Multifamily development in downtown Des Moines slowed in 2022

Outlook for 2023 is brighter, city officials say

BY KATHY A. BOLTEN

The slowdown of multifamily development in 2022 was most apparent in downtown Des Moines, where no new apartment units went on the market, the first time that’s occurred since 2012, according to CBRE’s residential market report.

And just one project – Hubbell Realty Co.’s five-story, 114-unit Level at 220 Maple St. in the Bridge District – is expected to be completed in 2023.

“We saw developers pump the brakes for a while but we’re starting to see some new projects come through,” Cody Christensen, Des Moines’ permit and development administrator, said.

Most communities in Polk and Dallas counties experienced a slowing of multifamily development in 2022, CBRE’s report shows. The number of new units built in the area declined in each of the three years since 2019, when 2,317 apartments were added to the market. In 2022, projects with 1,006 units were completed, 57% fewer than in 2019, the report said.

“We expect to see construction levels remain below historic averages for the next 12 to 24 months,” said Cy Fox, senior vice president at CBRE Inc., which has offices in West Des Moines. “Interest rates have gone up, construction costs are up. There’s limited land availability in some parts of the metro area.”

More downtown housing needed

For downtown to remain healthy, more multifamily needs to be added to the central business district, Fox said.

Michael Whalen, president and CEO of Heart of America Group, agrees. Whalen said he believes downtown, which includes the East Village, can support an additional 10,000 residents. Over the next two years, he expects his company to add nearly 300 new units in the East Village, generally located east of the Des Moines River and south of Interstate Highway 235.

“I have confidence that in the long term, people want to live in the East Village and live near the greater downtown area,” Whalen said.

Just three years ago, a flurry of new multifamily construction was underway downtown. Hubbell Realty was completing multifamily projects in its Gray’s Station development, located south of Martin Luther King Jr. Parkway, and its Bridge District development east of the Des Moines River. In addition, Newbury Development was completing work on its 57-unit project at 401 S.E. Sixth St.

Since then, multifamily construction in downtown has slowed.

In addition to Hubbell’s Level project, other downtown projects include a five-story, 169-unit project at 425 S.W. 11th St. by Sherman Associates and a seven-story, 110-unit project by Heart of America Group at 317 E. Sixth St.

Downtown projects in the pipeline

At least two new projects proposed for the downtown area are making their way through the permitting process:

Heart of America Group’s proposed 186-unit multifamily project at East Sixth and Des Moines streets. Construction of the $42.5 million development is expected to begin in late 2023 or early 2024.

Turrim LLC’s proposed 33-story, 390-unit high-rise apartment development at 515 Walnut St. Construction of the estimated $140 million project is estimated to begin in the second half 2023 with completion in late 2025.

Like Whalen, Joseph Teeling, manager of Turrim LLC, believes downtown can absorb additional apartment units.

“The market studies that we’ve done have really given us confidence that the city can handle this project,” Teeling said. “All of our studies have validated that there’s a need for more housing downtown.”

About 80 of the apartments in the high-rise will be leased at rents affordable to people who earn 50% or less of the area median income level. In 2022, a single person who earned $34,500 or less annually would be eligible to live in the high-rise. A three-person household with an annual income of $44,350 or less would also be eligible.

“There is a need in downtown for workforce housing,” Teeling said. “We also think this will be a great place for folks to live who work downtown but aren’t in entry-level jobs. … My sense is that this will attract a mix of different age groups of people, including those who are retired.”

City officials anticipate more multifamily activity in the downtown area in the coming months, said Ryan Moffatt, an economic development coordinator in Des Moines.

“It’s certainly not going to go back to what we saw five years ago when we had 13 downtown projects going at one time,” Moffatt said. “But when I look at our pipeline of projects that we’re working on right now, we’ve got four or five that realistically could get going downtown in the next year.”

Apartment vacancy rates

Suburban multifamily activity

Much of the multifamily activity is occurring in the suburbs, particularly Waukee.

