Without land, development is nearly at a standstill. It turns out there’s a low supply in Greater Des Moines, along with a low supply of the workers needed to help build out that development.

For the 2018 Annual Real Estate Magazine, the Business Record hosted a video roundtable earlier this year on issues affecting land development.

The four professionals who participated in the discussion were keen on what one called the “vibrancy” of Greater Des Moines, and they predicted a strong development environment for the next few years. The economy is strong and there’s a lot of momentum.

“All the indicators are very positive, business growth is positive, unemployment is very low. All the indicators are still very good for this area. So we don’t see anything trending to the negative,” said Hubbell Realty’s Joe Pietruszynski.

However, developers do expect some headwinds, they said, especially from land costs and a shortage of construction labor.

Still, cities such as Waukee and Des Moines are taking steps that could offset land costs, engaging in infrastructure projects such as extending sewer lines that help defray project costs in Waukee. Des Moines is working on the first rewrite of its zoning ordinances since 1965, and some of its features could be a boost to developers by providing predictability and allowing higher densities in certain parts of the city.

Lessons can be learned from the past — think the housing crisis and the Great Recession, just 10 years ago now — that can keep the region out of an economic swamp.

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

What is the most important factor affecting development this year in Greater Des Moines?

Joe Pietruszynski
Well, the most important factor impacting development this year will be two major things. One is the amount of labor available and the time to get constructions completed. And the other is because of the improved economy and the increased demand for different types of housing. We’re seeing a relatively low supply of land for different types of housing uses across the metropolitan area. So I think those are the two biggest challenges from our perspective. Those who have land resources will do quite well. Those who don’t will find it challenging to obtain those land resources for future growth and development.

Aimee Staudt
I’d agree about the construction labor shortage. The other thing we see is that land costs just continue to remain high, and it’s difficult if you don’t have some land holdings to come in and pay some of these prices and make some of the deals work.

Dan Dutcher
Well, certainly construction labor is a major issue and it’s going to be compounded even more when you have a major project like Apple [data centers in Waukee], which they want to start this year. That’s going to significantly impact wage rates. From a city perspective, there’ll be an influx of people, hopefully, into the Waukee area, which certainly puts stress on our services a little bit. Land costs are concerning to me because I’ve seen them get into a level that really I don’t think is sustainable sometimes for residential development, especially out west. 

Will Des Moines form-based zoning be an answer to escalating land cost and development issues?

Michael Ludwig
With increasing land prices, it makes even more sense to be focusing on nodes and corridors that have existing utilities. If the land prices are going up, obviously utilities factor into that. But if you can limit your costs on other development components, hopefully we can balance those things out with opportunities at our nodes and corridors in Des Moines for continued development. 

What is driving the escalation in costs?

When an appraiser underwrites the land or when someone is looking at a land resource, oftentimes they think just because a parcel of dirt in one location looks the same on the surface as their own parcel of land, they assume they have equivalent value. That’s not the case. Land is actually scarce in the surrounding metropolitan area because only certain areas have infrastructure located next to it. Dan Dutcher mentioned sanitary sewer, a major driver of land development. Without the sewer there, the cost of extending the sewer is extreme. And one piece of land may be priced with that infrastructure in place, another may not. But the buyer’s expectation is that they’re the same. We’re seeing a lot of people in the marketplace understanding that there’s a scarcity of land and they’re all valuing the land equivalent to each other. Land is really what’s left over in the equation. We first start out, what type of building units need to be on that parcel of property, we figure out their costs, all their inputs, what a builder needs to make in terms of the risk that they are taking on in that area, and then really what’s left over is the land residual. As all the costs in the equation start increasing, what we’re finding is that price of land in the marketplace today is really overvalued. It’s underwriting for what people want. And that’s mainly due to the fact that there’s lack of infrastructure there that the developer has to pay for.

Given those factors, how were Knapp Properties and Destiny Homes able to pull off a deal that will result in lower-priced new homes in Pleasant Hill?

We’ve owned that particular piece of ground for a long time. So that helped. We did an initial plat there several years ago, and so some of that infrastructure was already in place and it just kind of seems like that point in the market where we’re starting to see people really struggling with entry-level homes. I think the average new construction price of a home in the Des Moines metro last year was $327,000. That’s a pretty big number, so we are starting to see people interested in ways to bring that number down but still maintain all the kinds of amenities that homebuyers demand now. [Note The houses in the development are expected to sell for around $225,000.]

