Des Moines is holding firm while larger commercial real estate markets such as St. Louis, Omaha and Wichita slowly recover or struggle, officials with Grubb & Ellis Co./Knight Frank say. Kurt Mumm, senior vice president of Des Moines-based Grubb & Ellis/Mid-America Pacific, is cautiously optimistic about the year ahead for the local office, industrial, retail and investment sectors.

“I see both the office and industrial sectors improving due to the continued absorption of excess space that was put on the market in late 2001 and 2002,” Mumm said. “Although activity levels remain similar to 2002, the supply-demand imbalance is narrowing.”

Mumm said Des Moines’ size is one of the main reasons the local market hasn’t experienced drastic swings in activity.

“We are below the radar screen of a number of large institutional developers that tend to develop more speculative space,” he said. “As a result, the majority of development is being done by local developers who are both sophisticated and generally more conservative.”

Des Moines is forecast to rank 77th in office space costs in 2003, by the Grubb & Ellis/Frank Knight survey of 93 major office markets worldwide, Mumm said. The average annual cost for local Class A office space is projected to be $18.10 per square foot in the fourth quarter, a 0.6 percent decrease from the fourth quarter of 2002. Experts say suburban office rates will be virtually unchanged in 2003, while downtown will experience downward pricing pressure.

The report also said Greater Des Moines will continue to experience sluggish leasing activity for office space, coupled with an ample supply of vacant space. The company reported the vacancy rate for 2002 was 12.5 percent.   On the up side, absorption of blocks of office space with 15,000 square feet or more is likely to improve. Dean Weitenhagen, office team leader for Grubb & Ellis, said approximately 20 Class B and C buildings have been discounted 20 to 30 percent in the central business district.

“There’s plenty of space in those B and C buildings and I think we’ll see discounts continue there,” Weitenhagen said.

Industrial tenants will also see opportunities in 2003 in the form of owner-driven incentives such as additional tenant improvement dollars, rent abatement and lower base rates, company officials say. Last year, several large properties were vacated by companies like SuperValu and R.R. Donnelley, opening more than 1.2 million square feet in the market. Those properties are being purchased at prices substantially below market value for use as multi tenant warehouse properties.

“For second and third generation spaces there is a downward movement,” said Morey Knutson, senior vice president of Grubb & Ellis. “I’m skeptical to make predictions, but I think the industrial market will be soft for a while.”  Officials say industrial tenants will have an excellent opportunity to expand or relocate. The new Northeast 66th Avenue interchange south of Ankeny, officials say, will be completed in 2004 and will create increased interest in the industrial corridor north of Interstate 80.

Bill Wright, vice president and retail team leader at Grubb & Ellis, said retail development around the perimeter of Jordan Creek Town Center in West Des Moines for big-box stores, strip malls, restaurants and free-standing businesses will be driven by the city’s land-use plan. Those businesses will have to adhere to building standards established last week by the West Des Moines City Council that require developers to create a pedestrian-friendly, village atmosphere. City officials will also encourage developers to design buildings for mixed uses, such as retail and residential.

“I think it’s going to be neat,” Wright said. “You’ll see buildings with retail on the first floor and residential units on the second floor. I think we’ll see a lot of well-thought-out development.”

Wright said though Jordan Creek is a hotbed for retail development, other sections of Greater Des Moines are also experiencing growth. The Iowa Highway 5 bypass south of Des Moines in Airport Commerce Park South, as well as the area around a proposed 1.2 million square-foot mall in Ames, will create a tenants’ market for retailers.

In contrast to new development, Grubb & Ellis’ 2003 Global Real Estate Forecast said landlords will be challenged to backfill vacant big-box spaces. Still, company officials are hopeful those spaces will be filled as landlords continue to lower their expectations for deals on second-generation spaces.

Occupants aren’t the only tenants company officials hope to attract. Last year’s unstable stock market and record-low interest rates spurred activity in commercial real estate as investors looked to diversify their portfolios. Michael Meggison, investment team leader for Grubb & Ellis, said 2002 was a “good year for conservative investors.”

Unfortunately, Meggison said, there is a “scarcity of quality products” because there are more buyers than sellers in the market. He said investment opportunities could improve in the last half of the year.  “That’s when buyers will be able to better see what’s going on with the economy,” he said.