Power Roundtable: Commercial Real Estate
This article reflects commercial real estate reporter Kent Darr’s key observations and thoughts on a discussion with Tim Sharpe, Gene Nelsen, Chris Costa and Richard Hurd.
Friday, April 25, 2014 7:00 AM
Editor’s note: The Business Record this year hosted a series of what we are calling Power Roundtables. We invited leaders from specific industries to discuss the trends, opportunities and challenges they are facing. The conversations were videotaped and can be viewed online. This article reflects commercial real estate reporter Kent Darr’s key observations and thoughts on a discussion with Tim Sharpe, Gene Nelsen, Chris Costa and Richard Hurd. We hope you enjoy our fourth Power Roundtable on Central Iowa’s commercial real estate industry.
- Chris Conetzkey, editor of the Business Record
What's our reputation?
Des Moines is starting to get a reputation for great fundamentals; we have low unemployment and a great demographic profile,” Tim Sharpe said. “Greater Des Moines is gaining a reputation as “the place to be,” said Richard Hurd, and none of the other panelists disagreed. Investors from afar -- think Dubai, Greece, Israel, Canada -- are checking out properties, many looking for apartment buildings, Sharpe said. “By and large, we are seeing out-of-state and out-of-country investors come into this market because of the stability and returns they can get compared with their home base,” Sharpe said.
Gene Nelsen can find some comfort these days when he appraises properties and can use recent sales as a measure of value. That wasn’t the case during the recession, when bank-owned properties were being sold at a fraction of their value. “Now we are getting more market-related transactions,” he said. “The values did go down because there was a lack of demand. Now that these projects are getting occupied at a healthy rate, and with interest rates going down, that allows the cap rate to compress a little bit and that pushes up the value.” Chris Costa said Knapp Properties couldn’t compete with the low prices banks were getting for residential lots. That situation has reversed itself in a big way. “We’ve never developed as many residential lots as we have in 2012 and 2013,” Chris Costa said. “We are selling at a pace that is unprecedented in my 16 years at Knapp Properties. In 2009, we sold one lot. From 2008 to 2011, we developed zero … we couldn’t compete (with bank-owned properties) by developing new ground. … Residential land and lot development is just exceptionally good now.”
Are values returning?
Finding capital for projects isn’t the issue today that it was a few years ago, but the local commercial real estate market would benefit from improvements in the national economy, our panelists said. “We do a lot of build-to-suit for national companies,” Hurd said. “We need for those companies to be expanding again. The overall economy and expansion of business is the big issue for us.” Sharpe said companies are reluctant to hire in big numbers. “There is a resistance to expand because of uncertainty in the marketplace,” he said. “What will happen with interest rates? What is the government going to do? What about Obamacare? That dampens the employment metric. If the government can smoothly exit quantitative easing, you’re going to see interest rates gradually rise, but that will be partly mitigated because the economy will be on the rise, also. If they do it too fast, there is a possibility we would go back into recession.”
How does activity downtown affect activity in the suburbs?
There was a mixed reaction to this question. Nelsen said downtown and the suburbs seem to grow independently of each other. Costa said that Knapp Properties founder Bill Knapp believes a strong downtown is essential for prosperous suburbs. “If you have a strong downtown, you have a strong economy in most of the suburbs,” Costa said. “(Knapp) has always felt it was necessary to maintain downtown as the focal point of the community and that should benefit the people who are invested in the suburbs.”
What will be the impact of commercial property tax reform?
Multifamily had a tremendous benefit with the rollback down to residential tax rates,” Costa said. “Anybody who has owned multifamily knows that property taxes are a significant portion of the expenses of operating that property.” On the other hand, the individual credit that will be applied to each commercial property is not significant enough to trigger a surge in development, he said. However, with the gradual rollback of commercial rates to 90 percent of valuations, the overall value of a property will increase over the time. Nelsen said his company is making adjustments to the value of properties it is appraising now in anticipation of that rise in value.
Where is commercial development missing?
“In larger cities, all you see is activity around airports. You don’t see that around here. I’ve never understood that,” Sharpe said. The Iowa Highway 5 bypass was expected to be a busy development corridor, but to date that has not happened. Knapp Properties hopes to launch some development in its Airport Commerce Park, but growth near the airport has been sluggish. “We thought that would be a real flourishing area and it hasn’t been, but that’s not to say it hasn’t seen some activity,” Costa said. The area would seem a likely draw for warehouse and industrial uses. The lack of flat land inhibits some development in the area. And industrial users like to be near interstates. “We do have other surrounding areas near the confluence of Interstates 35 and 80 -- Urbandale, Grimes, Ankeny -- that are a lot more level than around the airport,” Nelsen said. National tenants like that proximity, Costa said. “We aren’t experts in that field, but as we look at doing some projects near the airport, what we see is that development has been stronger in the suburbs because of access to 80 and 35,” he said. “We hope that the market leads a little bit south.”
The recession’s lesson:
“Cash is king,” Costa said. “If there is anything people have hopefully learned, it is that you need to have cash available in times of need.” Nelsen agreed: “Companies failed, not because they weren’t good companies necessarily; they just didn’t have enough cash to weather the storm.”
Boring is good:
Greater Des Moines’ stability is its biggest drawing card right now. “Des Moines is really becoming known as a very stable, very predictable market.” said Sharpe, noting the local economy doesn’t reach dizzying highs or lows. “Since the recession, boring is pretty good.”
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