In fall 2019, downtown Des Moines was buzzing with activity.


Many of the more than 80,000 downtown workers filled restaurants during weekday noon hours. Visitors strolled through the Pappajohn Sculpture Park. Hotels were filled with business travelers and conventiongoers.


That buzz of activity went away with the arrival of COVID-19 in the spring of 2020. Eighteen months later, downtown’s pre-pandemic level of activity has not yet returned – in part because 18.3% of the central business district’s office space is vacant. And what is concerning to some is that the vacancy rates could climb even higher as companies move to allowing employees to work remotely either all or part of the time.


“We have a lot of owner-occupied buildings in Des Moines,” said Bill Wright, senior vice president of CBRE|Hubbell. “We’re starting to see employers deciding ‘You know, we’re probably going to be 50% … or 70% of what we were.’ And we’re starting to see some owners” ask how much the space could be leased for.


“That’s what gives me the greatest pause is that shadow space. I don’t think we understand what that means to the market now … but it’s certainly going to have an impact on our market.”


Wright was among six panelists who participated in the Business Record’s second Project515, a series of virtual events designed to take a deep look into specific sectors of the real estate industry. The first discussion, held in June, focused on retail and the service industries. The second discussion, held in mid-August, focused on the office sector, particularly in the central business district.


Other panelists included Brian Crowe, executive vice president, economic development, Greater Des Moines Partnership; Siri Fliehler, registered interior designer, Shive-Hattery; Adam Kaduce, senior vice president, R&R Realty Group; Carrie Kruse, economic development administrator, city of Des Moines; and Jonathan Ramsey, associate principal, BNIM.


It’s often said that downtowns are essential to healthy cities and suburbs. Without strong central business districts, other areas of a region often struggle to be healthy and vibrant.


So it’s concerning when a downtown starts to show signs of weakening, panelists said.  


As the pandemic has lingered, companies are reassessing plans of when to bring employees back to the office either on a full- or part-time basis. Some are assessing whether they need as big an office footprint as they did pre-pandemic, or whether they need a footprint at all. The result could be an increase in vacant office space, not only in the central business district but also the surrounding suburbs.  


The Partnership, along with the city of Des Moines, Polk County, Catch Des Moines and other downtown-related groups, has hired a team of consultants to help shape a new vision and action plan for downtown as it emerges from the pandemic. The plan is expected to be completed by next spring.


“This is our chance right now to think about what’s up next in the coming decade and to make sure that this is a great place to live, work and experience,” Crowe said.


Among the things the plan will likely take into account is the amount of vacant office space in the downtown area. In the fourth quarter of 2019, the Greater Des Moines area had an office vacancy rate of 12.4%, according to CBRE|Hubbell Realty’s quarterly market report. The central business district’s vacancy rate was 12.5%, and the western suburbs’ 11.3%.


The vacancy rates have climbed during the ensuing months. In the 2021’s second quarter, which ended June 30, the area’s overall office vacancy rate was 16.9%, up 4.5 percentage points from the end of 2019, according to Hubbell’s report.


In the central business district, 1.16 million square feet, or 18.3%, of office space was vacant in the second quarter, according to the report. (The downtown has over 6.3 million square feet of office space.)


In the western suburbs, which have more than 9.4 million square feet of office space, 14.9%, or 1.4 million square feet, was vacant, according to the report.


“We’re at levels that we haven’t seen here for several years,” Wright said.


The report also noted that sublease space accounts for 9.2% of all the available office space on the market. The amount is nearly 7 percentage points higher than the six-year average of 2.4%. Among the subleased space available is 22,000 square feet at 909 Locust St. and 17,000 square feet at 601 Locust St., both in downtown Des Moines, and 30,000 square feet at 1275 N.W. 128th St. in Clive.


“We’re seeing more and more of that space come available,” Wright said. “Some companies have made that decision that they are either closing up the office or they are going to much more of a hybrid environment, and they are putting [that space] on the market for sublease.”


The vacancies are similar to what occurred during the Great Recession, more than a decade ago, Kaduce said.


During the recession “we saw a freeze of the credit markets and we saw a lot of fire sales,” he said. “Lot of buildings – and we even saw a few in Des Moines – got returned to lenders. We’re not seeing that now. … But the result is the same: higher vacancy rates.”


One way of filling some of the vacant office space is by enticing companies from outside Iowa to relocate to the Des Moines area, members of the panel said.


Crowe said the Partnership is fielding inquiries from companies located on the East and West coasts and in larger metropolitan areas. Those companies are finding it challenging getting workers, particularly those with long commutes, back into the office, he said.


