While recently visiting a local Starbucks, I noticed an employee behind the counter with a tattoo in the shape of California. I decided to ask the barista if she was from the Golden State, and indeed she was.
I asked what brought her to Des Moines, thinking she would say family or a love interest, but I was wrong. She had read and heard so much positive press about the Des Moines area that she decided to give it a shot.
Rick Krause, CBRE | Hubbell Commercial
She started applying for jobs online and landed one with Wells Fargo, the largest employer in Des Moines. Working at Starbucks was her second gig. I asked if she lived in the suburbs. She replied, “Nope, I live downtown and work in the suburbs.”
Population surge
This anecdotal story is pretty common these days. Young people are flocking to Des Moines like never before. I have lived in Des Moines nearly 40 years, and never have I seen the growth we are currently experiencing. Much of it has to do with the quality of life. We don’t yet have a rush hour — we call it rush minutes. The cost of living is reasonable, and young people stand a chance of getting ahead financially.
The population of the Des Moines metropolitan statistical area (MSA) grew 2 percent in 2016, an increase of 12,145 residents, the United States Census Bureau estimates. That growth rate ranks 34th in the country out of 382 metros. As of July 1, 2016, metro Des Moines boasted a total population of 634,725.
Des Moines has consistently been recognized as a top place to live, work and play. Last year’s population growth is the continuation of a long-term trend for the Des Moines area. Since 2000, the Des Moines MSA’s population has grown by nearly 32 percent. Since 2010, the population has risen by 11 percent.
A report released last year by American City Business Journals projected the MSA to grow by more than 50 percent by 2040, nearing a population of 1 million. Des Moines is known for its financial services, insurance, government, manufacturing, plus trade and services. Some 81 insurance companies are domiciled in greater Des Moines.
Development wave hits
With all this growth comes a strong demand for multifamily housing. Based on this growth, the market needs an additional 1,600 new units annually. With that being said, there are over 5,500 units currently under construction in metro Des Moines. Most of these units in the pipeline will be completed within the next 18 months.
The bulk of this housing is being built downtown (over 2,500 units), the western suburbs (more than 1,700 units) and Ankeny, a northern suburb (over 750 units).
The number of units currently under development in Des Moines is comparable to larger cities throughout the Midwest. In Kansas City, according to Colliers International, there are 6,163 units currently under construction. There are 4,300 new apartments scheduled for completion in that market this year, according to the Milwaukee Journal Sentinel.
Developers have come from all over the Midwest to build apartments in Des Moines. We look for this trend to continue as multifamily housing developers maintain a strong interest in acquiring additional land for development.
Currently the downtown area has a half-dozen cranes erected, half of which are for housing. Five years ago there was not a crane in sight. There are two developers, Blackbird Investments and Mandelbaum Properties, planning to build mixed-use skyscrapers, with multifamily being a large component of these two developments. The last time a residential skyscraper was built in Des Moines was more than 30 years ago.
Over the past year, the steady demand for apartments has continued, but the large amount of newly delivered units has led to increased vacancy rates. According to the CBRE|Hubbell Apartment Market Survey released in February, the overall vacancy rate in the Des Moines area increased from 3.9 percent in 2016 to 5.2 percent in 2017.
The vacancy rate has more than doubled in the central business district, rising from 2.1 percent to 4.3 percent. In the western suburbs, the vacancy rate increased from 4.3 percent to 6.6 percent. In 2016, when vacancy was at 2.1 percent in downtown Des Moines, millennials looking for apartments in the city had to settle for an apartment in the western suburbs.
Near-term outlook
The increased apartment development activity downtown will have an impact on occupancy in the western suburbs since renters that wish to live downtown will now have more options. Taking all of this into account, overall occupancy rates still remain quite healthy.
Some local developers have slowed multifamily construction out of fear that too many units are coming on the market. We know that Des Moines will continue to grow and that there will be demand for more apartments. The question is whether the development will moderate to match demand.
Near-term absorption will be important for this market to maintain its health. Over the long term however, Des Moines is poised for positive economic fundamentals to continue and the apartment market to remain vibrant.
—By Rick Krause, Vice President, CBRE | Hubbell Commercial. This article first appeared in the June 2017 issue of Heartland Real Estate Business magazine.