Midwest Real Estate News May-June 2009 : Page 1

midwest WWW.REJOURNALS.COM St. Louis R E A L E S T A T E N E W S® Gateway city works through recession Page 26 THE DAKOTAS | ILLINOIS | INDIANA | IOWA | KANSAS | KENTUCKY | MICHIGAN | MINNESOTA | MISSOURI | NEBRASKA | OHIO | TENNESSEE | WISCONSIN MAY/JUNE 2009 VOLUME 25, ISSUE 4 Slowing down in Des Moines— Iowa’s capital hit by economy, like most other major Midwest cities business during the economic boomtimes,DesMoines saw steady, but not astronomical gains. Because the city didn’t see such a big upswing in business, it’s not suffering through as steep as a drop nowthat the econ- omy has soured, Pitts said. “A lot of the investors out there, a lot of the compa- nies that were buying up all these properties did not focus on Iowa,” Pitts said. “Iowa is a tertiary market. In othermarkets,markets like L.A.,NewYork andChicago, they were trading these properties like commodities. That didn’t happen here in Iowa.” Properties in Iowa instead were selling at a higher cap rate, and going to smaller investors, Pitts said. “You’d be hard-pressed to find a billion-dollar office transaction in Iowa. I don’t know if one exists. In mar- kets like L.A. or New York, portfolios like that are com- mon,” Pitts said. In addition, Des Moines is, as Pitts like to say, “if not the insurance capital of the world, at least in the top three.” Farm Bureau Insurance and Principal Financial Group are just two of the big insurance players that are Continued on page 33 by Dan Rafter, Editor Kurt Mumm doesn’t have to read any economic analysis to know that times are tough in Des Moines. He just has to ask any of the brokers who work for NAI Ruhl & Ruhl Commercial Company. They’ll tell him that commercial real estate deals in the capital city of Iowa have become extremely hard to close, and that new commercial projects are few. And it’s not that Des Moines is unique. It’s suffering through the recession and real estate slump just like the other major and mid-major cities in the Midwest. “We continue to see a lot of the same things that are happening with the larger markets,” said Mumm, pres- ident of the DesMoines region forNAI Ruhl & Ruhl. “We are seeing the constraint in the credit markets. We are seeing the lack of equity and capital that is out there for some of these real estate projects. It’s placing a real strain on a lot of our local developers. Refinancing is tough. It’s all putting a lot of real estate companies in a difficult situation.” This doesn’tmean, of course, that Ruhl&Ruhl, or any of the big commercial brokerages in the Des Moines region, is closing shop. The company is adjusting, and is doing what it can to get through the toughmarket. Its propertymanagement business has increased as some of its other businesses have contracted. The company is taking onmorework inmanaging properties that have recently been taken over by banks. It all adds up to survival for the brokerage. And Ruhl & Rulh’s strategy of surviving the slump is a mirror of how the area’s other successful brokerages are getting by until the local economy — along with the national one—finally recovers. “We have been successful in being appointed the receiver in a number of distressed properties,” said Kevin Crowley, commercial sales manager with Iowa Realty in West Des Moines. “That’s an unwelcome but happy piece of business for us to get.” And it’s all part of surviving the slump in DesMoines. According to Iowa Workforce Development, unem- ployment is on the rise in the state of Iowa. The state’s unemployment rate rose to 5.2 percent in March from 3.9 percent in the same month one year earlier. That’s the bad news. The good news is that Iowa’s unemployment rate is lower than the nation’s as a whole. The U.S. unemployment rate stood at 8.5 percent in March, up from 5.1 percent one year earlier. This is indicative of Iowa and the DesMoines region: The economy isn’t great here, and the commercial real estate business has certainly seen better days, but both the economy and the real estate industry aren’t suffer- ing as badly as they are in other markets. ForMarcus Pitts, vice president ofWest DesMoines- basedNAI Ruhl& RuhlCommercial,much of the reason is that the Des Moines region, like many markets in the Midwest, has been a largely stable one when it comes to commercial real estate. While other markets experienced huge swings in

