Joel Aschbrenner

jaschbrenn@dmreg.com

More than 2,300 apartments are scheduled open around downtown Des Moines in the next year.

Never before have so many housing units opened in such a short period in the city's core.

Developers say they can fill the apartments; there is strong demand for downtown rentals.

But some are concerned that an apartment bubble could be forming.

Copyright 2016, Des Moines Register and Tribune Co.

An unprecedented wave of apartments is about to hit downtown Des Moines.

More than 2,300 rental units are scheduled to open in the next year alone in and around the city's core, a Des Moines Register analysis shows. That represents a more than 40 percent increase in downtown’s housing stock. And another 1,400 downtown apartments are on the drawing board.

Real estate developers are confident they can fill the new housing. And city planners say downtown is ready for the influx of residents.

But the flood of new units will provide the biggest test yet of demand for downtown apartments and the amount renters are willing to pay.

Studded with amenities such as swimming pools, stone kitchen counters and stainless steel appliances, some of the complexes will charge higher rents than the Des Moines market has previously seen. Some studios will go for nearly $1,000 a month, and two-bedroom units will approach $2,000.

“It’s got to be good news for renters that there are going to be more units to choose from, but if the demand is there, developers are going to continue to raise rents,” said Rick Krause, a vice president with CBRE/Hubbell Commercial, who specializes in the apartment market.

Since the recession, real estate developers eager to cash in on the demand for rentals have been steadily building apartments in downtown Des Moines. Several hundred units have opened in the past few years.

But now, the wave of apartment construction is cresting, and thousands of rental units are ready to hit the market.

“This is the first time that the downtown market depth will be tested,” said Jake Christensen, president of Christensen Development and a partner in Jackson Crossing, a 244-apartment development on Indianola Avenue. “I do think we will finally have a little vacancy, and I think that is healthy.”

‘I don’t see a crash coming’

The Register interviewed more than 15 developers, city planners and real estate professionals, and nearly all said they believe metro Des Moines has enough demand to fill the new apartments.

“I think you’ll see things get a little more competitive as more supply comes on line,” said Alexander Grgurich, a development analyst for Nelson Construction & Development, which is building a bike-friendly apartment complex called Bici Flats. But “I don’t see a crash coming or anything like that.”

Developer Tim Rypma, who just broke ground on a 90-unit East Village apartment building, said he thinks the demand for downtown rentals is greater than the wave of new units.

"I bet I get five or six inquiries a week saying, 'Do you have anything available?'" he said. "Everything is full."

Their confidence comes from several factors, developers say:

Most downtown apartments built in recent years have been fully leased, with waiting lists, before they open.

Vacancy rates for downtown apartments are at about 2 percent, according to an annual survey from CBRE/Hubbell Commercial. Real estate experts say a healthy apartment market has a vacancy rate of about 5 percent.

The metro area is growing, adding about 53,000 residents from 2010 to 2015, according to census data.

Millennials are creating steady demand for apartments. Born in the '80s and early '90s, millennials are the largest living generation in the U.S. They are buying homes later in life — either by choice or because of financial barriers such as student loan debt and slow wage growth — and they want to live in urban centers.

Studies show renters are willing to pay more to live in walkable neighborhoods, giving downtown apartment owners an advantage over their suburban competitors.

Will downtown Des Moines rental boom hurt suburbs?

Natalie McCombs, 25, recently moved to a one-bedroom apartment at The Lyon, an 11-story apartment building in the East Village, where one-bedroom units are listing for $935 to $1,000. She paid about the same amount for a two-bedroom apartment in West Des Moines.

Downsizing was worth it, McCombs said, because she wanted to be closer to her job at Kemin Industries and within walking distance of downtown's events and nightlife.

“The majority of my life is in the downtown area,” she said. “I work down here. Most of my friends live here. I wanted to be closer to everything.”

David Baeza, 25, recently moved with his fiancée from the quiet Waveland neighborhood to The Randolph, a new apartment complex on Court Avenue. He wanted to experience downtown living before settling down and buying a house.

He works downtown and likes the idea of being able to walk everywhere — especially once a Hy-Vee grocery store opens across the street.

"I don’t think we will ever use our cars," Baeza said. "We won’t have to.”

Des Moines is not alone in seeing a downtown apartment boom.

"It's a relatively new, post-recession phenomenon, but it's not unusual," said Ed McMahon, senior resident fellow at the Urban Land Institute. "It's happening in virtually all other large and small cities around the country: Indianapolis, Columbus, Ohio, Oklahoma City, Kansas City."

In the short-term, McMahon said he thinks Des Moines should be able to fill the new downtown apartments, thanks to the overall shortage of rental housing, millennials' need for apartments and the demand to live in urban, walkable neighborhoods.

Following the housing crash, strong demand for rentals made apartments a stable place for real estate investors to put their money.