Are data centers inflating land prices.

Well, I’ll address it more from the seller’s perspective. They see what land’s selling for, and so the farmers — a lot of the land that Waukee has available for future development is owned by the farming community — read in the paper that somebody in Polk County or Warren County has sold their land for $60,000 an acre, and that’s their price expectation. It surprised a lot of us when Apple, buying 2,000 acres, was able to get it for around $37,500 an acre on average, when you had other major data center companies that were paying $50,000, $60,000 an acre.

Why do you think that was?

I think most of the people that you’re dealing with aren’t particularly greedy. They have owned that land for a long time and if they could get $30,000 an acre plus, they were happy to do that. Some of those people wanted to turn around and buy three times the amount of ag land somewhere else in the state. And we didn’t really have any holdouts. We were able to assemble and Apple was able to assemble over 2,000 acres without having somebody in the middle say, “I want $60,000.”

Is the same thing happening with some of the infill properties in Des Moines? 

I think we’re seeing prices in the East Village escalate for multiple family development, and I think that it just becomes more imperative that the return that comes out of that land has to offset those costs. So when it’s mixed-use for densification or smaller-lot residential, obviously the market is going to tell you what people are interested in. But from my perspective, I believe that there is room for smaller-lot residential with new construction. Right now, our building code has a 60-foot-wide minimum lot width. You have to go to the zoning board of adjustment to get any relief to have anything less than 60 feet, and we’re hoping that under our new code, you can go down to 40- to 50-foot-wide lots. So you’re increasing your yield on your development parcel with the number of units that you can put on that, and then obviously we’re seeing mixed-use development has a higher level of return both for the developer and from the city’s perspective. 

What is the level of builder demand?

I would say that there’s still a significant level of demand out there from builders. You are starting to see more of the builders start to play in the development market again, similar to what we saw kind of in the last real estate cycle, and you’re starting to see banks lend on that again to builders. So that’s another factor that I think is probably driving up a little bit of the land costs. The more players you have trying to be out there as developers, the more you’re going to see land prices increase. 

What is Hubbell expecting in 2018?

Oh, we’re excited. I think we are projecting that the market’s going to keep having steady growth at least for the next three years. You know, Des Moines is full of vibrancy. It’s full of positive growth trends. We’re seeing at least 2,200 to 2,500 new housing starts needed in the metro, and we’re seeing that trend continue over the next three years. There’s nothing in the Des Moines market that makes us say we’re worried, like we did back during the Great Recession. All the indicators are very positive, business growth is positive, unemployment is very low. All the indicators are still very good for this area. So we don’t see anything trending to the negative.

We do see some headwinds in what people are paying for the land. It has to underwrite correctly. And there are people out there that are building and that are a little beyond the tips of their skis, mainly just passing that land cost through so that they can make the margin on the sale of the house. That can be a little bit of a dangerous game if you see any kind of dip or recession in the future. Because then major land assets get devalued. It takes cash out of your operations, and that’s when you start seeing businesses fold and those projects go back to the bank. We’re not seeing that right now because, again, the market is vibrant.

I think we have been very steady in our growth and it hasn’t been a spike and valley, it’s just generally been a very steady pace. I think that we’re expecting to continue in a very steady pattern. I don’t think we’re overbuilt. I know there is still market there.

On the land side, if you were to continue watching, what would make you concerned?

I think if you saw some significant increases in interest rates, that would get everybody to pay attention, but from what we’re hearing, it’s going to be kind of steady. Things have been steady. I think that on a macro level, the tax cuts did some good things for our economy overall, and where maybe we were kind of hitting the end of the cycle, this might have pushed us back a little bit in that to continue for economic growth.

What would really worry me is developers going out there adding a lot of different housing plots without any buyers, like what happened pre-recession. We’re not seeing that, we’re just seeing developers more matching the demand for housing. They’re falling more in sync with each other than they did in the past.

What is the answer to the labor shortage?

I think a lot of workers in the construction industry ended up leaving the industry when we did have the last downturn. Because there simply weren’t any jobs for them. So they ended up either getting new skills or finding new jobs or starting their own businesses, and a lot of those people just did not come back. There has been a lot of media attention about skilled trades and just trying to get more young people involved in that, trying to get the understanding that you don’t necessarily need to get a four-year degree, but that’s a viable career path for young people. I know Hubbell, Joe might want to speak to the efforts they’ve made, but they’ve made a significant contribution to that here locally.

