With a couple of exceptions, the forecast for Greater Des Moines commercial real estate looks much the same this year as it did for last, judging by CBRE|Hubbell Commercial’s annual market report.

For 22 years, the brokerage has provided a sweeping look at the market, from rental rates to emerging trends. The report takes it all in: industrial, multifamily, office, retail. A separate report deals with the investment market.

In 2019, the gist of it all is that we still have too many apartments, retail is challenged, industrial properties — awash though we are in new construction — remain hot. Not much has changed in those sectors.

The office sector is facing headwinds from a range of forces. Companies are having difficulty finding workers in a time of low unemployment, and occupied space is going dark in deference to the construction of new corporate campuses and moves to renovated spaces.

“A lack of available employment could have employers begin to question a need for additional office space,” according to the report.

On the investment side, the influx of foreign investors in commercial real estate markets on the coasts is pushing domestic dollars inland. A quick glance of the top deals in multifamily, for example, finds investors from Chicago, Milwaukee and New York.

Oversupply in multifamily

“There’s a light at the end of the tunnel,” CBRE|Hubbell Commercial Vice President Cy Fox said in regard to the 8 percent vacancy rate in metro apartment buildings registered in the first quarter of the year, an increase from 6.7 percent the previous year. In downtown Des Moines and the western suburbs, vacancy rates were just shy of 10 percent.

Those numbers are driven by oversupply. As a result, net rents are expected to rise slowly, held back by concessions that can range from a couple of months of free rent to iPads, large-screen TVs and stocked larders as landlords lease up new properties.

“Survey results indicated 27 percent of respondents offered concessions in the form of free rent, which is a 2 percent increase over last year,” according to the report. “We estimate concessions could be more prevalent than the survey suggests, and will continue to impact effective rents and economic occupancy rates throughout the market in 2019.” The multifamily report is a joint effort of CBRE|Hubbell Commercial and Commercial Appraisers of Iowa Inc.

A slowdown in construction starts, with some projects not much more than a glimmer in a developer’s eye, combined with anticipated population and employment growth, could balance out the market in time.

“Supply is a concern in Des Moines and the western suburbs, but construction starts are going to wane and we’re going to have greater balance going into 2020,” Fox said. “That story hasn’t changed because the pipeline really hasn’t increased a whole lot. The two towers that are proposed downtown are about half of the units that are planned.”

According to the multifamily report, permits were issued for 1,261 apartment units in 2018, down 53 percent from permits for 2,720 units in 2017.

In 2018, the Greater Des Moines market grew by 1,418 apartments of a planned 2,500, with some projects delivered in phases. Another 2,163 units are expected to hit the market this year of 2,498 that are under construction. In 2017, 3,138 units were delivered.

In the western suburbs, 1,458 units are under construction, with a total of 1,153 expected to be completed this year.

Downtown Des Moines is awaiting the arrival of 612 units this year, and Ankeny is expecting 294.

Of the 1,043 apartment units that have been proposed with possible completions in 2020 or 2021 (those that remain a glimmer in the eye), 909 are planned for downtown Des Moines.

Vacancies and stagnant rents are not deterring investors, Fox said.

“Groups that have been dominant in retail investments in the past are looking to diversify; they are not people who typically would chase multifamily,” Fox said. “It just shows you how healthy the multifamily market is. We’re outpacing our Midwest peers on employment growth and population growth.”

The rent concessions are making it difficult to appraise properties, primarily newer projects that are just beginning to attract tenants, he said.

Overall sales in 2018 were about $110 million, roughly the same level as 2017, Fox said.

‘Headwinds’ for office

All of those companies that moved into fancy new spaces last year were bound to leave behind empty offices this year. As a result, the vacancy rate in the sector is pegged at 8.1 percent, up from 6.5 percent in 2018.

New construction is expected to add 93,666 square feet of office space by the end of the second quarter. Last year, there was 443,745 square feet of new office space added to the market and in 2017 there was 342,323.

Still, the market displays positive fundamentals, according to the CBRE|Hubbell Commercial report. Lease rates continue to rise 1 percent to 2 percent in quality buildings, landlords are refreshing older properties, and lease concessions in the form of rent abatements and pricey tenant improvement packages are on the decline.

“Despite these positive fundamentals, headwinds are facing the marketplace,” according to the report. “A burst of large blocks of space have come available and concession levels could once again increase as landlords compete for tenants with a larger footprint.”

At the same time, the small-to-medium-size office users that flourish in the market could have difficulty finding Class A office space.

Harrison Kruse, a CBRE|Hubbell Commercial sales associate, said not to be too concerned about the headwinds. The market has dealt with them in the past.

“I don’t see there being a downside in our office,” he said.

Kruse does caution that employers are having trouble meeting desired head counts because of low unemployment.

“We do get some pushback from big nationals because of that,” he said.

He said the Jordan Creek area in West Des Moines and Prairie Trail in Ankeny will continue to attract office users who see similarities to the amenities they can find in downtown Des Moines.

An indication of that hunt for amenities is the ability of Prairie Trail to attract office users to its entertainment district, he said.

“Prairie Trail is definitely winning a lot of the office users because of the location and, again, food, restaurants, walking trails, entertainment. You’re creating the live, work, play community,” he said.

Keen on industrial

From the report: “Recently, the development of new industrial product in Des Moines has become a darling for the developer community. Industrial buildings as a product type are attractive to developers as the market has increasing tenant demand for quality high cube and flex product and landlords are attracted to the lower re-tenanting costs that often characterize office or retail product.”

So attractive that Hubbell Realty Co. is adding another warehouse to its Grimes portfolio and entering the Ankeny market for the first time. It also is adding a mixed-use hybrid called flex-tech in Johnston.

