Archives January 2020

commercial real estate trends 2020

2019 Commercial Market Review: Real Estate Trends in Iowa and Beyond

In 2019, many different commercial real estate trends in Des Moines influenced the market for commercial real estate buyers and sellers. Paying attention to trends is essential for every savvy multifamily real estate investor. Find out what trends we saw each quarter in our 2019 commercial market review.

Commercial Real Estate Trends in 2019: Q1

In the first quarter of 2019, we saw the year’s lowest average price per unit across all transactions. Later on, we’ll discuss why the average price per unit is climbing across Des Moines and other Midwest metro areas. Other important takeaways from our 2019 Q1 report include:

Inverted Yield Curve

In March 2019, we saw the first inverted yield curve since 2007.  An inverted yield curve occurs when investors begin requiring a higher return on their investment within a shorter time frame. Historically, inverted yield curves indicate the potential for an economic recession within 18 months. For the past 45 years, every major recession was preceded by an inverted yield curve.

Photo credit: The Washington Post

Class B and Class C Units Outperforming Luxury Class A Rentals

Even though developers have built more and more Luxury Class A multifamily apartment buildings in the area, demand for Class B and C units has increased. In spite of the increased earning potential of a newer, nicer apartment building, Class B and C units are still more profitable. The renter-by-necessity demographic is large, and they’re more focused on finding affordable leases, not renting fancy apartments with luxury amenities.

Comparing Commercial Real Estate Trends: Q1 2019 vs. Q1 2018

When we compared 2019’s Q1 stats to 2018’s Q1 stats, we saw a decrease in overall sales volume but an increase in average price per unit from $44,444 to $52,625. Average CAP rate remained comparable in the year-over-year comparison.

Commercial Real Estate Trends in 2019: Q2

Although Q2 saw the same number of transactions as Q1, Q2 brought an increase in sales volume along with more units sold — 349 units exchanged in Q2 versus just 224 in Q1 — and an increased price per unit. Investors were purchasing bigger buildings with more units, spending more in order to see a higher return on their investment. We noted some other interesting commercial real estate trends in our 2019 Q2 report:

Iowa Thrives in Spite of Economic Concerns

The Iowa economy was on a slight downward trend, with a number of key economic indicators, such as residential building permits and average weekly manufacturing hours, performing poorly. Rent growth slowed to a national average rate of 2.5%, the lowest rent growth rate in the first six months of the year since 2011.

In spite of these economic indicators and slow rent growth, central Iowa continued to draw interest from investors across the nation, and Iowans continued to enjoy one of the lowest unemployment rates in the country, averaging out at 2.4%.

Class C Multifamily Units Experiencing Growth As Homeownership Drops

In Q2, we saw a 0.6% drop in homeownership rates and an increase in demand for Class C multifamily units. Class C units are generally older apartments with few amenities and renovations, and they’re typically located in lower-income areas.

Comparing Commercial Real Estate Trends: Q2 2019 vs. Q2 2018

We see a few differences when we compare Q2 2019 with Q2 2018. Not only did we see a steep increase in total sales volume, but we also saw an increase in average price per unit, similar to our Q1 year-over-year comparison.

Commercial Real Estate Trends in 2019: Q3

At a glance, Q3 statistics look similar to those in Q2. Our transaction count increased by one, and overall sales volume and price per unit experienced a slight increase. However, a few interesting details stood out when we collected our 2019 Q3 report:

Iowa Economy is Neutral

Although determining factors in the Iowa economy continued to trend slightly downward, certain other elements balanced out those negative effects. As autumn and winter approached, fewer building permits were issued. Agricultural markets also experienced a downturn, but the low interest rate environment helped make up the difference. The overall outcome was a neutral economic outlook.

Price Per Unit Driven Up By New Investors

As you may have noticed throughout this report, one of the major commercial real estate trends in Des Moines in 2019 was an increased average price per unit across all transactions. We saw this increase in each quarter, with the exception of Q4 — we’ll discuss Q4 below.