"We are seeing a lot of appetite for rentals both from the perspective of tenants and from investors," said Caitlin Walter, director of Research for the National Multifamily Housing Council.

Nervous about the influx

Still, some apartment owners are concerned about the rush of new rentals.

Frank Levy, president of Newbury Living, which is renovating the Mercy College of Health Sciences dorm on the north side of downtown into 86 apartments, said he is “very nervous” about the number of apartments to be built. He is not worried about his apartments under construction now, but he questioned the demand for additional projects.

“I am concerned by how quickly the supply/demand imbalance could reverse,” he said in an email.

Memories of the condo market collapse are relatively fresh. During the housing bubble, condo developments sprung up around the metro. When the recession struck, condo builders were left with big debts. The ensuing condo crash ultimately contributed to the downfall of some of central Iowa's largest development firms.

Developers always over-build when there is strong demand; it's a natural real estate cycle, Assistant City Manager Matt Anderson said.

But Anderson said he doesn't think there are too many downtown apartments yet — a theory the wave of new rentals will test.

"What we’re waiting to see is just how strong and just how much swagger does downtown have," he said. "I think downtown is going to weather pretty well."

Parking a top concern

The apartment boom figures to further change the look and feel of the city’s core. There will be more street life in parts of the downtown that are often empty after day-time office workers leave. And more retirees and empty-nesters are expected to join the 20-somethings moving to the heart of the city.

Anderson, who oversees Des Moines’ economic development efforts, said downtown is ready for the rush of residents. Infrastructure such as streets, water lines and sewers are more than adequate, already supporting more than 80,000 workers during the day.

Parking is the main concern. The city says downtown as a whole has more than enough parking, though some specific areas could use more.

Tony Tyler, 34, recently moved to The Randolph and has not found long-term parking near his building in the busy Court Avenue area. There's a garage next door to his building, but the city is expected to demolish it in coming months to make way for a 32-story apartment complex.

“I’ve been here two months, and I still don’t have a stable spot," he said.

Anderson said most of the new apartment complexes will provide parking for residents underground, on surface lots or by leasing spaces at nearby garages.

Don’t expect lower rents

All told, 2,342 rental units in 24 downtown area projects are scheduled to open before the end of summer 2017, the Register’s analysis shows.

The downtown area has about 5,500 housing units now, according to a survey conducted by the city of Des Moines.

Conventional economic wisdom says that a 40 percent increase in supply would drive down prices. But real estate professionals say they think there is enough demand that rental rates will hold steady.

“I don’t think you’ll see prices come down,” said Troy Strawhecker, a part-owner of The Lyon apartment complex. “I just think you’ll see the price increases start to slow down.”

Downtown rental rates have soared in recent years amid strong demand for apartments. At the beginning of 2016, the average rent for a one-bedroom apartment in the central business district was $911, up nearly 8 percent from $846 the previous year.

More market-rate housing

Nearly all of the new apartments are market-rate rentals. Only about 75 units will have income restrictions.

That should make it easier for some renters to find apartments. In recent years, many have complained that the only rentals available downtown were income restricted.

Affordable housing advocates, though, say inexpensive rentals are needed to house downtown's service sector and clerical workers.

Many of the new apartments aim to attract deep-pocketed renters willing to pay more for amenities like heated parking, pools and dog parks.

In more than half of the new developments, one bedroom apartments will start for more than $1,000 a month, the Register’s analysis shows.

Boom brings variety

The construction is spread across the city’s core. Apartments are being built in the heart of downtown, throughout the East Village, around Court Avenue and in the neighborhood around Indianola Avenue.

Five of the apartment developments are in the burgeoning area south of Martin Luther King Jr. Parkway.

Thirteen projects are new construction, and 11 are renovations of existing buildings.

The projects range in size from eight to 244 units.

There are high-rises attached to the skywalk, luxury townhomes, “micro” studio units and refurbished warehouse lofts. Several developers are building bike-friendly apartments with storage lockers and repair stations.

“It’s great that every one of these developments is a little different and has the ability to appeal to people for different reasons,” said Shawn Foutch, who is renovating the 19-story Equitable Building into apartments. Foutch said most of his prospective renters are empty-nesters and baby boomers who like the building's historic character and want access to the skywalk.

The current wave of new apartments doesn’t include some of downtown’s most talked about rental projects. The 29- and 32-story apartment towers proposed by Blackbird Investments and Mandelbaum Properties, respectively, would open in 2018 or later.

Multiple developers said the coming wave of apartments could make it more difficult to bring the tower projects to fruition. Lenders may wait to see if this year’s crop of rentals is filled before putting money into other large apartment projects.

Strawhecker said he is confident tenants will fill the new downtown apartments. But he thinks developers will pause after this wave to see how the market settles.

“The real question is: How long can we keep doing what we’re doing?” he said. “Nobody knows.”