The Dallas County community has 967 apartment units – spread over several projects – under construction, the most in the metro area, according to CBRE’s market report.

Several hundred more units will likely be built over the next 12 to 18 months, a review of Waukee’s development website shows. Among the projects is a 256-unit complex called Converge near Northwest Sixth Street and Northwest Sunrise Drive that Hubbell Realty Co. plans on building. Early this year, Waukee’s City Council approved the final plat for Kettlestone Peak Apartments, a three-building complex planned by J Larson Homes on 15.2 acres east of Grand Prairie Parkway and north of Southeast Pleasant View Drive.

Multifamily development tends to be cyclical, Kass said. When interest rates for home mortgages are low, single-family home purchases increase. When the interest rates rise, purchasing a home becomes more expensive, pushing some potential buyers out of the market. 

“We’re in a time where we have higher interest rates so the demand for multifamily housing is there and developers are interested in building it,” Kass said.

West Des Moines in 2022 delivered the most new apartment units at 345, according to the CBRE report. In early 2023, projects with nearly 670 units were under construction, including a mixed-use project at 950 Jordan Creek Parkway. The development will include nearly 200 high-end apartments, Ruth’s Chris Steakhouse and other commercial space.

Clyde Evans, West Des Moines’ community and economic development director, said he expects to see additional multifamily development projects proposed in the city in the coming months.

“We’ve just been flooded by requests from people looking for opportunities to develop apartment projects in West Des Moines,” Evans said. “Lenders are still lending money for apartment projects.”

Apartment developments are proposed in an area north of Des Moines University’s new campus at 8025 Grand Ave. in West Des Moines. In addition, a development called the Grand Experience, proposed along Grand Avenue between 60th and 88th streets, is proposed to include up to 1,200 residential units, a large number of which will be apartments.

Multifamily developments with about 120 units are currently under construction in Norwalk, said Luke Parris, the city’s community development director. He said more are needed in the suburb that is south of Des Moines.

“Norwalk’s job base is changing to include more industrial jobs,” Parris said. “We need more workforce housing, which includes multifamily options. People want to live close to where they work. … Our master plan includes spaces for that multifamily option.”

CBRE’s Fox expects demand for apartments to continue. People new to the area are opting to rent before buying a home. Higher interest rates for home mortgages are also keeping people in apartments.

“The biggest competition for Class A multifamily assets is people who are moving out to buy [single-family] homes,” Fox said. “That’s not happening very much right now.”

Out-of-state investors remain interested in multifamily properties 

Twenty-three out-of-state investment groups purchased multifamily properties in Polk County in 2022, a significant increase from five years ago, a review of Polk County real estate transactions shows.

Cy Fox, senior vice president at CBRE Inc., which has offices in West Des Moines, expects the interest by out-of-state investors to continue well into 2023.

The Des Moines area “is a very steady market – you don’t have the big swings that a lot of primary markets do on the coasts,” Fox said.  

And while multifamily sales slowed in the fourth quarter of 2022, interest remains high in the properties, he said. “We saw quite a few buyers that were in the price discovery mode [in late 2022 and early 2023]. With more certainty and stabilizing of interest rates, we’re starting to see some of that capital come off the sidelines, which is encouraging.”

The review of Polk County transactions involving multifamily properties found that:

In 2022, 55 multifamily properties were sold. Twenty-three, or 42%, of the sales were to out-of-state entities. At least four of the transactions involved sales by Hubbell Realty Co. to groups from outside of Iowa. The sales are “primarily due to strong demand from the national multifamily investment market,” a Hubbell spokeswoman wrote in an email.

In 2021, 63 multifamily properties were sold, the most in a five-year period between 2018 and 2022, the review showed. Seventeen, or 27%, of the sales were to entities located outside of Iowa. 

In 2018, 25 multifamily properties were sold, seven of which were to out-of-state entities.