Office Roundtable Q&A – 2020 Annual Real Estate Magazine
KATHY A. BOLTEN Apr 20, 2020 | 4:32 am
19 min read time4,511 wordsBusiness Record Insider, Real Estate & Development
At the close of 2019’s fourth quarter, 12.4% percent of competitive office space in the Des Moines area was vacant, according to CBRE|Hubbell Commercial’s quarterly survey.
More than 1 million square feet of the vacant office space was located in the western suburbs; another 787,000 square feet was located in the downtown area, the report said. In all, more than 2.1 million square feet of office space is available for lease.
The surplus of vacant office space likely means a slowdown in the construction of new speculative office space in the Des Moines area, a panel of office experts said.
“I don’t know that many developers are planning new spec office buildings right now,” said Brittany Freund, vice president of R&R Real Estate Advisors. “I think we have enough spec space currently as well, as large companies are vacating – or going to vacate – space: IMT, Sammons, Holmes Murphy and Kum & Go.
“There’s over 400,000 square feet that’s already online or coming online here in the next few years that we’re going to have to backfill,” she said. “I don’t think that there’s a need for spec space at this time.”
However, the little spec building of office space that is occurring is in new development areas with little office space available, panelists said.
For instance, Minneapolis-based Sherman Associates plans to build a spec office building in its Gray’s Landing development south of Martin Luther King Jr. Parkway.
“There hasn’t been any [office space] built in that area in a long while,” said Jane Berg, a vice president at Hubbell Realty Co.
Read the discussion:
Q. Where do you see the office sector heading in 2020 in Central Iowa?
Jan Berg: I see office moving down a path of looking at the employee, their needs and their environment desires. We have less need for office space for lease because a lot of our corporate headquarters have chosen to vacate a leasing situation and move into owner-occupied. Since we have such a low unemployment rate, employers and landlords need to be looking at an environment that is interesting and conducive to the employee’s needs. I think there’s going to be looking into additional amenities [for employees] and how [companies] can make their space more interesting.
Kevin Crowley: I would add that as that need develops for trying to attract and retain employees in the office space that they occupy, you’re going to see more amenities added, whether it’s conference rooms, huddle rooms, workout rooms, public meeting spaces; we’re just going to see an expansion of that. Many companies are trying to figure out how to [accommodate workers] who split their time between working at home and in the office. How people use office space is definitely shifting.
Sara Herman: We’re starting to see people try to exhibit their culture and their brand. The unemployment rate is really low and [companies] are competing for employees. They want their space to reflect who they are because the minute that [prospective employee] comes in for an interview, [companies] want to make sure that they’re representing who they are. [Companies are] realizing that space can be one of the most critical components to that hiring process. Brittany Freund:
We do have quite a bit of a spec space available right now. We also have some large companies that have vacated space or are going to be vacating some leased space. There are options out there for tenants. I think some tenants are going to be looking for a change, including some larger tenants. Sometimes it’s easier to start from scratch and implement some of these new design ideas in a fresh space. I think we’ll just see a little bit of movement this year.
Q. Let’s talk about some of those vacancy rates. What kind of vacancy rates are we experiencing now? What do we think is going to happen over the next year or two?
Berg: We do have several larger spaces [available because of companies] choosing to build their own building. The number I came up with was 1.4 million [square feet] in the market of vacancy over 10,000 square feet. That’s interesting because it’s hard to find space that is under 10,000 square feet right now. The interesting fact is that it’s almost split equally between downtown and the western suburbs.
Q. You hear people talking about the benefits of downtown and then talk about the benefits of being in the suburbs for their office space. Have you seen equilibrium like that in the past, or is that a relatively new issue?
Crowley: There’s always been some equilibrium to the market. There are some companies — both national and local — that really … want to be in a vibrant downtown. They’ve made the investments to stay in the downtown. At the same time, there’s some people who want to go out to the suburbs and they want free parking, and they want other amenities that they wouldn’t necessarily get downtown. So that really becomes the mix, and there is equilibrium in the market.