Des Moines

Dan Rafter, Editor

Kurt Mumm doesn’t have to read any economic analysis to know that times are tough in Des Moines. He just has to ask any of the brokers who work for NAI Ruhl & Ruhl Commercial Company. They’ll tell him that commercial real estate deals in the capital city of Iowa have become extremely hard to close, and that new commercial projects are few. And it’s not that Des Moines is unique. It’s suffering through the recession and real estate slump just like the other major and mid-major cities in the Midwest. “We continue to see a lot of the same things that are happening with the larger markets,” said Mumm, president of the Des Moines region for NAI Ruhl & Ruhl. “We are seeing the constraint in the credit markets. We are seeing the lack of equity and capital that is out there for some of these real estate projects. It’s placing a real strain on a lot of our local developers. Refinancing is tough. It’s all putting a lot of real estate companies in a difficult situation.” This doesn’tmean, of course, that Ruhl & Ruhl, or any of the big commercial brokerages in the Des Moines region, is closing shop. The company is adjusting, and is doing what it can to get through the tough market. Its property management business has increased as some of its other businesses have contracted. The company is taking onmore work inmanaging properties that have recently been taken over by banks. It all adds up to survival for the brokerage. And Ruhl & Rulh’s strategy of surviving the slump is a mirror of how the area’s other successful brokerages are getting by until the local economy — along with the national one — finally recovers. “We have been successful in being appointed the receiver in a number of distressed properties,” said Kevin Crowley, commercial sales manager with Iowa Realty in West Des Moines. “That’s an unwelcome but happy piece of business for us to get.” And it’s all part of surviving the slump in Des Moines. According to Iowa Workforce Development, unemployment is on the rise in the state of Iowa. The state’s unemployment rate rose to 5.2 percent in March from 3. 9 percent in the same month one year earlier. That’s the bad news. The good news is that Iowa’s unemployment rate is lower than the nation’s as a whole. The U.S. unemployment rate stood at 8.5 percent in March, up from 5.1 percent one year earlier. This is indicative of Iowa and the Des Moines region: The economy isn’t great here, and the commercial real estate business has certainly seen better days, but both the economy and the real estate industry aren’t suffering as badly as they are in other markets. For Marcus Pitts, vice president ofWest Des Moinesbased NAI Ruhl & Ruhl Commercial,much of the reason is that the Des Moines region, like many markets in the Midwest, has been a largely stable one when it comes to commercial real estate. While other markets experienced huge swings inBusiness during the economic boomtimes, DesMoines saw steady, but not astronomical gains. Because the city didn’t see such a big upswing in business, it’s not suffering through as steep as a drop now that the economy has soured, Pitts said. “A lot of the investors out there, a lot of the companies that were buying up all these properties did not focus on Iowa,” Pitts said. “Iowa is a tertiary market. In othermarkets,markets like L.A., New York and Chicago, they were trading these properties like commodities. That didn’t happen here in Iowa.” Properties in Iowa instead were selling at a higher cap rate, and going to smaller investors, Pitts said. “You’d be hard-pressed to find a billion-dollar office transaction in Iowa. I don’t know if one exists. In markets like L.A. or New York, portfolios like that are common,” Pitts said. In addition, Des Moines is, as Pitts like to say, “if not the insurance capital of the world, at least in the top three.” Farm Bureau Insurance and Principal Financial Group are just two of the big insurance players that areHeadquartered in the city. Wells Fargo also has a large presence in the city. These relatively stable companies have helped craft a sound, conservative economic base in the capital city, Pitts said. This doesn’t mean, of course, that the woes of the national economy aren’t impacting the commercial real estate business in Des Moines. “When people start to read some of the stories about what is going on in the coasts and other markets where things are pretty bad, everyone tightens up here a bit, as well,” Pitts said. “We are starting to see some investments and properties going back to the banks, yes, but we are pretty proactive here, and we are getting control of things.” Pitts points to several projects in Central Iowa that give himreason for hope that the region will make it through the market with less suffering than other cities. Bass Pro Shops, for example, is building a new outdoor superstore in Altoona, Iowa. Aviva USA, an insurance giant, is building a new headquarters inWest Des Moines.Wellmark Blue Cross Blue Shield ismaking plans for a new facility in downtown Des Moines. Insurance company ING is also expanding its downtown presence, Pitts said. “The mixture of these stable businesses with the Midwest mindset means that we’ve been pretty fortunate here,” Pitts said. “I hope things continue to go that way for the residents and businesses here. This is a good place to do business.” Larry Cedarstrom, president of Grub & Ellis/Mid-America Commercial in West Des Moines, Iowa, likes what he sees in the industrial market in the Des Moines region. DeanWeitenhagen, vice president of the same company, doesn’t in the office market. “The local industrial market is historically about as good as it has ever been,” Cedarstrom said. “We have a vacancy rate in industrial of about 7 to 8 percent. The prices and asking rates are probably low as far as national rates go, but they are holding steady here at around $4 or $5 a square foot. We’re doing well from an industrial viewpoint.” Cedarstrom, like other commercial pros here, points to the steady nature of the region as the main reason why Iowa and the Des Moines region are making it through the recession in a relatively healthy state. The office market here, on the other hand, is struggling. Weitenhagen says that a perfect stormhit the region to cause this. First, four of the largest employers in the Des Moines market decided during the last three years to build their own new office buildings. This put about 3 million square feet of office space back on the market. This happened during the recession, which makes moving all that available office space even more difficult. “We are all redoubling our efforts to make sure we are in front of our users in that marketplace,” Weitenhagen said. “The rates and incentives have been impacted greatly. That’s just a fact. Landlords are doing anything they can to retain tenants. Of course, the first thing to do is to not lose any. The second thing is to go after every deal that is out there as hard as you can. Landlords have to offer great rates and incentives.” Some of these incentives include periods of free rent, free moving costs and the addition of no-cost high-speed Internet access. Weitenhagen says he has even seen landlords who are offering tenants buyouts to leave one office space and move into another. These are challenges. But they are challenges that are not impossible to overcome, Cedarstrom said. “I do see some optimism out there,” he said. “We’ve done pretty well in Des Moines keeping our retail up, for instance. We haven’t seen near the loss of retail that the national economy has seen. Yes, the office market is going to be a tough one for us for a long time. But we are looking toward the future as a company. We are pushing our horizons out. We are a car ride from Minneapolis, St. Louis, Kansas City, Omaha and Chicago. We are going to have to start mining tenants from those cities in the future.”

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