More than 17% of leased office space in the downtown Des Moines area was vacant, according to CBRE|Hubbell Commercial's first-quarter market survey report. Photo by Duane Tinkley

 

TJ Jacobs, a vice president at CBRE|Hubbell Commercial, had just one positive thing to say about the Des Moines area’s office market during a recent virtual presentation that included information about the real estate sector:

“It’s nice to know that occupiers and investors find genuine value opportunities in the office sector,” Jacobs (pictured) said during last week’s presentation. “That’s my one positive comment on the office market.”

The Des Moines area, unlike East and West Coast cities, is insulated from acute declines in demand for office space, Jacobs said. However, that doesn’t mean Des Moines and its suburbs are immune from experiencing dips in office occupancy rates or drops in rental rates, he said.

Between the quarter that ended March 31, 2020, and March 31, 2021, the office vacancy rate in Greater Des Moines increased 3 percentage points, from 13.2% to 16.2%, according to CBRE|Hubbell’s market survey.  The central business district’s office vacancy rate was 17.4% at the end of the first quarter of 2021; the vacancy rate in the western suburbs was 14.5%.

The office vacancy rate nationally in May was 15.6%, according to a report by Commercial Edge, a national firm that provides commercial real estate research and other services.

People who work in suburban or downtown offices spaces frequently patronize restaurants, fitness centers, convenience stores, boutiques and other retail establishments that are near their work sites. When the pandemic hit, many office workers began working remotely. A large percentage of those workers have not yet returned to the office, leaving retail establishments and support services located near offices with a substantially smaller base of customers from which to draw.

With fewer customers, some retailers located near offices may be forced to permanently shutter their businesses, experts have said.

In February 2020, about 96% of leased office space was occupied in the U.S., according a CBRE report. In April 2020, a month after the economic shutdown caused by the pandemic, less than 20% of leased office space was occupied, CBRE reported. A year later, about 30% of leased office space is occupied.

Many large users of office space, both nationally and locally, have said they expect workers to begin returning to offices between July and September. However, the number of people working in office settings will likely be less than before the pandemic because of the flexibility being offered to workers. Some companies are letting employees work remotely full time; others are allowing workers to work remotely one to four days a week.

In Des Moines, for instance, Nationwide last year announced a hybrid work model where some employees would work remotely and others would work primarily in the office. The move means one of the company’s downtown Des Moines buildings – a five-story, 372,000-square-foot Class A building at 1200 Locust St. – is for lease.

Jacobs predicted vacancy rates in the Des Moines area will continue to increase before stabilizing. He said rental rates will likely remain stable in the suburbs but fall in the downtown area.

“Today’s market is an office tenant’s dream,” Jacobs said. “Unfortunately, uncertainty in their own business and head counts based on hybrid [work schedules] is keeping occupiers from taking full advantage.”

Jacobs said short-term leasing options with built-in early termination options are becoming increasingly common. In addition, five-year leases are not considered “long term,” he said.

Office space owners who want to attract tenants will need to offer amenities that include touchless features like doors, elevators and sinks; air filtration systems; and increased janitorial services. Other amenities such as training and collaboration spaces, work cafes and outdoor gathering spaces and walking trails also will be important, he said.

Projects like Sherman Associates' recently completed 63,614-square-foot office building at Martin Luther King Jr. Parkway and Southwest Ninth Street, are providing the amenities, Jacobs said. The building includes a fitness center, bike storage and a rooftop patio. The Oaks on Grand, a proposed West Des Moines office development, will feature patio and amphitheater space that overlook a pond. R&R Realty Group is investing more than $1 million in new amenities at its Regency West Office Park.

“These features will help lease and renewal efforts,” Jacobs said.

When will it become apparent that the office sector has recovered from the pandemic?

“Longer commute times … and downtown parking ramps that are full will be signs of office recovery here locally,” Jacobs said. “Eventually that will translate into longer commitments of space by tenants, which will be a welcomed change for landlords.”