Historically, I think the worst vacancy we saw in downtown Des Moines was [in 2007-2008] right before the downturn. It was probably about a 25% [vacancy rate]. That’s when you saw the Liberty Building, the Des Moines Building, the Midland Building … get repurposed into apartments. That’s really the cycle that happens. In other parts of the country … older suburban office parks are either leveled or turned into other uses.
Berg: I might add that that ebb and flow has happened for the past 30 years. When these properties become obsolete, they either find a new purpose or they’re removed from our inventory.
Q. Will currently available vacant office spaces have opportunities for multiple users in them?
Crowley: Yes, they can be divided. Sammons is moving out of [4350 Westown Parkway], a building that’s just under 100,000 square feet of usable space, and at 24,000 feet per floor, it could be leased in partial floors, whole floors, multiple floors. … I really think that there’ll be very little spec space built [in 2020]. What developers like Sherman Associates are hoping for is that they’ll get that anchor tenant that would be a 50%, 60% user and then they’ll go ahead and build a building and then have some additional rental spec space available.
Q. Is there a new trend that tenants or clients want in their office spaces?
Herman: We’re seeing a big push for natural light, something [to which] people have gravitated. … That ability to have an open floor plate with a lot of window access — you can easily convert that to make sure that a lot of employees will have access to natural light. We’re seeing a push away from the perimeter office concept that shuts that down.
Berg: This major amount of vacancy that we’re getting, … those properties in a way have become obsolete in the way that they’ve been finished, because they have offices all the way around the outside. They may not have as much light and windows. If it becomes obsolete or not as desirable, the landlord has to put money into it and it’s fairly costly.
Crowley: A lot of landlords are facing [the need to] reinvest in properties, and the hard question for them is [whether to take previously made] improvements out at the risk of having somebody that would want those improvements, or do they take them out and just wait for the market to come?
Q. With more people working at home and businesses owning their own space rather than leasing, it seems that office occupancy is staying relatively healthy. Why is that?
Crowley: I think coming out of the downturn, there was a lack of building and the market caught up with itself. Now, we’ve had a plethora of build-to-suits for companies building for their own offices … and that’s leaving the backlog of existing space. We probably have a three-year supply of office space right now based on normal historical data. It’ll be interesting to see how that is absorbed.
Herman: I think one of the other things too is we’re seeing that although people are reducing their real estate footprint per employee, they’re also bringing a lot of amenities into their space. They may not be lessening the total amount of square footage that they’re using; they are just providing it differently. So instead of the typical larger private office or the larger-size workstation, we’re seeing a lot more open collaboration spaces of conferencing; areas of huddle; areas where they can have those kinds of standup meetings. …
Companies may be keeping the same or even growing their real estate footprint to some degree. It’s just they’re repurposing it for different things.
Berg: You know what else is so important to that is integrated technology. It has driven the design of office since the 1980s.
Herman: Five years ago, even when we would meet with clients, they had probably 50% [of their workers] on laptops. Now when we go into places and almost 90% of their employees are on laptops. [Workers are] not tethered to a desk, which gives them a whole lot more opportunity.
Crowley: 5G, from what I’ve been told, is supposed to revolutionize space the way that the laptop, the PC and the cellphone did. … 5G will change [things] again as far as accessibility [providing] employers a lot of flexibility to where their employees go.
Q. Can you talk a little bit more about how you see that affecting the office space?
Crowley: Literally, people can have desks with wheels, or there’s a number of employers now that don’t have assigned seating in their work areas. They might have [as one company] calls it “a neighborhood” and work areas where an employee may come in and he or she does not have a desk with the family picture on their cube. It’s literally that they’re coming in with their backpack, and they’re unloading, and they’re putting their PC out and maybe a flower or whatever they want to bring into work that day. When they’re done, they pack it up and go home. … If you’re not in early, you may not get to sit where you wanted to sit that day.