More than half of the buyers in Q3 were located outside of the Des Moines area marketplace. Investors who may typically buy real estate on either coast are taking advantage of low real estate prices in the Midwest. Unfortunately for local investors, newcomers investing in the area often cause inflated property prices because they are typically willing to spend more on commercial real estate.

Comparing Commercial Real Estate Trends: Q3 2019 vs. Q3 2018

2019’s Q3 saw another leap in total sales volume when compared to Q3 2018. The average price per unit also increased when compared to the previous year’s data.

Commercial Real Estate Trends in 2019: Q4

We ended the year strong with our highest overall sales volume and number of transactions. Take a look at other insights from our 2019 Q4 report:

Price Per Unit Down This Quarter

After seeing the average price per unit increase over multiple quarters, this metric dropped lower in Q4. This was due to a majority of sales in the Des Moines metro area and fewer properties purchased in more expensive suburban communities (about a 3:1 ratio in Q4). According to our data, Des Moines area suburbs are selling around $60,000/unit while the Metro is trading closer to $55,000/unit, on average.

2020 Projection: Fewer Development Completions

With the conclusion of Q4, we begin to look to the new year. Commercial real estate trends predicted for 2020 include a decrease in development completions compared to the previous 5 years.

CAP Trended Down Throughout 2019

Throughout 2019, CAP rates trended down. This real estate trend is likely due to cautious investors seeking safer investments. A property’s CAP rate represents the risk an investor takes on when purchasing a property. A higher CAP rate indicates more risk. Learn more about how to buy a property with a good CAP rate.

Comparing Commercial Real Estate Trends: Q4 2019 vs. Q4 2018

When we took a look at our Q4 2019 data and compared it to our Q4 2018 commercial market review, we saw a 118% increase in sales volume — the largest year-over-year increase of any statistic we recorded! Q4 2019 also saw an increase in average price per unit when compared to the same quarter in 2018.

Contact Us to Learn More About Des Moines Commercial Real Estate Trends

If you’d like to learn more about commercial real estate trends in Des Moines, or if you’re wondering how to use these 2019 commercial market review insights to optimize your investment strategy, reach out to our experts! We’re here to be your real estate investing resource. Browse our current listings or get in touch.

commercial real estate fracking

Real Estate Fracking: How To Get More Profit Out of Rental Properties

The concept of fracking has moved beyond the oil and gas industry and into the real estate industry. The word fracking evolved from the phrase “hydraulic fracturing,” a process where energy companies use high pressure to fracture underground shale rock in order to extract oil and gas. Learn how savvy property owners are leveraging the concept of fracking in order to take advantage of unique benefits and market opportunities.

What is Real Estate Fracking?

In the context of commercial real estate investing, fracking involves breaking up properties into smaller pieces in order to shift the business model and increase revenue. Experts leading the discussion around real estate fracking are encouraging intrepid entrepreneurs to explore its many possibilities.

“Real estate use is getting broken up into smaller bits and reconfigured in higher valuations,” explains Steve Weikal, Head of Industry Relations at the MIT Center for Real Estate. “Companies are taking underutilized or unutilized real estate and monetizing it — in ways we never thought were possible.” He cites co-working companies as one example.

Airbnb and other short-term rental concepts also exemplify the potential benefits of real estate fracking done right. One property owner in Atlanta transformed a traditional rental property into a short-term vacation rental and was able to earn an extra $500 monthly net income when compared to collecting monthly rent from a long-term tenant. And that was just a one-bedroom apartment. Imagine the potential in a large multi-family property.

How Real Estate Fracking Creates Value for Property Owners

Real estate fracking creates value by breaking a property up into smaller pieces. This can mean smaller units — fewer square feet per unit can allow for more units in a building, more tenants and more income. In comparison, the “We Living” trend is leveraging this idea with a co-living concept.

Another option for breaking properties into smaller pieces is shifting from a traditional long-term lease to a short-term rental model. For example, a building with five units may have $5,000 gross monthly earning potential if each unit earns $1,000 monthly. If a property owner transforms the same units into short-term rentals and charges $50 per night, that monthly earning potential increases to $7,500.

