Archives August 2020

Still bullish on Des Moines: State of the Market participants see bright future for this Iowa city

Steady and resilient. Those are the words that panelists used during the second annual Des Moines State of the Market summit held Aug. 25 by Midwest Real Estate News and REjournals.

Just think of how participants would have described this key Iowa market if it, like all major cities across the country, wasn’t fighting through an economic slowdown caused by the COVID-19 pandemic.

As 2020 started, the commercial real estate market in Des Moines was strong, with deal velocity rising, vacancies falling and rents soaring. Then the pandemic hit, and that all came to a halt.

Participants in Tuesday’s State of the Market event, held virtually because of the pandemic, were quick to point to that strong start of the year when explaining why Des Moines was poised to recover quickly once life returns to a state of at least semi-normalcy.

“We are still bullish on Des Moines,” said Kris Saddoris, vice president of development with Hubbell Realty Company. “Our fundamentals haven’t changed because of the pandemic. All the things we have put in place are still here. We are poised to come of this very, very strong. We haven’t had widespread devastation here. Yes, the economy has been pushed down. But all the pieces that make Des Moines a strong economy are still there.”

Jared Husmann, president of the Katalyst Team at KW Commercial, pointed to Des Moines’ multifamily market as an example. This sector remains strong, with rent collections still high and vacancy rates law, he said.

Husmann said that Des Moines will get back to normal life eventually. He emphasized the word “normal” here, saying that he wasn’t looking for a “new normal” or “next normal.” No, Husmann is expecting the old normal, one in which Des Moines’ economy is again strong and commercial real estate deals and developments resume the rise he saw at the end of 2019 and beginning of 2020.

“The longer we go, the closer we are to getting back to normal,” Husmann said. “In Des Moines, you can still go out to restaurants. You are still seeing people moving about. We didn’t lock down like everyone else. You do see masks. But I see us continuing to move forward. We are getting back to normal.”

This doesn’t mean that Des Moines doesn’t face challenges. Levi Franzen, senior real estate relationship manager with U.S. Bank, said that he expects rents in the multifamily space to be flat or slightly declining in the near future.

Franzen did say, though, that apartment owners have started to back off on offering concessions to potential tenants. The reason? These owners have settled on slightly lower rents for their apartment units, rents that tenants are willing to pay without needing the enticement of concessions.

When deciding whether to lend today, Franzen said, U.S. Bank is performing stress tests to vet the health of projects and owners

“We are looking at the operator’s and property’s performance,” Franzen said. “We look at how they’ve performed historically. We then look at whether they can withstand any additional stress going forward.”

Franzen said that banks are still active, even with the pandemic.

“There is lending out there,” Franzen said. “Lenders are looking for well-capitalized projects or well-capitalized borrowers. It will depend on the lenders you are talking to, their comfort level.”

While the multifamily market has performed well during the pandemic in Des Moines and its surrounding communities, there are fears that even this sector will start to suffer now that the federal government’s enhanced unemployment benefits have disappeared.

Husmann said that this is a real fear. But he also said that Des Moines’ apartment sector is strong enough to withstand this new stress.

“Most of the tenants who were having trouble paying pre-COVID are the same ones having trouble now,” Husmann said. “Most of the tenants, though, are still paying their rents. It all comes down to the hierarchy of needs: food, water and shelter. People need shelter. They are paying on time if they can.”

Franzen said that the end of the enhanced unemployment benefits could have one positive effect: Restaurants and hotels had been struggling to get their workers back while these employees were collecting their enhanced unemployment benefits. Many were earning more on unemployment than they would have had they returned to work.

With the end of the higher unemployment checks, many of these employees might return to work.

“They needed that desire and drive to get back to work,” Franzen said. “We are seeing our unemployment numbers coming down.”

Des Moines CRE professionals said, too, that the pandemic will bring changes to the multifamily market, some long-lasting.

Saddoris said that more people might seek out housing with lower density. Instead of seeking vertical multifamily properties – the ones most common in urban areas – buyers might instead move toward horizontal communities, ones that offer more room and more space for social distancing.

