des Moines for $1.5 million, Hurd signed Shive-Hattery Inc. as a major tenant, and the engineering firm is directing an expansive renovation of the building.
Other brokers are just as busy.
R&R Realty Group, long a stranger to the multifamily market, recently announced plans to build an apartment complex in West Des Moines, then turned its attention to a major project in Omaha.
Tim Sharpe, who co-manages the private capital group for CBRE/Hubbell Commercial, said the Greater Des Moines market is attracting investors from around the globe, especially those interested in buying multifamily residential properties.
“This is no longer fly-over country,” he said.
The Polk County assessor’s office this year had recorded 384 commercial transactions with a combined value of $313 million through Oct. 8. Over the same period last year, there were 368 transactions valued at $345.5 million.
Nationally, there has been $30.3 billion in commercial mortgage-backed securities issued so far this year, according to Commercial Mortgage Alert. That puts the industry on pace to smash last year’s volume of $48.4 billion and will make 2013 the busiest year for issuance of those securities since 2007.
National Real Estate Investor reported recently that capitalization rates, the difference between net operating income and the cost to acquire a property, also are at historic lows. In general, lower capitalization rates indicate less risk, and high rates suggest high risk. The bump in interest rates has not paralleled a steady decline in capitalization rates. In the Midwest, an investor can expect a spread of about 7.5 percent, indicating the investment is stable and returns a decent yield.
The Business Record asked Hurd and other Greater Des Moines commercial real estate professionals whether interest rates that have gone up and down a few basis points since spring are curtailing their business.
The resounding response was “no.”
However, they also point out that somewhere down the road, a big spike is looming. But for now, the financing costs of a project are not enough to deter investors.
Nobody’s talking about inflation
Chris Murray, president and CEO of Denny Elwell Co.
“I think that the increase in interest rates is playing into decisions being made and the timeliness of putting those decisions into action,” Murray said. “But we’re still at a historically low area. I don’t think the interest rates that we are seeing are scaring anyone.
“We do have inflation hitting us, but we’re not recognizing it. Price increases in material, notices that different sectors are going up; for example, there has been a 5 percent increase in drop ceilings. There are costs that are going up, but no one is talking about them. Wood, steel, fuel, shipping, quite honestly, no one is talking about it.”
Murray said that he tracks long-term and short-term rates, as well as rates on nonrecourse borrowing. Overall, he has seen rates rise 25 basis points in the last 10 months, then drop, “but not quite as low as they were to begin with.”
Lack of good jobs dragging market
Kevin Crowley, manager of Iowa Realty Commercial
A tepid jobs market, especially the lack of high-income jobs, is the main drag on the market, Crowley said.
“The inability of the national economy to generate good-paying jobs inhibits the market. Kemin (Industries Inc.’s) announcement is the first big job announcement that I’ve seen in a reasonable amount of time,” he said. “But for the most part, we’re not creating high-value jobs.”
Those jobs generate enthusiasm by retailers and help fill office spaces, he said.
The Greater Des Moines economy is generating enough activity to begin filling some vacant office space downtown, Crowley said.
“But we’re not filling big vacant spaces,” he said.
Concern, but not hesitation, over interest rates
Kyle Gamble, managing director of CBRE/Hubbell Commercial
“There’s still debt available for deals that
make sense, and historically those rates have been good,” Gamble said. “The potential for rates to increase in a very short period of time still seems to be there, which is concerning to many investors. As far as it causing deals to not move forward, deals that have been under contract, I have not seen any of that.”
Gamble said cap rates in the range of 7 percent indicates that investors are sensing little risk.
“Around here, 7 is a low cap rate and would have to be tied to a very strong and consistent income stream,” he said.
No upward pressure on capitalization rates
Richard Hurd, Hurd Real Estate Service
“As of this time there is still so much demand
for yield that I have not seen any upward pressure on cap rates,” Hurd said. “The cost of financing has increased slightly, though. Interest rates and cap rates for investors are not running in parallel.
“I’m seeing interest rates that have increased 50 to 60 basis points on a 10-year term, 25 basis points on short term. But there is so much capital in the commercial real estate market that higher rates are not having much impact.”
Locking in low interest rates
Kurt Mumm, president of NAI Optimum
“We are seeing an increase in investors trying to lock in longer-term financing solutions,” Mumm said. “In the past, a five-year maturity on a loan was just fine. Now that people realize that we might not see these rates in a long time and if they can get a 10-year term on their loan, that’s more important than a half-point reduction on their interest rate. There’s plenty of activity.
“People recognize that these are below-market rates. If you’re going to borrow some money, you might as well tie it up at these rates.”
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