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City addresses rising office vacancy rates

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West Des Moines city officials and several local companies that have a significant stake in Class A office space began discussing a strategy to deal with rising vacancy rates in the western suburbs this month.

Mayor Steve Gaer said the city is taking a proactive approach to vacancy increases expected next year as large employers such as Aviva USA and Wellmark Blue Cross and Blue Shield move from leased to owned facilities.

Gaer said that at the Dec. 16 meeting, the group discussed which employment sectors are believed to have the largest near-term growth potential, such as the health-care industry, as well as how to take advantage of the momentum associated with the arrival of Aviva and the synergy revolving around two hospitals under construction in West Des Moines. They also talked about the “ancillary interests” that tend to follow Microsoft Corp., which in August announced plans to build a $500 million data center in the city.

The “good news is that there are no material layoffs” contributing to the vacancies at this point, he said. “The easy answer to the problem is you need to create jobs to fill up office space.”

According to the third-quarter office marketing trends report released by Grubb & Ellis Co., the overall average vacancy rate for Class A office space in the western suburbs is 13.5 percent.

By Gaer’s estimate, that rate could increase to 23 to 25 percent in 2009, which translates into roughly 850,000 to 1 million square feet of unoccupied space, he said.

“Corporate campus construction will drastically impact downtown specifically,” as well as West Des Moines, said Debra Kastantin, director of research with Grubb & Ellis/Mid-America Commercial. “Office demand is directly linked to job growth,” especially in the financial services industry, she said.

The relocation of Wellmark, Aviva and Nationwide Mutual Insurance Co. in the coming months is projected to flood the Greater Des Moines market with an additional 1.2 million square feet of vacated space by 2011. Also, the Iowa Foundation for Medical Care will vacate 170,000 square feet of Class A space in the western suburbs when it consolidates three offices into one location with a 16-year lease of a building at 1776 West Lakes Parkway beginning in January. The 270,000-square-foot site has been vacant since Marsh USA Inc. relocated to its corporate campus headquarters in Urbandale in May 2008.

“It’s a challenge to find tenants to take over significant amounts of office space,” said Jeff Pomeranz, West Des Moines city manager.

Pomeranz said West Des Moines is very optimistic as it approaches $500 million in building permits for 2008, the city’s strongest year to date. And though he doesn’t view the construction of build-to-suit properties as a negative, he recognizes the impact and the need to develop a strategy.

“It’s really a metropolitan issue. We want to work with the city of Des Moines and others as a team,” he said.

Though new development and construction are considered to be positives, as more companies move toward owner-occupied facilities, the challenge is to determine how to fill the vacated space.

Kastantin said it can be difficult to project how long it will take to absorb the vacancies, because “we have to decide what companies are going to require that space.”

“In many ways we are a victim of our own success,” said Susan Ramsey, senior vice president of communications and marketing with the Greater Des Moines Partnership. “Growth is good, but it does present the issue of how to fill the space when they leave the building. The reason we have the problem is because good things are happening in our community.

“Many people across the country will tell you that it’s a nice problem to have,” she added, “but it’s not something we don’t want to react to and look at as strategically as we can.”

Ramsey said a “community-wide focus on how we address this problem” is necessary in Greater Des Moines, adding that office space is becoming vacant not only downtown or in the suburbs, but across the entire area. “The issue of the metro area office vacancies will be a priority in 2009,” as part of the Partnership’s economic development efforts, she said.

“The economic development organizations and state of Iowa leaders who can attract new companies to Central Iowa can quickly become heroes in the commercial real estate industry,” Kastantin said.

Gaer, Pomeranz and Clyde Evans, West Des Moines economic development director, attended the initial meeting, which included representatives from the Mid-America Group, R&R Realty Group, Knapp Properties Inc., Ladco Development Inc. and West Glen Town Center.

Gaer said the first meeting was intended to kick off the conversation and lay out the issues facing major office space owners, adding that plans are in place to expand the committee when it reconvenes in February.

“We’re going to put together a more specific plan with measurables and timelines,” he said.

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