Residential Roundtable Q&A – 2018 Annual Real Estate Magazine

What is the dominant theme in housing this year?

Greg Wattier With downtown housing, I think I see a couple things.You’re going to see more properties around this city that a few years ago people maybe would’ve shied away from. And then I think the second thing is, we just see more and more amenity-based design. That’s a huge feature now, just the variety of amenities.

Madeline Sturms In Pleasant Hill specifically, I think a trend that we see is that what’s happening in all of the other metro communities isn’t necessarily true for us. We still have a great need for a diverse range of housing options being provided in our community. Just because there’s apartments downtown doesn’t mean that we have an overflow of apartments in our community. And so, just trying to continue to recruit people to our community to continue to provide that diverse and all-inclusive housing options for the residents
in our community.

Alexander Grgurich I think 2018’s going to be the year of choice for apartment dwellers, downtown especially. I think up until now the under-supply has made tenants just jump on whatever’s available to lock down a place to live downtown. But I think now that there’s a lot more supply and choice, I think tenants are going to be finally able to really choose where they want to live based on what lifestyle they want to have. And then downtown won’t just be downtown, it’ll be East Village, kind of south of downtown, maybe across the river, different areas.
It’s their choice.

Kris Saddoris Yeah, I’m going to echo what Alexander just said. You know, to me 2018 is the year we’ve all been waiting for. … It’s going to answer the question that I have been asked a thousand times in the last three years: Can Des Moines take the supply? I believe it’s an overwhelming yes. And you know what? In 2018 we get to prove it, finally. So I think you’re going to see exactly what Alexander said. We need 5 percent vacancy, that’s normal for any market. The worst thing I tell people we can do is to have any of your large employers recruit somebody in, they fly in from Portland and they can’t rent. They’re going to Uber ride out of here and never come back.

They need to have that choice when they’re here in diverse housing for us to finally have a normal market. I think it’s going to be phenomenal. But we also can finally prove we can absorb them and there’s not going to be this massive natural disaster happening in housing. But you know I’ve been saying it for a long time, and what we all think is true, we get to prove it out this year. I can’t wait.

Empty apartments are a plus?

Saddoris They are. The worst thing you could have right now, honestly, is a low vacancy level. I mean you cannot have people come down here and not have choice.

Grgurich Yeah, just building on that, when you say vacancy, you’re surprised it’s the downside to having no vacancy is tenants then, they call a place and if they don’t jump on it immediately, it’s gone in 12 hours. That’s the way things happen. And what that causes is a lot of people to just say, “I’m not even going to fight that downtown battle. I want to live downtown, but I’m not even going to look.”

Saddoris They’re going to go west or north or elsewhere.

Grgurich The competition is not really other downtown properties, in my view. The other competition is suburban apartments as well as staying at home with mom and dad for a certain demographic. So that’s the real competition. So they’re just saying, “I’m even going to run the rat race then, if I have to be on it, and make a decision on the spot.” So now that there is choice, now that there is some vacancy, we’ll actually see a larger pool want to actually go through the selection process for downtown.

Do you help renters make that choice through design?

Wattier Well, I always say that the finances are what drive the decision in the head, and architects drive the decision in the heart. And so I think it’s both, and obviously I have my perspective, but I do think good design sells, good design rents, and whether it’s inside a space or outside a space or how a project addresses its neighbors, or all those things, that’s a big deal to people.

So in terms of amenities, what are we going to start seeing that is different from what is being offered now?

Wattier I know we’re drawing a lot more common spaces and gathering spaces. An example that was put together last year, actually the end of the year before, was the Maxwell. And that has a space, it has this really fantastic outdoor space on top of parking garage, and it wasn’t too many years ago that that could’ve been seen as a negative, to have to actually create that space. But it made this very vibrant outdoor space, and you see those in other communities, and I believe it’s one of the first ones that was done here. So I think you’ll continue to see really unique common areas, and we’re seeing a larger proportion of area to common space now.

It used to be that there was one lobby and a couple of adjacent spaces, and now there’s common spaces on every floor in different areas. I think more and more developers now see the value in taking a little bit of a rentable area and putting it into some of these common spaces. So I think that’s a big thing, it’s not so much about the bells and the whistles. And then, even though there’s some great programming that I’m seeing, it’s just having those different variety of spaces that people want to hang out, whether they’re working or playing or napping.

Saddoris You’re seeing those spaces move up. … Nationally we know the trend is to move those spaces up. It used to be always the first floor and then we put the units up above; well, now you’re starting to see, again, a variety of spaces but also see them higher in the building. And obviously there’s a ton of beautiful rooftop stuff downtown right now, lots of interesting spaces in all of those, but how do you kind of move those up higher in the building, as opposed to everything right on that first floor?