People might continue working from home, too, long after the pandemic fades, Saddoris said. This might change the way new apartment properties are developed and designed.

“It’s all about understanding what people are going to want,” Saddoris said. “What does work from home look like? People working in the multifamily industry have to understand that a living space might also become a workspace now.”

Husmann said that he had already seen a trend toward townhome development before COVID hit. This trend should only accelerate now, he said. He also said that he is seeing a move toward the suburbs and away from denser urban areas.

Of course, multifamily isn’t the only sector performing well in the pandemic. The industrial sector is thriving, too.

And Jason Conway, director of real estate development with Opus Development Company, said that this sector will soar even higher once the pandemic fades away.

“If you liked industrial during COVID, you’ll love it post-COVID,” Conway said.

The retail sector, though, does face challenges. Brick-and-mortar retail was already struggling with the threat of online shopping. Richie Hurd, vice president with Hurd Real Estate, said that not all retail markets are created equal.

Hurd pointed to the difference between a market like Des Moines and one like Phoenix. The retail vacancy rate in Des Moines is about 4 percent. In markets such as Phoenix, though, where developers built quickly and often, the vacancy rate in this sector is far higher.

“We never overbuilt like Phoenix,” Hurd said. “Phoenix is a boom or bust town. When retail was hot in the ‘90s, with strip centers and retail centers everywhere, developers overbuilt. Now Phoenix is overbuilt or under-demolished, depending on how you look at it. In Des Moines, as you drive around the retail corridors you see vacancies getting backfilled.”

Hurd said several of Des Moines’ key retail destinations, such as the Jordan Creek Town Center, are healthy and active.

“If you have a good retail location, regardless of what is going on in the market, you will still have people wanting to be there,” Hurd said. “Des Moines is a good retail market and will continue to be strong after this is over.”

David Maahs, executive vice president of economic development with the Greater Des Moines Partnership, agreed that the future looks strong for Des Moines. He said that the city’s fundamentals are strong. That will help Des Moines’ economy and real estate market get through the pandemic.

Des Moines, though, has not been immune to the economic drag of the pandemic and the resulting slowdowns in business. Maahs said that the Des Moines market is down about 30,000 jobs today. That is better than many markets, but a bit worse than markets such as Kansas City and Omaha, he said. But most other Midwest markets do have a higher unemployment rate today than does Des Moines.

“We are doing well,” Maahs said. “We will do better than most metro areas in coming out of the COVID recession.”

The office sector in Des Moines, as it does throughout the rest of the country, faces plenty of uncertainty. The big questions center around when workers will feel comfortable returning to the office and how much space companies will require in a post-COVID world.

Adam Kaduce, vice president with R&R Realty Group, said that despite the uncertainty, he remains optimistic about the future of the office market in Des Moines.

“The office is that place where business leaders and teams go to innovate, collaborate and solve the biggest challenges of the day,” Kaduce said.

Kaduce said many local companies have already brought back a good portion of their employees to their Des Moines offices. The larger national users, though, have been slower to make this move, he said. Kaduce predicted that larger companies will keep most of their employees home until at least 2021.

Much of the delay in workers returning to the office space is related to the challenges cities and suburbs face in reopening schools during the pandemic. If students are learning remotely, and not physically in their classrooms, this makes it more difficult for their parents to return to their offices.

Kaduce said that he is encouraged by the number of companies in the Des Moines market today that are right sizing. They might be downsizing the amount of office space they need, but they are making plans to upgrade their work areas. Many are buying new furniture and changing office layouts or considering moves to buildings with more amenities. Others are hammering out more flexible schedules for their employees, allowing them to work from home unless they need to meet with clients or collaborate on projects with their peers.

“This is encouraging,” Kaduce said. “Employers are granting their workers more flexibility.”

Original Article Posted Here:

Still bullish on Des Moines: State of the Market participants see bright future for this Iowa city

Missed Due Diligence Items

Missed Due Diligence Items During Your Due Diligence Inspection

8 Common Due Diligence Mistakes for Multifamily Properties

Investing in multifamily real estate is exciting, and multifamily rentals have the potential to deliver huge returns. However, if you’re new to commercial real estate investments, you may benefit from some assistance during the purchasing and due diligence process — especially during property assessments.

