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Des Moines Industrial Sector Can Compete With Other Tech-Centric Markets

Located in Grimes, Iowa, the Grimes Distribution Center is comprised of four newly constructed industrial buildings. Each building is roughly 110,000 square feet.

When hearing the names Apple, Microsoft, Google and Facebook, one’s mind might automatically shift to the Silicon Valley: the West Coast mecca of technology and computing. But you can find those same companies in the corn and soybean fields of Iowa. The state has become synonymous with state-of-the-art data centers for these familiar technology companies and others.

Chris Pendroy, CBRE|Hubbell Commercial

When I recently attended a Society of Industrial and Office Realtors (SIOR) conference in Austin, Texas, I was asked by many of my peers what is happening in Iowa. I casually referenced this impressive list of technology companies and I began to field questions from inquisitive industry professionals.

Why Iowa, they ask? “Simple,” I say. “Affordable, renewable energy and lower cost, abundant water.”

In August 2017, Apple announced its plans to purchase 2,000-plus acres in Waukee, a western suburb of Des Moines. The technology giant will construct the first phase of its 400,000-square-foot, cloud-based data center and the center’s power consumption will be 100 percent fed by renewable fuels, primarily wind energy provided by Mid-American Energy.

The announcement of this landmark project drew so much attention that Apple CEO Tim Cook joined Governor Kim Reynolds for the announcement, stating his excitement for the future of Apple and the investment in Iowa and the local community.

Warehousing footprint
Despite the continued expansion of data centers in Central Iowa, it is important not to overlook the ever-increasing footprint of large warehouse and manufacturing buildings also under development in submarkets such as the South, Ankeny/Northeast Des Moines and West Suburban. The sudden growth is evidence of a maturing industrial marketplace, once under-served and overlooked, but always ideally located in the center of the country.

Des Moines’ location at the confluence of the two heavily travelled Interstates 80 and 35 is often overlooked because of our proximity to large markets like Chicago or Minneapolis. Many real estate investment underwriters for publicly traded REITs and large-life insurance companies are generally seeking heavily populated metro markets to invest.

However, the rise of alternative capital sources, small-life insurance companies, private equity funds, the growth of small to mid-sized REITs and foreign capital seeking good commercial real estate investment fundamentals are now choosing to expand to smaller markets like Des Moines. The cost and barriers of entry to larger markets are too high for these types of companies.

While first-tier markets remain desirable, many national real estate investors are looking for opportunities to enter smaller, tertiary markets. Returns are increased due to attractive cap rate offerings only smaller marketplaces like Des Moines can offer. Many investors recognize Des Moines as an ideal market for adding to their portfolio, as the properties are often more stable and suitable for long-term holding patterns.

New construction
Today, the Des Moines metro industrial market is booming and is specifically fueled by the construction of speculative bulk warehouses. We are also seeing build-to-suits by local manufacturers seeking expansion and others updating antiquated facilities.

According to the first-quarter 2018 CBRE|Hubbell Commercial Des Moines Metro Industrial Market View, the marketplace currently has 1.65 million square feet of new industrial supply under construction, most of which is speculative bulk warehouse construction. The net absorption over the most recent 12-month period was a healthy 1.48 million square feet.

Third-party logistics companies are driving much of this demand for new construction. However, local expansion of existing businesses is also a catalyst for backfilling both existing Class B industrial supply as well as new speculative construction.

Rental rate growth has added to the attractiveness of the Greater Des Moines market. Once considered stagnant, year-over-year rent growth has helped solidify Des Moines as a dynamic marketplace. Average industrial lease rates equate to $4.80 per square foot triple net.

The overall vacancy rate across all industrial product types was healthy at 6.9 percent at the end of the first quarter of 2018. The demand for owner-user buildings and small- to mid-sized industrial space remains strong, while limited supply is pushing businesses to consider new speculative construction.

Although Iowa will likely always be a hub for agri-business and financial services, an exciting submarket has developed in technology. Des Moines is becoming a leader for national warehousing users seeking sites for e-commerce or traditional distribution hubs that desire to be centrally located.

Iowa is a place to easily reach major metropolitan populations while having the flexibility to route around the often-crippling congestion larger markets can create.

— By Chris Pendroy, Vice President, CBRE|Hubbell Commercial. This article originally appeared in the June 2018 issue of Heartland Real Estate Business magazine.

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