The Des Moines area’s office sector is showing signs that it is emerging from its pandemic-related contraction with an uptick in showings of spaces available to lease and an increase in the average size of new leases signed, local real estate brokers say. 

Still, it will take months to absorb the more than 3 million square feet of vacant office space currently in the Greater Des Moines area, brokers say. In addition, it will likely be two or more years before any new large speculative office space is added to the market, although small built-to-suit projects will continue, especially in the suburbs.

“It feels like we’ve bottomed out in terms of high vacancy rates in Des Moines – at least in the suburbs,” said Adam Kaduce, president of R&R Real Estate Advisors, R&R Realty Group’s brokerage subsidiary. “We’re seeing more showing activity, and deal sizes are getting bigger.”

The real estate office sector is an important cog in the economy’s health. Office spaces that are vacant for long periods typically result in lower property values and less revenue for building owners and property tax dollars for public entities. Empty office spaces also mean less business for restaurants and other retailers. 

“There’s just more of an overall vibrancy in an area when people are out and about, whether it’s in the suburbs or downtown,” Kaduce said. “When people aren’t out, it makes downtowns and other areas look desolate. … Potential office users like seeing that vibrancy.” 

Second-quarter vacancy rates

The percentage of vacant office space in the Greater Des Moines area decreased slightly between 2023’s first and second quarters, CBRE Inc.’s latest market report shows. In the second quarter, which ended June 30, just over 3 million square feet of office space was vacant, or 16.53%. In the first quarter, 3.12 million square feet, or 17.23%, was vacant.

The Des Moines area has over 18.4 million square feet of office space. 

More specific details from CBRE’s report show that:

In Des Moines’ central business district, 1.145 million square feet, or 17.52%, of office space was vacant. In the first quarter, the CBD’s vacancy rate was 18%; in the second quarter of 2022, the vacancy rate was 18.73%.

In the western suburbs, 1.6 million square feet, or 16.1%, of office space was vacant. In the first quarter, the western suburbs’ office vacancy rate was 17%; in the second quarter of 2022, it was 14.2%

In Ankeny, 35,897 square feet, or 5.4%, of office space was vacant. In the first quarter, Ankeny’s office vacancy rate was 4.78%; in the second quarter of 2022, it was 11.82%

JLL reported an overall Des Moines-area office vacancy rate of 13%. In the first quarter, the rate was 12%. (JLL and CBRE review the market differently. JLL’s report tracks spaces being marketed for multitenant use. CBRE’s report includes owner-occupied spaces.)

The Des Moines-area office market appears to be faring better than other parts of the country. The U.S. office second-quarter vacancy rate was 17.1%, up 180 basis points from a year ago, according to Commercial Edge’s national office report. More than half of the country’s top 25 markets recorded vacancy rates above the national average, the report showed.

“Des Moines is in as good or better shape than other parts of the country,” said TJ Jacobs, a vice president at CBRE’s West Des Moines office. “A lot of that has to do with transportation. We tend to rely more on auto transportation than public transportation. … If I’m going to the office, a 20-minute drive isn’t that big of a deal. If it takes an hour and a half to get to the office, I’m going to accomplish more by staying home and working than I am commuting.” 

Leasing activity

More than 217,000 square feet of office space was leased in the second quarter, a slight increase from the first quarter, CBRE’s report shows. For the first half of the year, just over 400,000 square feet of office space has been leased. 

Over 80% of the new leases were for office spaces in the western suburbs.

“The suburban office market is back, and it feels like [the central business district] is starting to follow,” said Justin Lossner, senior managing director for JLL’s Des Moines office.

Lossner said he and others are beginning to see more interest in vacant office space in Des Moines’ central business district. Showings are increasing, which eventually can lead to signed leases, he said.

“It all starts with showings, which we’ve seen an uptick in in the downtown area,” Lossner said. “The showings move to [request for proposal] activity, and that can lead to leases getting signed.”

One challenge facing downtown is the sizes of leasable spaces that are available, Lossner said. “The challenge that exists downtown, more so than in the suburban market, is that there aren’t as many 3,000- to 5,000-square-feet, highly amenitized spaces downtown that also offer flexible parking arrangements.”

New construction vs. remodels

About 58,000 square feet of office space was under construction in the Des Moines area in the second quarter, a drop from the first quarter when over 270,000 square feet was being built, according to CBRE’s reports.