Inspecting a multifamily asset can be time-consuming, and there are a number of potential dangers and risks that many buyers and agents miss. Working with an experienced due diligence consultant when purchasing your next property can help you avoid due diligence mistakes and protect you from costly updates and repairs.

Whether you’re working with a professional due diligence coordinator or navigating property inspections on your own, be on the lookout for these common items missing during due diligence reviews.

What Does Due Diligence Include?

Due diligence audits protect you, the new property owner, from making an investment that could cost you more than you’d profit. Before investing in commercial real estate, buyers should look at financial statements, do a market analysis, check tenant reliability and study turnover rates.

One of the most important things to do when buying a multifamily property is a thorough property inspection with professionals who know what they’re looking for. We’ll focus on a few common due diligence mistakes new multifamily investors make during their property walk-through.

8 Red Flags & Common Items Missing During Due Diligence

Pay attention to the following items during your due diligence inspection. Catching these issues before finalizing your purchase could save you thousands of dollars!

1. Faulty Electrical Outlets

Many older apartment buildings have aging wiring and electrical outlets that do not meet state and local electrical code requirements. Electrical codes are put in place to provide a regionally recognized standard for the safe installation of electrical wiring. When wiring does not comply with codes, it could pose a significant safety risk to building residents.

Lenders and insurance agents will require updates for any electrical elements that are not up to code. This can often mean rewiring the entire building, an expensive project that, while necessary to avoid potential fire risk, could negatively impact your bottom line.

Closely inspect all electrical outlets in the entire building to make sure everything is up to code. Look for things like GFCI outlets in bathrooms and kitchens, and hire a professional to investigate further. An electrician will provide specific recommendations tailored to the needs of the property and will be able to give you an estimate on the total cost of a major electrical overhaul. With this information, you’ll be better equipped to decide if the property is a wise investment.

2. Outdated Breaker Boxes

Some older apartment buildings also utilize Federal Pacific Electric (FPE) breaker panels. These breaker panels have a high potential risk for unexpected failure and are universally understood to be defective and unsafe. FPE panels are no longer used due to faulty manufacturing and risk of electrical fires.

If you see Federal Pacific Electric panels in a building, you can expect your lender or insurance agent to require you to replace each FPE electrical panel. Failure to replace FPE breaker boxes will likely lead to higher insurance premiums on the building.

Hire a professional if you’re looking at buying a building that has FPE breaker panels. An electrician can give expert guidance about replacing FPE breaker boxes, along with cost estimates. Modernizing breaker panels may be a significant investment, but it’s an important one to keep residents safe and protect the longevity of the property.

3. Cast Iron Pipes & Orangeburg Sewer Lines

Cast iron and Orangeburg pipes are two types of plumbing to look for in older buildings. Cast iron was a common material for plumbing pipes prior to 1970, and Orangeburg pipes were used in many properties built from 1945 to 1972. Both of these materials are substandard when compared with modern PVC sewer pipe structures.

Cast iron pipelines are known to rust, causing breakages or deterioration. Aging cast iron pipes can lead to sewer seepage around the property and cause massive damage and inconveniences. Orangeburg pipes are essentially made from hot tar and wood pulp, and they often deform and collapse. Hire a plumber to inspect the pipes with and find out as much as you can about the plumbing inside and around a rental property before you commit to a purchase.

4. No Water Cut-Offs

Older apartment complexes are often missing water cut-offs throughout the plumbing system. These water cut-offs are simply valves that allow water to flow from the source to the faucet, toilet, etc. These knobs allow you to easily cut off the flow of water in the case of a leak.

If a property does not have water cut-offs, you will have to turn the entire building’s water supply off in the event of a leak or a burst pipe! This is inconvenient for property managers, maintenance staff and tenants. Look for water cut-off knobs next to toilets and under sinks, and be aware of the cost associated with updating an older plumbing system.

5. Unsafe Decks, Balconies & Porches

Balconies and porches are nice amenities for residents, but they’re often not built to comply with current building code requirements. In order to protect tenants, have all balconies and porches inspected by a professional.