Freund: Flexibility is key. I think a few years ago more employers were moving towards the work-from-home idea but found that they were losing some connection with their employees. Having space available is important to employees, even though it’s not your personal space.
Q. What sort of opportunities or challenges does it present to you when somebody says, “We want the flex space, we want the huddle areas.” What are you doing today to design office space versus how you designed it 10 years ago?
Herman: I think some of the opportunities [are that companies] can flux their numbers so we don’t have to pay so much attention to their growth. It’s a pretty sustainable approach. You don’t have to plan ahead [to] build out all these offices or have all this workstation space because if it’s a flexible environment, as their population grows or shrinks, it gives them more opportunity for those people to be in, because you’ve done collaboration spaces or it’s spaces where they work based on their function for that day; you’re not so tethered to their growth population.
I think the challenge — and it’s been out there for many years — is that there’s a lot of backlash to open office space. People say that they’re easily distracted by the noise volumes; that there’s a lot of challenges working in that environment. Many of the challenges can be overcome. I think that you have to, as employers, create space that can be utilized by all employees. Quiet spaces [need to be created]. We’ve seen a lot of enclave type spaces where employees, when they need a heads-down focused kind of day, they can check out … and eliminate a lot of those distractions. It’s just something that people have to be aware of when they’re starting to plan out their space.
Crowley: Very seldom now do we [have clients tell us] that they have enough huddle rooms, enough conference space. They always need more. That’s a big, big, big requirement.
Q. We talked about attracting new employees and having office space that reflects the work environment. Can you give examples of what that might look like?
Herman: I think that you have some companies that really want to attract that younger employee and so they [develop] almost like a college campus type of vibe. They want to brand themselves. You might see the gaming. … A lot of companies have started to brand themselves throughout their building too. [It’s] illustrating your core values, your mission statements, making sure that employees remember what your company stands for. [Companies] want that to be throughout the building and done in a tasteful way. We’ve seen a lot of that incorporated into the architecture and design of the space.
Crowley: If you get to tour a lot of these new buildings … be it John Deere, IMT, Merchants Bonding, Holmes Murphy … all of those buildings really reflect that company’s culture, whether it’s in collaboration space, common areas, places where people can work. It really does reflect that even though their buildings were all built within, say, 24 months of each other, there are similarities, but there’s unique differences in each one, too.
Freund: I think four or five years ago, people were being driven toward more of the open office concept in that trend. As they’re doing that, I think other companies are seeing that that doesn’t always work. I feel like the new trend is designing a space that fits your company culture and your needs, which is not always necessarily an open concept.
Q. When you’re working with businesses and they first come to the table, what do you find yourself maybe correcting or trying to lead them down a different path?
Herman: Everybody has confidential things that cross their desk, and not everybody [who has the confidential information] is in a private office or a private space. We just have to have a dialogue, “Well, how frequently does that happen?” If you could position yourself so you’re not right on the walking path, [would that work]? … The other thing we hear is that people want their growth to be accommodated, but then they also want to make sure that they want to give their employees the maximum amount of space that they need. Sometimes you can grow into that maximum space and repurpose it not just within that individual’s workplace but allowing conferencing spaces where all of a sudden they don’t have to do conference calls at their desks.
Q. Anything else from the other panelists when you are working with different clients?
Berg: Technology has driven everything that we’re doing. Five, seven years ago when we started pushing the open office format, it was driven by our younger generations who have always had technology all their life.
Herman: One of the things that’s interesting is you go to any given Starbucks or into Smokey Row … and people are working. They are working in a very loud setting and very vibrant where there is a lot of people and a lot of action. It proves that you can work in those types of things. Some people enjoy that and actually are more productive with that, but there’s definitely others [who want quiet]. There are still study carrels out there. You have to accommodate all types of people in the way they work.