“If I was going to invest in real estate, I like industrial,” said Marty Herrmann, a CBRE|Hubbell Commercial vice president who specializes in the sector. “What I like is that I think we’re always going to need fulfillment.”

The sweet spot for developers is the ability to buy land at reasonable prices and wait for the market to find them, he said.

For projects built in the northeast side of the metro, truck drivers out of Chicago can make a delivery and return to the Windy City in the same day, Herrmann said.

Overall, occupancy in the warehouse market dropped to 94.2 percent in the first quarter of 2019 from 97 percent in 2018, “but still remains healthy. Impressively all six submarkets show occupancy levels in excess of 92 percent,” according to the report.

The market is seeing new warehouses in excess of 100,000 square feet, and the era of tall ceilings of 32 feet is upon us. Nearly 300,000 square feet of warehouse space is under construction.

E-commerce users have been circling Greater Des Moines for several years, Herrmann said, and many of the large new projects are being built in anticipation for its arrival.

Retailers search for identity

“Retailers still need to figure out who they are, a 50,000-square-foot big box or a shop that focuses on customer interaction and customer experience,” said Tyler Dingel, a CBRE|Hubbell Commercial senior vice president who specializes in retail.

Successful retailers seem to have figured it out; they provide customer service and interaction.

He points to Apple stores.

“The focus is on the interaction between the consumer and the employee trying to figure out how to use the technology, how to maximize the technology, how to make it personalized for them, the right style, the right color, the right software; it’s very customer-specific,” Dingel said. “The old model is five associates, a ton of product, and you sort through it yourself.”

He is optimistic but sees challenges ahead for retail, though he does not play the “retail apocalypse” card.

“Overall retail sales is strong, but brick and mortar continues to try to figure it out,” he said. “When the economy does shift ? we’ve been on a 12-year run of economic recovery, it still feels to me like retail is still hanging on and when that shift happens there is going to be some additional fallout.”

Dingel said one troubling area is the proliferation of franchise operations, especially as a backstop at struggling regional malls.

“It’s this business in a box deal that makes me a little bit nervous that if we do hit some headwinds on a downturn in the economy and spending declines a little bit,” he said. “Typically your corporate stores have more ability to withstand some of the ups and downs of the market, but if you have a franchisee that has tied up a large chunk of their net worth to try and take a run at owning their own business, they may not be able to withstand those ups and downs.”

Department store closures have pushed vacancy rates at Greater Des Moines malls to 16 percent, up from 4.4 percent in 2018. The rate has been hit by the closings of Younkers and Sears department stores.

Jordan Creek Town Center is positioned to adjust from those closings. Dingel credits the city of Des Moines with trying to work out a development deal with the owners of Merle Hay Mall to repurpose its empty spaces.

Communities should be willing to use incentives, such as tax increment financing, to help malls adjust to changes in the market, unless “they want to see these large stores sitting empty for years on end.”

In addition to the Jordan Creek area, other strong retail areas in Greater Des Moines include Altoona, Ankeny and the Hickman Road corridor in Clive and Waukee, according to the report.

“Retail land pricing on this corridor is as strong as any submarket,” according to the report.

Dingel said that because of its strong economy and robust consumer spending, the metro will continue to draw first-to-the-market retailers, especially those that offer unique experiences.

The money flow

Linda Gibbs and Tim Sharpe are senior vice presidents at CBRE|Hubbell Commercial who lead the capital markets group. That means they are keyed in on the flow of dollars from high net worth individuals, family offices and institutional investors, such as pension funds.

Though investment dollars dropped a tad last year in Greater Des Moines — an 8 percent fall to $401 million from $434 million in 2017 — they rang in to the tune of $564 billion nationally, a 22 percent hike from 2017 and the third-highest amount on record, Gibbs said.

Who had money to spend?

“Everybody,” Gibbs said.

“There is a lot of money out there looking for places to land,” Sharpe said. “Allocations come out and they need to get the money out; it trickles to our market. It starts on the coasts, then the secondary markets and then the tertiary markets.” Greater Des Moines is a tertiary market.

Investment dollars are attracted by better yields as well as the strong economy.

Cy Fox, a CBRE|Hubbell Commercial vice president who specializes in multifamily, noted that on one recent day he received inquiries from Israel, New Jersey and New York.

Gibbs and Sharpe said there is strong demand for multifamily and retail properties.

“Everybody thinks retail is dead, particularly brick and mortar stores,” Gibbs said. “It’s not. The vacancy rates across the country are pretty stable. We’re seeing some interesting things that are happening nationally.”

Among those trends is converting empty big box stores that once anchored shopping centers into hotels.

Also drawing the interest of investors are senior housing, student housing and self-storage, a category bolstered by the popularity of apartment living among millennials and empty nesters.

Sharpe said opportunity zones should be attractive investments. The investment areas have been established in about 9,000 low-income census tracts in the United States. That number breaks down to two near Drake University, one in the Valley Junction neighborhood of West Des Moines and about 60 elsewhere in the state.

The zones were created by changes to federal tax law in 2017. They provide tax relief for folks with capital gains who invest in economic development activities in the selected areas.

“Conceptually, it makes a whole lot of sense,” Biggs said.

“The good thing is they don’t require any public money, other than the tax benefit,” Sharpe said.

So, when will the glow fade from the economy?

“The momentum is going to continue this year,” Gibbs said. “It should be another great year for investment sales.”

Still, a “disruptor” will occur at at some point, but it probably won’t shake the economy off its underpinnings.

“Lenders have become much more conservative,” Gibbs said, “and investors are more astute.”

And again, there is the Greater Des Moines economy. Investors “recognize the financial stability and high employment,” Sharpe said. “Financial services are a huge draw. Multifamily is going to turn around. It’s just challenging right now. That’s how markets cycle.”