Common balcony and porch issues include over-spaced spindles that could possibly allow children to fall through or become stuck, unsecured or misplaced footings and more. Familiarize yourself with local building codes for decks, balconies and porches, or hire a qualified contractor to inspect these areas.

6. Check Your HVAC Inventory

Walk through each unit and inspect each HVAC system. If possible, hire a qualified HVAC contractor to walk the property with you. Getting an accurate assessment of the heating and cooling systems is essential because repairing and replacing HVAC equipment is extremely expensive. You’ll want to have a good record of which systems are in good repair and how many will need to be replaced in the coming years.

7. Sufficient Exterior Lighting

Tenants want to live at a place that is safe and well lit. New, bright lighting can also improve the property’s overall curb appeal. Drive by the property at night to look at exterior lighting and ensure the entire parking lot and common areas are lit appropriately. If possible, walk the hallways of the apartment/building to look for defective lighting.

8. Confirm Property Has Secured Access

Lighting makes tenants feel safer, but secured entrances are an essential part of building safety. Without secured entry points, anyone could enter the property, even individuals who could harm residents or vandalize property.

Providing secured access protects residents and prevents vandalism. Always check for secured access points to the building to ensure residents’ safety and quality of life, and be prepared to invest in security improvements if property entrances aren’t up to par. From keyed entrances to doors with keypads or smart locks, research what you feel is appropriate for your property.

Don’t Fall Victim to Common Items Missing During Due Diligence Reviews

Before buying your next multifamily investment, have a professional help you with a due diligence audit to make sure you’re not making any due diligence mistakes. The Katalyst Team has years of experience and has seen plenty of checks that save buyers money and common errors that have cost new buyers. Reach out to us!

Questionnaire: How to Interview a Real Estate Agent

Listing Agent Questionnaire:

1. Who are you?:

2. What company do you work for?

3. Is your company:
o Franchise:
o Corporate:
o Boutique:

4. What area of commercial real estate do you specialize in?
o Retail
o Industrial
o Office
o Multifamily
o Hospitality
o Other

5. Do you have a niche inside of that asset class? .

6. What is your geographic focus?
o Des Moines
o Northern Suburbs
o Southern Suburbs
o Western Suburbs
o Eastern Suburbs
o Central Iowa
o All of Iowa
o Other:

7. What is your average price of sales sold in the last five years?
o $500,000-$1 Million
o $1 Million – $2 Million
o $2 Million – $3 Million
o $3 Million – $3 Million
o $3 Million – $5 Million
o $5 Million+

8. What listings do you currently have on the market? .

9. How do you market your properties for sale? Please provide/check all that apply:
o Online Market Place
i. Crexi
ii. LoopNet
iii. CoStar
iv. Catalyst
v. Buildout
vi. MLS (Multiple Listings Service)
vii. Individual Website
viii. Other
o Corporate Webpage/Listing
o Direct Mailing
o Email Blast
o Prospect Calling

10. How do you do your research? What sources do you use? .

11. How do you protect my: data, financial information, lease information, tax returns, and other confidential information from buyers? .

12. What commission rate do you charge? .

13. How do you split your commission? Do you work with other agents, brokerages, offices? .

14. Do you “pocket-list” your listings? If yes, for how long? .

15. If you Do/Do-NOT split commissions can you tell me why and how that works? .

16. How big is your Prospecting (email/calling) list of owners with property similar to mine? .

17. What is your desired listing agreement time-frame? Why that amount?
o 1-3 Months
o 3-16 Months
o 6-12 Months
o 12+ Months

18. How long do you think it will take to sell my asset? .

19. How long have you been agent? .

20. How long have you specialized? .

21. How often do you communicate with me OR provide Listing Reports?
o Weekly
o Bi-Monthly
o Monthly

22. What would a successful business transaction for us look like to you? .

23. Do you currently own commercial property? If yes, please describe for me .

24. Will your properties directly compete with mine and my listing? .

25. Who are your team members?
o Assistant:
o Listing Specialists:
o Buyer Specialists:
o Underwriter:
o Marketing Agent:

26. Remarks/Other: .