You still want activity on the first floor, we’re not going to get away from that, but you’re starting to see as opposed to everything being on the first floor, you’re starting to see them move throughout the building, and smaller spaces as opposed to one gigantic area, smaller and more intimate spaces that different people can be in.

Grgurich I think when we look at projects, we look at it kind of two ways, bottom up and top down, and so I think top down, the highly amenitized living, the maker markets, is kind of weaving its way through because unfortunately a lot of people doing projects just look at what major trends are and then check the box. It’s why you see pool tables still, to check the box, even though it’s outdated. So I think you’ll see that happen, but then at the same time, we look at it bottom up, really dig into who the tenants are, what the value proposition is that we’re offering them, because it’s more than just four walls and a place to live and some amenities.

And so we look at each project differently. Some will have more, newer amenities, some won’t because we have buildings like the Fleming Building that Greg helped design that has, like, no amenities at all. We have a theater that you have to pay to rent if you want to reserve it, but there’s no amenities. I guess the mailroom might count. But it’s one of our best performing buildings, because in the core, a certain type of professional doesn’t want to share all those things.

So I think you’ll see an overabundance of new amenities and more amenities based on some projects, but then on others where the value proposition is different, I think you might see people zero in on who their core demographic might be.

Can you define micro?

Wattier Micro is a regional term. You go to Portland or Seattle, they’re 200 square feet. You’ve got to remember that with 450 square feet you can get two to three people into that in Portland. So it’s a regional term when you say micro. It’s like saying all millennials are the same.

That goes back to the same thing that we started talking about, which was those shared spaces. Is that continuing to drive that component?

Wattier I’m definitely seeing that in other markets. An architect that we loved to pay attention to is David Baker in San Francisco. They’re doing smaller white apartments. Super clean, super simple, they’re not fancy finished but they’re nicely designed, nicely done. Not only are there several amenity spaces but they’re done super well. So I definitely see that in other markets. I haven’t seen that completely go that way here. It’s like looking through the door a little bit here but folks still want a really nice countertop, and a really nice this and that.

Grgurich I think the trick, too, is if those amenity spaces are bigger, how do you make it feel like if you’re using it with just you and a friend or two couples, how does it not feel like I’m hanging out with everybody else here? I think that’s the trick. You can build the greatest thing, but unless you activate it, it’s not as useful. We did this pocket park at the Des Moines Building, but it’s not activated cause there’s no tenants. It’s probably the best skate park until we raise money for the regional skate park. I mean that’s a testament unless you have a tenant activating it, like a commercial retail tenant. Many spaces can be useful, but you amp it up to another level with programming.

And you’re talking about appealing to lifestyles, not ages?

Grgurich I am, because I don’t believe demographic ages line up with those lifestyles.

Saddoris And that’s to me one of the cool things that’s happened downtown. You know our millennials have always … they’re great early adopters down here and led that, but our renters are such a wide variety today. And the great thing is that for the first time we have almost three different demographics working in this market. To me the beauty of it is having this beautiful mix of all of these kinds of age demographics looking for that same thing. We’re finally seeing renters by choice. You used to be considered a failure if you were a renter, and now it’s like “Oh, thank goodness I’m a renter.”

Grgurich Totally.

Wattier It’s a different demographic.

Saddoris We started in the millennials and then out to the empty nesters, and now you’re starting to see us churn up again [to an older age group]. I think it’s phenomenal.
It’s part of the plan for some of the areas where there’s the option to purchase, but I’m just kind of curious what that timeline looks like.

Grgurich Well, we group millennials together a lot in our commentary, but I think within the millennial subset, there’s really two within that. I’m an old millennial, technically, and I live downtown. I’m in the range, but I’m very different than the fresh-out-of-college millennial. We see fresh out of college want the more highly amenitized living, they want an urban Disney World kind of living experience. At the other end, you have renters by choice that are older millennials like myself, that the amenities aren’t that big of a deal as are the proximity and the lifestyle and everything and the walkability.

And I value not being in a building that’s crazy and loud and goes crazy. So I just think we have to watch our grouping people together when there’s such separate interests that we have to really home in on.

Saddoris But we have to ask what’s their next step? What do they need here? I don’t think we ever envisioned, “Oh my goodness, you can raise a family downtown.” Well yeah, you can. But how are we being thoughtful about what it’s going to take — the schools, the playgrounds, accessible outdoor spaces, all of those — so that we do continue that continuum?

Grgurich Well, I think that transition you were talking about, I think it’s been amazing to see the success of a lot of Hubbell’s row home product that’s kind of like townhomes in an urban setting because in addition to parks and schools we have to look at even the product. I don’t have kids, but I would imagine it’d be really hard to park in a parking garage, walk three blocks to your urban in-the-core building and have a kid in tow and deal with all that. So I think the urban row home product where they could pull into their parking in their unit and it’s there. I mean it’s been amazing to see the success of those, and I’m surprised that more haven’t been built because I think that is the next step on the continuum for a lot of families or just people.