“They are feeling there’s an opportunity to have some density and collaborative space with employees if they [were located] in smaller markets like ours,” Crowe said.  


Amenities like the sculpture and skate parks, Iowa Confluence Water Trails, Principal Park and proposed soccer stadium are key to helping keep business in the Des Moines area and attracting new ones, the panelists said.


“A lot of times people will equate their access to unique retail opportunities, their access to unique event spaces as quality of life,” Crowe said. “So having access to unique experiences … is absolutely critical.”


In July, EMC Insurance Cos. announced plans to develop a pocket park on vacant ground at 701 Walnut St. in downtown. The company, which acquired the property in 2018, had planned to build an office tower on the site. However, EMC now has “determined it has no near-term needs for additional office space,” according to a news release.


The site is where the Younkers department store had been located. The vacant building was destroyed in a fire in March 2014.


The park will include sports courts, seating, raised flower beds and public art.


“It’s those types of placemaking, where government and the private sector can partner to really make improvements to downtown and continue to work on [its] vitality,” Kruse said. “It’s those types of things that make downtown the special place that it is and help attract workers back [to offices].”

 


 

Project515 coverage

Participants in the Business Record’s second Project515 event recently discussed the office market, both locally and nationally. They were asked to predict what the future holds for the office sector. Here are their responses:


Brian Crowe

executive vice president, economic development, Greater Des Moines Partnership 

"I know right now that we have companies from all across the country who are recruiting our workforce to work remotely for their companies. I think there will be a continued battle for … workforce attraction and making sure that we are just a destination where people want to be. [That battle could] help bring those companies here and help fill up that vacancy. We also have extremely strong entrepreneurial business starts happening right now. Hopefully, there's opportunities for some of those companies to grow [into] some of the spaces.”


Siri Fliehler

registered interior designer, Shive-Hattery

"I think we’re going to see a lot of renovations happening [instead of] new spec office builds over the next five years. From a design perspective, I think it'll be really honing in on ‘What are the employees needing when they come into the office? What's that right balance and support of different types of spaces? How does technology get integrated so that it is a blend of remote and in-person workers and it's a seamless workplace?’"


Adam Kaduce

senior vice president, R&R Realty Group

"I think companies will move toward where the demand is. If it's for smaller spaces, for the time being, that's where the market will go. But you've got buildings right now in Des Moines that are owned by strong landlords and strong companies that have good balance sheets and are well capitalized. While we'll see vacancy rates go up, we won't see buildings get returned to lenders. I think they'll continue to maintain good properties, and as those large uses return to the market, they'll start to backfill that space."

 

Carrie Kruse

economic development administrator, city of Des Moines

"We’re going to see the downward pressure on lease rates and we’ll see the increase in the vacancies. Eventually, we’re going to see that reflected in property tax assessments. … There could be some short-term revenue challenges for local governments related to the shifts in commercial property assessments. But I think Des Moines is really well positioned for this to be a quick recovery. … I think the revenue challenges to local governments will be short-term."


Jonathan Ramsey

associate principal, BNIM

"I think for a lot of companies, I can see them taking a strategy of just making smaller tweaks and working with what they have as being the preferred approach and not over-commit to any one strategy in the face of continued uncertainty. … Ultimately, there will be a critical mass of clients who get to the point where these sorts of strategies – returned to work and the hybrid – may become very commonplace in terms of what people are trying to accomplish in their workplaces."


Bill Wright

senior vice president, CBRE|Hubbell

"Vacancy rates are going to go up, no question about it. I think you'll have a period of time where there's going to be some concern. Des Moines has so many great things going for it: quality of life, education, its people, its business climate. My prediction is, by the middle of this decade, we're going to have some major employers make a decision that Des Moines is their new home and [they will] backfill some of those spaces."


Redesigning office space

Siri Fliehler, registered interior designer with Shive-Hattery, and Jonathan Ramsey, associate principal at BNIM, talked about how office space has been adapted to the post-COVID-19 environment. 


Ramsey: Companies “are talking about investing in more robust audiovisual systems and technologies, such as camera tracking of speakers in conference rooms, and better arrays of microphones. Those are the sorts of technologies that some organizations already have in place, but I think they've become more of interest to others in this new environment.”


Fliehler: “I think, if there's a silver lining to the pandemic, it's that we are really looking at employees as holistic individuals and really thinking more carefully about their wellness and well-being within the workplace. … When we’re talking about getting people back to the office, we need to ask, ‘What is it that is going to drive them to be excited about coming into the office every day? What are not just the big moves in first impressions, but the little things everyday that make their life easier, and make it exciting to come into work?’”