The Des Moines area – and most of the country – likely won’t see much new speculative office development for the next couple of years, brokers say. (The exception will be built-to-suit projects for small office users, they say.)

Instead, the focus will be on redevelopment of existing office space.

“There will be new space to the market but it won’t necessarily be new construction,” R&R Realty’s Kaduce said. Large office spaces that had been used by one tenant are being divided into smaller spaces, he said. “Those spaces have never been in the competitive market and now they are for the first time.”

In addition, amenities are being added to buildings to help lure workers back to the office, including at R&R Realty Group’s office building at 4900 University Ave. in West Des Moines. 

The building has been unused since the start of the pandemic when a financial services tenant sent its employees home to work and never brought them back. Knowing that the tenant wasn’t going to renew its lease, R&R Realty began making updates to the building, including staining it a lighter color. In May, the company announced that Co-op Solutions will occupy 99,700 square feet of the building’s 163,196 square feet. Co-op Solutions, headquartered in Rancho Cucamonga, Calif., currently leases office space in Clive. The company provides services that support credit unions.

“I think that’s where we’re going to see more construction activity – in the redevelopment, remodeling of buildings that will include new office amenities,” Kaduce said. 

Remodeling of space is also occurring in downtown office spaces.

MidAmerican Energy Co., which earlier this year completed its acquisition of Dotdash Meredith property along Grand Avenue and Locust Street, has begun demolition and renovation work in the office building. (MidAmerican Energy is vacating space it has occupied since 1975 in the Ruan Center at 666 Grand Ave.) 

In April, permits valued at $995,000 were issued to allow the removal of existing interior construction of the first through fourth floors of MidAmerican Energy’s new office building, located at 1615 Locust St., Des Moines building records show. In June, a building permit valued at $5.15 million was issued for interior renovation work on the fourth floor and other parts of the building.

The city of Des Moines is in the process of acquiring the former Nationwide office building at 1200 Locust St. in downtown Des Moines. When that purchase is complete, the building will be remodeled to accommodate the consolidation of several city departments under one roof.

If the momentum in leasing activity continues to grow, the Des Moines area’s office market will get stronger, Kaduce said. “If we can keep up that momentum and continue to see those average office users in the market continue to grow and to be out in the market looking for space, that would get us back to more of what we consider a normal activity level.”

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Second-quarter office highlights

CBRE Inc. and JLL both recently released second-quarter reports about the Des Moines area’s office market.

Highlights include:

•  31 leases were signed in the second quarter, similar to the number signed in the first quarter, according to JLL.
•  10 office buildings in the market have at least 50,000 square feet of contiguous office space for lease, according to JLL.
•  Just over 80% of new leases signed in the second quarter were located in the western suburbs, according to CBRE.
•  Three tenants renewed leases – Dentons Davis Brown PC (215 10th St., Des Moines), RCG Mercy Des Moines (6651 S.W. Ninth St., Des Moines) and Concentra, (11144 Aurora Ave., Urbandale) – and one expansion by Wells Fargo Clearing Services (6400 Westown Parkway, West Des Moines).

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Update on Well Fargo’s downtown buildings

CBRE Inc. is in negotiations with a potential buyer of two of Well Fargo’s downtown Des Moines properties, according to Tyler Dingel, an executive vice president for CBRE’s Des Moines office. “We have work to do before we have a deal in place,” he wrote in an email.

In March, Wells Fargo & Co. listed five downtown Des Moines properties for sale as part of its plan to consolidate many of its Des Moines-area employees at the company’s Jordan Creek campus in West Des Moines.

CBRE is listing the properties for sale. Properties include:

• 801 Walnut St., a 298,882-square-foot structure built in 2005. The building includes underground parking.  
• 800 Walnut St., known as the Skyview Building. Built in 2002, the nine-story, 328,495-square-foot building includes 50 underground parking stalls.  
• 206 Eighth St., known as the Tower Building. The 11-story building, constructed in 1988, has 188,769 square feet of space.  
• 207 Ninth St., known as the Founders Building. The three-story structure, with 53,868 square feet of space, was built in 1910 and remodeled in 1990.  
• 800 Mulberry St., a 1,625-space parking garage. The concrete structure was built in 2002.  

Dingel told the Business Record that CBRE has “talked with local and national groups that have shown interest in the buildings. … A couple of [the buildings] are set up well for a conversion from office into either residential and/or boutique hotel.”

A spokesperson for Wells Fargo declined to comment about the potential sale of the downtown properties or how much the company is asking for the properties.