Sturms And that’s one of the things we’re trying to target as a community is providing, once people have aged out of maybe downtown living when they have a family, an entry-level home for them to move to the suburbs. Pleasant Hill is the closest suburb to downtown Des Moines, so let’s provide you close access to all those amenities while at the same time if you want to buy your first home in our community you still have access to everything that’s downtown but can kind of age out into that next step of housing.

Where is the demand for luxury units? Is someone really willing to pay the $2,000 to $2,500 range? To rent with that type of investment, couldn’t I look to buy something?

Wattier We keep hearing that it exists but we ….

Saddoris It doesn’t exist here today so if you truly have that ability and don’t want to invest the capital and you want a high-end, it doesn’t exist here. I would argue that it does exist, especially with the changes with the taxing. A lot of those deductions, if you will, for home ownership are going away, but I also think people are less likely to make that as an investment today than they were years ago. Are they willing to buy a lifestyle, if you will? Yeah, and if they can, I think they are willing to and that’s to me the next level that Des Moines needs as we give this wide opportunity for everyone. We’ve done a beautiful job in the middle.

Grgurich On the higher-end stuff, I think that while there is a demand for maybe that higher-end luxury apartment, the question is how many? Because there’s not room for a thousand of these kinds of units. It’s tough because some of the projects proposed show these units, but there’s hundreds of them in a building. That type of tenant that is willing to pay that much doesn’t want to feel that they’re in this institutional building with a bunch of other people. Nobody’s figured it out, but the condo HOA fees are out of control so we’re seeing people switch to renting then that are like, “I never want a condo again because I’m paying as much in the fees every month as I would rent on a studio apartment sometimes.” It’s unreal. I think we have yet to explore that. There’s a market there; it’s just not huge.

Saddoris And that’s what I think. We’ve done a beautiful job on the rental piece and we’re seeing that kind of naturalize, but again what’s that next step? How do we allow the ownership component to come into downtown? And how do you have someone who wants to make a capital investment?
We have had great success with the Bridge District. It is a little higher end, but we’re almost through the first phase of that, which is 44 units. But again, how do you come back with a level that is just below that? I think that’s where we’re going to see our Gray’s Station neighborhood go. So you have that ability to have the ownership piece in a walkable neighborhood.

Will for-sale townhomes or condos be the next construction phase, after apartments, in Gray’s Station?

Saddoris It is for-sale townhomes. We’re trying to stay right in that $275,000 to $400,000 range. We know where that sweet spot is. The reality is if you want to purchase in downtown Des Moines, your choices are limited. It’s back to when you first came to rent. To me you’re having something that says, “I’m a partner in downtown development and I believe in the future of this and I’m willing to make a capital investment in downtown.” That’s to me positive, to have that much positive response to what’s going on in downtown. You’re willing to make a capital investment. You’re betting that it’s going to appreciate.

Grgurich That quantity of Gray’s Station single-family row homes in the overall downtown story, it’s unreal. Retailers will look at those density and pure quantity figures better or closer, and it might hit their hurdles. We’ve been lucky to get Hy-Vee with that project downtown with all those incentives but I think when you start adding mass, that’s when those things start to happen on a market basis, too.

How are you taking the mobility issues into account on your projects?

Grgurich Oh, we’re doing the best we can adding by sharing station opportunities, locating, just thinking about all of that, where you place it on the site. We’re doing what we can, but private developers can only do so much with what we control, there needs to be something bigger as a system.

Sturms I think that’s where cities … we have a complete streets policy similar to the Connect Downtown effort so we’re requiring, we’re trying to shift the mentality that we’ve been so used to [in which we’re] designing for cars and we’re accommodating pedestrians. We want to design for pedestrians and accommodate cars in our designs. As a city perspective, when we’re investing in capital improvement projects, we want to set the standards that we are either adding now 6-foot sidewalks to make sure you are making it a comfortable experience for pedestrians to walk through your neighborhoods and that cars are the second thought; that we want to make it comfortable so that people want to walk, want to bike and that the amenities are there for them to use to create that inclusive environment to provide options for everyone.

Wattier Sidewalks are great, if they are designed well and thought about. There is a time and a place to not have sidewalks. I live in Beaverdale, and Beaverdale has these places of uniqueness to them and I lived on a block, a street, that has no sidewalks. Everybody drives slow on the streets. And people walk and they move over and they say, “Hi, hello, sorry.” They get out of the way, they force you to talk to people. I’m not saying that’s how you should design a brand-new subdivision, but the blanket statement of “You’ve got to have a sidewalk on every single road and every single place” I don’t agree with. I 100 percent agree with walkability, but there’s different ways to achieve it.

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