Of course, there are risks and expenses associated with operating a short-term rental property, but the benefits often outweigh the negatives.

Real Estate Fracking Case Study: WhyHotel

WhyHotel is a startup company that operates short-term vacation rentals in new luxury residential apartment buildings. WhyHotel partners with property owners to take advantage of the building’s “lease-up” phase. These buildings transform into pop-up hotels, generating income with short-term guests before long-term residents move into the building.

WhyHotel is able to generate income from units that would otherwise sit vacant. And by avoiding risks typically associated with buying a vacation rental property, this concept leverages the real estate fracking potential in a profitable, sustainable way.

Is Buying Vacation Rental Property a Good Investment?

Buying a destination rental property is not a requirement to experience the benefits of real estate fracking. Many creative commercial real estate concepts, such as “we living,” allow for property owners to break properties up into smaller, higher-value pieces with short-term leases. However, buying a vacation rental property can be an excellent investment. Depending on factors such as location, property size and local laws, listing a property for rent on a site like Airbnb or VRBO can earn more income than traditional long-term rental properties.

Is Buying Destination Rental Property a Good Investment for YOU?

Whether you choose to invest in long-term or short-term rental properties (or both!), you will have the opportunity to find success and generate income. If you have questions about buying a vacation rental property or any other topics related to investing in commercial real estate, reach out to our team of experts at (515) 639-0145. Learn more about how to buy a rental property, and browse our listings to find commercial properties you can buy to rent out.

commercial real estate advice

A Property Owner Shares His Real Estate Investment Tips For Beginners

We recently sat down with Joe Ekis, a local Des Moines property owner with an impressive breadth of experience within the real estate industry. From managing day-to-day operations to investing in properties and helping operate a property management company, he’s had his hand in all aspects of this type of business. In an exclusive interview with our team, Ekis shared about his experiences in the commercial real estate world, including helpful tips and advice for anyone interested in diving into multifamily rental property investing. Check out some valuable real estate investment tips he has for beginners.

Commercial Property Management Tips: Owning, Operating, Managing and More

What Role Do You Play as an Apartment Owner, and How Do You Handle Day-to-Day Operations?

Early on, I was working for somebody else and learning the property management system and career. When I stepped out on my own and bought my first commercial property, I started out self-managing. I was very hands-on — changing toilets and collecting rents and mowing grass. I progressed in my investment career, and now I own part of a property management company. We have weekly meetings where we talk about property managing, and I’ll wear both hats — owner and property manager.

What Did You Learn From Your Self-Managing Experiences?

I think starting out self-managing was a good thing because it gave me perspectives from both sides. When you can be the person in the trenches, doing the day-to-day stuff, you can talk more intelligently with the property management companies you hire later on. You can be a more informed owner/investor when you’ve done it yourself.

Was it Challenging to Give Up Your Role as a Property Manager When You Started Hiring a Property Management Company to Take Care of Day-to-Day Operations?

It’s challenging to transfer that responsibility over to somebody else. You just feel like you know it all, and you’re used to staying involved with the day-to-day decision-making. It was challenging at first, but now I can concentrate on big-picture opportunities in the real estate investment world. And I’m also older now and less inclined to want to be involved with cleaning every apartment and strapping on a tool belt to do maintenance tasks. It was a natural transition for me and my career path, but it wasn’t always the easiest transition.

Can You Talk About Some Commercial Property Management Tips From Your Early Years as a Property Manager?

I had an old boss and mentor who told me, “Spend my money like it’s your own.” I was managing a large apartment complex for this man, and he also owned the property management company. He wanted me to pretend like I owned the place. If I did, how would I make investment decisions?

Usually when you hear someone say “Spend my money like it’s your own,” it seems like you’re supposed to avoid spending money. But that’s not necessarily the case. Sometimes spending more money might be worth it in the long run because you’ll just get more value from what you spend it on. Here’s an example: Do you spend $200 to fix a 12-year-old refrigerator? The answer is no — you spend $450 to buy a new one because that’s a more cost-effective decision for the property in the end. Don’t scrimp on preventative maintenance, prolonging the life of your current appliances will pay off down the road.