Crowley: Nobody’s really talked about it, but white noise is really a common tool in open space. It really does dull the tone so that you don’t overhear conversations. Then the other thing that you notice … is the proliferation of people working with their earbuds in, whether they’re streaming music, listening to a TED Talk, whatever they’re doing, they’re doing their work but at the same time they are there creating their own distraction, in a way.
Herman: It’s interesting when you talk about white noise, there’s some buildings, older buildings that almost have inherent white noise because of their HVAC systems. Sometimes where we encounter that and we’re like, “You don’t actually need [white noise] because you have this built in.”
Q. What about the space outside of a building? What are people asking for now, and what are you doing that maybe you didn’t do five or 10 years ago?
Freund: I think we’re seeing more glass these days. Parking is important. Underground parking. Rooftop patios, that’s something that we’ve added to a few of our buildings. Outdoor seating areas. We’ve incorporated food trucks into our parks and with that, people need a place to sit. We’ve invested in upgrading some of our outdoor seating areas so that they have a place when they stand in line, grab their food. They can just hang out outside and visit with other folks that are also eating.
Berg: In addition to that outdoor space, it needs to be something that’s inviting, and that each individual employee feels like they can use. For example, water features, walking trails, a signature look to the building. Now you can take an older building, but you’ve got to invest the money and just create something that sets it apart from the one next to it. We used to like to have everything look the same.
Q. A recent study said that 70% of professionals work remotely at least one day a week and 53% work remotely at least half of the week. How are companies doing to reimagine and redesign their office spaces to meet those employees’ needs, and does it mean we need less office space if more and more people are working remotely?
Herman: If you’ve truly given employees flexibility, it’s hard to predict when they’re coming in the office. Having unassigned workspace space works really well for that type of a culture because you still need to accommodate them when they come in the office. Often when they’re coming into the office is when they want to collaborate with their team members, which means that their team might all be coming together on that same day. You have to be strategic with how you approach that space. Often, you’re still using the same amount of conference rooms; you’re still including the same amount of collaboration space. You might just have more drop-in stations where their footprint might be a little smaller because [the worker is] only going to be there two or three days a week.
Berg:It depends on the type of work you do. I think there’s cutting back on people doing at-home teleconferencing. I just think they’re going to see that as less productive and they’re going to reduce that opportunity. … And yes, I do believe we have already seen a reduction in office [space] and we will continue to see it.
Crowley: Previously, if you had one job, you had one seat for that job. Now we’re seeing that there might be really two or three jobs with one seat. That’s really something that you’ve got to plan around. We’re seeing now that people are saying, “OK, we have 150 employees, but we might only wind up with 125 seats. We have this public area so that the day that everyone’s here for some reason, there’s places for them, but it’s not assigned work areas.”
Q. Are we going to see more coworking space in the Des Moines area, and what’s it going to look like?
Crowley: Like a lot of other things, there’s limits to the market. It’s just like how many restaurants can we support? How many gyms or workout places can we support in a community our size? There’s room for collaborative workspace, but like a lot of other things, it’s really what the market will bear. Right now, I would say that we have enough, and unless someone really comes out with some new widget that’s going to attract new people, I think that we’re probably at a stable level in that space right now.
Q. We’ve talked a little bit about the labor shortage in Iowa, which has a 2.5% unemployment. When potential users of office space are looking here, are they concerned about being able to find employees?
Crowley: I think that a lot of companies moving to Des Moines will do their homework and they’ll have their [human resources] people looking and seeing what the workforce is like. … We’ve had a lot of national firms come in from Austin, Texas, and San Jose that are looking for experienced programmers … to come to work for them. We’ve actually seen them come in here and their whole modus operandi is that they’re going to steal employees from other companies.
Berg: I don’t think our low employment rate discourages companies from coming here because they look at not only do we have a low employment rate, that says something else to them. It says we have quality workers. It says we have high-educated workers. I think they’re willing to come here and, as Kevin said, steal employees.
