July 26, 2022

A Bright Future Even with Rising Interest Rates, Inflation? It Looks That Way for the Industrial Market in Iowa’s Biggest Cities

Demand for industrial warehouse space in the biggest cities of Iowa? It’s at an all-time high. And the brokers working this market don’t expect that to change anytime soon.

Just ask Blaise Bennett, Associate Vice President with Northmarq, who works the Des Moines, Iowa, market. He says that the lack of available warehouse supply throughout this market makes it challenging for end users to find the space they want.

And when they do find it? They are willing to pay more for it. It all adds up to a booming industrial market in this Midwest state.

“You have a situation right now where there is an incredible lack of Class-A supply for industrial product,” Bennett said. “Couple that with rising demand, with a lot of tenants wanting to operate and get into the Des Moines market, and we are seeing a very strong industrial market here. At the same time, we have rising construction costs. It is all pushing rents to levels in these Iowa markets that people never expected to see.”

Bennett has the numbers to back this up. He says that asking rents for industrial warehouse space has increased almost 50 cents a square foot from 2021 to the summer of this year in the Des Moines market.

And vacancy rates? They, too, are well below the national average. Bennett said that industrial vacancy rates are more in the 2.5% range in Des Moines and the central and eastern markets of Iowa.

Iowa’s central location in the United States is one of the reasons for this rising demand. Companies want to get their products to customers as quickly as they can. Having more of it stored in the center of the country helps.

At the same time, Iowa offers plenty of opportunity for developers because it has so much available land, Bennett said. Iowa has long been known for farming and agriculture. Developers are now approaching the owners of this land, paying them to carve out large parcels for industrial development.

“They know that there is a tremendous wave of demand from different users across the country,” Bennett said. “Even on a national basis, companies want to get into Iowa.”

Bennett said that an influx of out-of-state developers are flocking to Des Moines. This is a new trend, he said. Again, location matters. As Bennett says, you can reach 50% of the U.S. population in a one-day truck drive from Des Moines.

That is a big plus for third-party logistics companies. At the same time, developable land in Iowa tends to be more affordable than it is in coastal markets.

“The cost of this land is increasing quickly,” Bennett said. “But relative to those other markets, entry costs are much more attractive for developers looking for land.”

Then there is the labor force throughout Iowa’s biggest markets. As Bennett says, there is plenty of skilled labor for developers and end users to choose from. And these workers tend to have that Midwest work ethic that companies like.

“I think we’ll continue to see out-of-state developers coming to Iowa and the Midwest,” Bennett said. “A lot of these developers are trying to work with higher construction costs today. They are finding that the Midwest is a little less risky. It is more cost-effective to build here. As a result, they see some higher returns.”

With demand soaring, and available industrial space limited, are developers turning more often to spec construction throughout Iowa’s bigger markets? They are, Bennett says.

There is a caveat here, though: Because demand for industrial space is so high, by the time developers finish building their Iowa spec projects, they tend to have the space filled.

“There is a crazy amount of spec building going on right now,” Bennett said. “But while it is spec today, most of our clients say that they are very bullish on having the space leased up before construction ends.”

When it comes to new construction, then, what are end users looking for today? Bennett says that clear heights are key. Many end users are looking for a minimum 36-foot clear height in their warehouse spaces, he said.

Cross-docking is important, too, Bennett said. That’s because efficiency matters to tenants.

“Companies are promising same-day delivery,” Bennett said. “When an order is placed, they need to be able to access that product quickly and efficiently and send it on its way. Cross-docking and clear heights are definitely features that we are seeing a lot of investors inquire about. They know ultimately that tenants will demand those features.”

Bennett said that the future looks bright for industrial, in Iowa and across the Midwest. There are challenges, of course, with rising interest rates topping the list. Bennett, though, said that the combination of rising demand and a lack of available industrial space should keep this sector strong, even if interest rates continue to rise.

Rising construction costs are another challenge that developers face. That combined with continuing slowdowns in the delivery of materials is making building new warehouses and manufacturing spaces a more difficult task.

The interest rate jump, though, remains the biggest worry among developers and investors today. Bennett said that some of this worry stems from how quickly rates jumped. The Fed did not inch its interest rate up slowly to combat inflation. Instead, it boosted by a large percentage rather quickly.

That resulted in a bit of a shock to those working in commercial real estate.

“These are not necessarily things we haven’t seen before,” Bennett said. “But some of these challenges seemed to happen almost overnight. With interest rates, they rose so suddenly after the Fed’s announcement. It might take a little bit of time, then, to soak in. People are feeling the stress of the sudden increase in rates.”