What Is the Hardest Part of Being a Hands-on Property Operator?

It’s a 24/7 job, 365 days a year. If the phone rings on Christmas day at 10am and there’s a fire or a flood or a lockout, you’ve got to respond. Fortunately, when I was first in that stage, I was single and didn’t have a family. As I got older and got married and had kids, they understood that was part of my job.

On the flip side, the advantage of working for yourself is having the flexibility to do activities, hobbies and errands when most people are working their 9-to-5 jobs.

Commercial Property Investment Advice: How to Own Rental Properties

Is it Challenging to Get Started Buying Rental Properties?

When you’re first starting out, it’s tough to find deals. You need to have a good real estate agent. And making your first investment can be tough because you need to have a sizeable amount of cash upfront. My first deal was a $160,000 8-plex in 1993, and I need to provide a 10% down payment. I later sold it for double what I paid. Having a good network of people to help you find deals is one of the best things you can do.

Should Investors Explore Different Types of Properties or Stick With One Type?

In the investment world, it’s easy to want to get involved in a bunch of different things. But if you find something that works, stick to what you know. I invest in what I know. I don’t overpay. I can drive by my properties and keep an eye on them. It’s easy for me to feel comfortable about my investment decisions.

What Real Estate Investment Tips Would You Give to Beginners Looking to Get Involved?

  • Pick a market and run with it! Whether it’s apartments, industrial, mini warehouses, mobile home parks or something else.
  • The first deal is the hardest. The second deal is much easier when you’ve had a little experience.
  • Invest in the property.
  • Drive net operating income.
  • Eliminate bad expenses and make wise decisions when it comes to expenses.
  • Repeat.

Investing in a property might involve rehabbing units, tearing out 30-year-old kitchens, moving walls, updating light fixtures, changing hardware and ripping out carpet. Know your market and give people what they want. You’ll wake up one day and realize it’s not as hard as you thought it would be.

How Can Property Owners Increase Income and Decrease Expenses?

It’s easier to control the income side. You don’t have a lot of control over expenses, especially when you need to replace something like a water heater. Even though it seems kind of counterintuitive, raising rents and creating vacancies can be a great way to increase income. If a unit may cost $700 to rent, but there may be renters willing to pay $800, and that’s not something you can find out if you never have any vacancies.Another example of increasing income would be doing a $6,000 kitchen rehab on a unit. If that renovation allows you to increase rent from $700 to $800, it will only take five years to start seeing your return on investment. And you will also see the additional benefit of adding value to the property overall when it comes time to sell and decreasing yearly maintenance costs for units with new plumbing or appliances.

2020 Commercial Real Estate Trends

What Trends Are You Seeing in the Multifamily Apartment Market?

One trend we’re seeing is RUBS – Residential Utility Billing System. These systems allow landlords to bill tenants for utilities that may have traditionally been rolled into rent cost and offered as part of a “utilities included” unit. Residents seem willing to pay more when charged separately for rent and utilities than when utilities are included in the rent price.

Another commercial real estate trend is the growing quantity of investors, including institutional investors coming into Des Moines and other secondary and tertiary markets and inflating property costs.

Technology is driving trends. Marketing and advertising have changed drastically along with technological advancements. In 1993, you would have to look in the Sunday newspaper to see a list of available apartments. Convenience stores and grocery stores would have apartment catalogs on a rack. Technology and the internet have made print advertising for apartments archaic.

Do You Have Any Final Pieces of Commercial Property Investment Advice?

First of all, just dig in and grind it out and do it. Don’t sit around reading books about it. Educating yourself is important, but at some point, you just need to do it.

If you’re using traditional financing options, consider what a banker would look for in terms of risk and reward for any given deal. Know your stuff, know your numbers and be involved.

Learn More About How to Own Rental Properties

From real estate investment tips to commercial property management tips, we want to provide you with everything you need to be a successful commercial property owner. Reach out to our team if you have any questions about how to own rental properties or how to manage your multifamily rental properties. Browse our listings if you’re ready to dive into the commercial real estate investment world.