Freund: I think as a trend, we’re seeing companies investing in the design of their space or redesign of their space so that they can maintain employees and compete for that top talent.
Q. Are there any unique design concepts or ideas that you’re starting to see trending?
Herman: We’re seeing biophilia make its way into office environments, which is involving nature and plants [into building designs]. The well-building concept has been around for a while, but employees are asking for more of that [from] employers. [Workers] want to make sure that the building itself promotes their health and their well-being. We’ve seen a big trend where stairs [have] become much more attractive. Stairs are now a feature in almost every building that you see out there. That’s because [employers are] encouraging their employees to utilize them. Nobody wants to [use] a back-of-the-building type of a stair to go from one floor to the other. It’s just easier to use the elevator. When the stairs are in a [prominent] place [they get used more].
Q. Do you ever get requests from smaller businesses to come in and just look at the office space to give some small suggestions as opposed to a full-blown overhaul?
Herman: Yes, we do. … We are seeing, “Will you come in and take a look at our lighting? We’re looking to upgrade this because we realized that that’s really beneficial for our employees,” or “talk to us about some of the things that we can do to give some new life to this without spending a lot of money.” We’ve helped a lot of people do strategies on those types of things or to conserve space.
Crowley: That is a challenge for second-generation space, and that LED lighting is probably in its fifth or sixth iteration since it was really rolled out 10 or 12 years ago. What you can do with LED lighting in an office space right now is amazing versus the old parabolic prisms. Lighting makes a major difference in walking into any space, whether it’s the coloring of the space, the way the employees feel while they’re working.
Herman: Sometimes that can even go too far. LED can be very, very bright. We’ve seen a pullback on some of that where they want to make sure that they can dim down those lights because that’s a big adjustment from a client going from a parabolic where it’s a fairly dark kind of environment. All of a sudden, employees [are pushed] into something that’s almost too bright.
Q. What sort of sustainability features are you seeing either tenants ask for or being used in new construction?
Herman: The latest energy codes out there are driving buildings to be energy efficient. From that standpoint, it’s part of what they have to do. I think we’ve seen for a while there was a lot with LEED certification — companies were going towards LEED and going for the certification. It really pulled back for a while, but we’ve started seeing it engage itself again. I think people, there’s a mindset out there that they want to be responsible to the environment.
Berg: The part that I’m disappointed in is that when people come in and remodel, they just trash what was there — and a lot of it is in good condition. If nothing else, carefully take it out and take it to Habitat for Humanity or something like that. I think we’re in a hurry or we say, “Well, that’s more costly because it takes more time to remove it and find a place for it.” We need to do more in that area.
Crowley: At the same time, though, landlords have to be careful to [decide], if a company’s leaving, do they let them leave their furniture? Do they let them leave their cabling wires? What do you do and what don’t you do? … Now in leases, we’re actually seeing where those discussions … that the landlord has the right to ask you to remove all your cables out of the trays or from above the ceilings. That becomes part of the negotiation upfront as to how a tenant may exit.
Q. What are your closing thoughts?
Freund: I think we will have a good 2020. I know there are a few larger tenants that are going to be coming out in the market and looking for space. Hopefully we’ll be able to take some of that second-generation space that we’ll be getting back from some of the other large tenants leased up.
Herman: I think that everything is cyclical. … I think helping people and employers future-proof themselves to some degree to make sure that the real estate strategies that they’re making right now will give them opportunity in the future to adjust to how people are working and the changes that are happening. I think it is kind of an exciting time because of the technology shifts and what you can do with office space.
Crowley: I think in closing, the one thing I will say is that we’re seeing our clients … are taking a longer view so that what they do today works five years from now. They want the ultimate flexibility as to what they’re going to be doing in year six, and they don’t know.
Berg: To piggyback on that concept that [Crowley] is talking about, I think it’s important to work with your clients and help them build in buyouts and to be able to get out of a current lease if it does not match their needs. We used to plan out five years. People are now planning out one year because things are changing so quickly for them.