A lot of people think that the path to success and wealth is a college education, but many times, people graduating colleges in certain degree areas are starting [at] or [spending] a good portion of their career earning 
$40,000 to 50,000 a year.

Staudt With giant college loans.

Well, if learning a certain skill set, for example, an electrician, you can start out life with minimal debt through your education requirements and easily earn $80,000 to $100,000 a year in that trade and get a massive jump-start over a college education. So we are really pushing that there is a big future in the construction trades and we see that trend, the need, continuing not only for the near term, but into the distant future. We kind of put our focus as a society on what I would call more business-related jobs in the office rather than the trades in the field.

How long does it take to change that attitude?

I think it takes a generation.

Ludwig We’re overcoming 20-plus years of emphasis that a college degree was the only way to make a living. My father was an industrial arts teacher in high school, and they used to have a home construction program. They built the house and sold the house during the school year. They dropped that program and everybody’s focus was you have to have four years of a foreign language and prepare to go on to a four-year college. There are at least one or two generations that we have missed. From a homebuilder’s standpoint, it’s the same as a homeowner standpoint. If you try and get a contractor today to come out and give you a bid on a renovation project, good luck getting a call back on things. It’s that tight. We just did a project on our house, and we had to be patient. We waited over a year for that contractor to be available to do some work.
What’s the training time, if you took somebody right out of high school, before you could put them on the job?

Well, the commercial trades are a little bit different than the residential trades. From a commercial perspective, if you’re going through the labor union process, you start out as an apprentice and you can get real-world job experience very early on and you work through that whole process and gradually kind of work your way up through journeymen.

And if they start at Central Campus or wherever with their classes while they’re in high school, they can get a lot of that out of the way and go right into an apprentice program, and that’s been what’s been really important about Hubbell’s investment in assisting with that, that trades program has been to help build that base earlier, high school entry.

Dutcher It’s going to take quite a bit of time to do that. I agree with what Mike said. ... I can remember taking industrial arts when I was in junior high, and you couldn’t touch the power tools, so I didn’t really know how. I used a hand plane to take a board from about this down to about that. But that was my whole semester project doing that. It takes a long time to make the switch over. I know we’re working with and the APEX School, which has probably been more slanted for kids going to college and exposing them to technology and software and architecture and some of the things. But they’re now, I think, they’re doing a class this next semester, which is more on the building trades and they want to get kids out that are juniors and seniors in high school and expose them to some of these building projects, expose them to some of the opportunities that they would have, that are out there. But again, it’s going to take some time. I think in the short run, you’re going to see the pie is only so big here. There’s only so many construction workers. You’ll see them shifting from one big project to another, or there’s going to have to be an influx of workers from other areas.

In this land environment, is there a type of development that makes more sense during this time?  

I would say right now it’s kind of an interesting time because all the sectors, retail’s certainly seen a lot of uncertainty in the global scale as retailers try to figure out how much brick and mortar they need versus how much online presence versus how are things going to shake out there. But in general, industrial in the Des Moines metro is really firing on all cylinders. 

Will tax reform lead to more investment?

I don’t know about that, but I think they might be looking at upgrading or expanding facilities, in which case obviously that impacts demand and overall project velocity.

Pietruszynski I haven’t seen a big influx of investors into the land development market. We see a lot of local money, local equity, local fundraising for different land development projects. I haven’t seen a lot of syndicated projects going in where they were bringing in outside money into the metropolitan area. I think the Great Recession scared off a lot of the outside investment community in smaller markets like Des Moines.

Staudt We see outside investment in existing commercial properties, that’s pretty typical here in Des Moines, but in land development, not so much.

Dutcher Des Moines’ been, you alluded to this earlier, and it’s a market-driven market. It’s not a financial-driven market, never has been. So we aren’t going to see these wild swings of growth. It tends to be more what the market conditions are, and so we aren’t, we probably aren’t sexy enough for a lot of outside investors, which has been good for us because in the down times, we don’t go down as much, and in the good times, we don’t go up as much.We don’t have money-chasing deals typically, like you do in some of the major markets. Then it really gets crazy.