On Thursday, CB Richard Ellis/Hubbell Realty Co., one of the state’s largest brokers of commercial buildings and property, is planning to release a report on the state of the industry in Central Iowa that will probably surprise no one.

And yet the results of the report, which will say that vacancy rates for office buildings rose last year to surprising levels and are expected to climb higher still before leveling off, are no less vexing to building owners and landlords.

The situation stems from a combination of the slowdown in the economy and low interest rates, which has made it relatively inexpensive to borrow money and has spurred investors in recent years to build more office space than the market could absorb. Compounding the problem for owners of local office buildings has been a trend for large companies, including Wells Fargo Home Mortgage and Allied Insurance, to build their own structures and move out of space they previously leased.

“Money is cheaper now than it has been in my whole career; I’ve never seen anything like this,” said Gerry Neugent, president and chief operating officer of Knapp Properties Inc.

Two years ago, the Hubbell Tower was completely full of corporate tenants. Today, it is 10 percent full. Former clients such as Wells Fargo Financial, which last year completed a second building downtown and is working on plans for a third, pulled out of the structure. So, too, did Brooks Borg Skiles Architecture Engineering LLP. Hubbell Realty itself, which owns the building, moved to a new site in the sestern suburbs.

To fill the building, Hubbell has developed plans to convert it into condominiums for low- to moderate-income individuals. The company has applied to the Iowa Finance Authority for tax credits to help finance the conversion, and is expected to learn if it has been approved this week.

“It’s going to be a while before we see a big speculative boom in office buildings,” Neugent said. “Building-wise, people are a little bit cautious.”

To combat the issue, landlords and commercial developers are using a variety of tools and tactics. Commercial brokers said property owners are knocking the price off leases, initiating lease discussions with tenants sooner than usual and hiring commercial brokers in greater numbers to help them keep their buildings full. They have also backed away from large-scale speculative building projects.

“For us, we’re really cut back on speculative development,” said Rick Tollakson, Hubbell’s president and chief operating officer. “In the past, as soon as we got to a certain level of leasing in one project, we started building the next one. Now, we’re only doing smaller speculative projects, or we’re doing built-to-suits.”

The conditions are also causing a sort of domino effect, where owners of Class A office space, which is the most expensive, have in some cases lowered their rent to try to attract tenants that would normally select Class B space. In Des Moines, Class A office space, which includes such buildings as 801 Grand, typically lease for $16.50 per square foot or higher. Class B space, such as downtown Des Moines’ Financial Center, home to Wells Fargo Bank Iowa, usually leases for $12 a square foot.     “We continue to see pressure on Class B and C buildings,” said Kurt Mumm, a senior vice president of Grubb & Ellis/MidAmerica Pacific. “There’s not the amount of deals out there we’d like to see. But what we are seeing is landlords becoming increasingly competitive in trying to land those deals.”     For years, the eight-story Capital Square building has been one of Des Moines’ premier addresses. Its soaring atrium, conference room space and connection to the skywalk have made it a desired location for such firms as RSM McGladrey Inc. and Merrill Lynch & Co.      The downturn in the economy, however, has hurt Capital Square, pushing owner Draper and Kramer Inc. of Chicago to turn to local specialists for help. Five months ago, the firm hired Hubbell Realty as a local broker to find tenants.

“Downtown leasing has been slow the last couple of years,” said Todd Millang, an agent with Hubbell who works on the Capital Square account. “They [Draper and Kramer] had always marketed it themselves, but they got to the point where they felt they needed a better presence, better marketing and better market knowledge.”

Despite the conditions for corporate structures, or perhaps because of them, commercial brokers say investors have turned their attention to the land itself. Large swaths of land zoned for commercial and retail development changed hands in 2003, and professionals expect more transactions for the current year.

In one of the biggest series of land-related transactions last year, FBL Financial Group Inc., which worked with Knapp Properties Inc. to develop the corporate homes for Wells Fargo Home Mortgage, Hy-Vee Inc. and its own headquarters at the West Lakes business park, announced plans a year ago to develop three multi-use business parks in Des Moines, West Des Moines and Waukee.

The three sites, among the most talked-about areas of development in Central Iowa, added 609 acres to the partnership’s holdings of 889 acres, bringing the total to nearly 1,500 acres. They are zoned for light industrial, office, retail and residential use.

The new parks include 341 acres at the intersection of Highway 5 and Southwest Ninth, about 123 acres in West Des Moines at the junction of Highway 5 and Southwest Connector, and about 145 acres in Waukee at the intersection of Alice’s Road and Hickman.

Land surrounding the Jordan Creek Town Center, too, traded hands last year, brokers said.

“Our building land and investment sales were extremely strong in 2003,” Mumm said. “We look for that to continue.”

Not all speculative office building has stopped, however. In one example, R&R Realty, whose 3.6 million square feet of office space makes it the largest developer of office space in Greater Des Moines, broke ground last year on two office buildings in its Country Club office plaza last year off 74th Street. The road is expected to be renamed soon to Jordan Creek Parkway. The structures are expected to be complete this summer. R&R is hoping the buildings capitalize on the recovering economy.

“The economy is picking up,” said Mark Rupprecht, R&R’s president. “I think vacancy rates will plateau and rents will stabilize. That will mean more demand, and with more demand, we’ll start seeing more absorption in the market.”