The amount of vacant competitive office space in the Greater Des Moines area is growing, sparking concerns that recession-era vacancy levels are on the horizon.

In the second quarter of 2020, the vacancy rate for competitive office space was 13.6% with 2.37 million square feet of space available, according to CBRE|Hubbell Commercial’s quarterly Des Moines-area survey. At the end of 2019, the vacancy rate was 12.4% with 2.1 million square feet of unoccupied space, the company’s quarterly report showed.

And while construction is underway or planned on at least five office projects in the Des Moines area, plans have been put on hold for other projects, commercial real estate brokers say.

“Since the pandemic hit, I have not heard a lot about new speculative, owner-occupied or build-to-suit scenarios,” said Korey Birkenholtz, a vice president at CBRE|Hubbell Commercial. “To me, a lot of those conversations are completely halted.” 

Nationally, the commercial real estate market is bracing for historic office space vacancies, caused in part by the decision of employers to work remotely in an effort to slow the spread of the novel coronavirus.

In mid-August, Moody’s Analytics released an office sector report that predicted that nationally, office vacancy rates would reach 19.9% in 2021, surpassing a record high of 19.7% set in 1991. Additionally, Moody’s Analytics predicted rents to fall 10.4% nationally this year, and twice that much in markets like New York City. 

The financial analytical firm, a subsidiary of Moody’s Corp., based most of its predictions on the fact that large companies are beginning to announce that their employees will work remotely well into 2021. Google, for instance, recently announced that most of its workforce would work remotely until at least July 2021. 

“Whether the increased availability of remote working infrastructure will have long-term effects on office demand remains to be seen,” said Victor Calanog, head of CRE Economics at Moody’s Analytics, said in a prepared statement. “However, the long-term nature of office leases means that it may take some time for vacancy rates to reflect the real trend.”

In the Des Moines area, many employees are working remotely and with employers setting return-to-work dates in 2021 or not setting them at all.
For instance, 90% of Principal Financial Group’s employees are working remotely and the company has not set a date for workers to return to the office, a company spokesperson said. Wells Fargo’s office employees will continue working remotely until at least Oct. 1, according to a spokeswoman. Krause Gateway Center, the Kum & Go headquarters, is closed through Jan. 1, 2021; employees at Casey’s General Store Inc.’s Ankeny headquarters continue working remotely and a date to return to the office has not been set. 

“Many employers are in a holding pattern until we have a vaccine and a better understanding of the coronavirus,” Kevin Crowley, chief operating officer and manager for NAI Iowa Realty Commercial, wrote in an email to the Business Record.

Crowley wrote that based on discussions with clients, he thinks there will be a significant reduction in the Des Moines area’s office workforce. If that happens, a significant amount of office space will sit empty.

Still, he added, “It is safe to say that we don’t know what the new normal will look like until the second quarter of 2021.”

The lingering aftereffects of the Great Recession, which ended in June 2010, stymied a rebound in office leasing for several years, in part because employers had reduced their workforces. The country’s unemployment rate, which reached 10% in October 2009, did not return to pre-recession levels until 2015.

In the Des Moines area, the vacancy rate for office space was nearly 20% in 2013, Birkenholtz said. He and others worry that the vacancy rates could return to those levels in early 2021. 

“I don’t think we’ve realized yet the full impact [of the pandemic] but I think we are seeing a trend with the lack of conversations on speculative construction and the other scenarios,” Birkenholtz said. “I think we’re going to see vacancies trend up a little bit with some peaking in the first quarter of 2021.”

But even if vacancy rates do trend toward 20%, the recovery will likely be quicker than after the recession, said Adam Kaduce, a senior vice president with R&R Realty Group. 

“At some point it’s going to be safe to go back into public and return to the workplace,” Kaduce said. “I think most people know that that’s going to be on the horizon. Hopefully in the next 12 months we’ll start to see some return to more normal day-to-day practices.”

Some companies are beginning to assess what their new “right size” of office space and staffing will be in the future, he said. “One of the things we have seen is that with companies that are downsizing, they are upgrading in terms of their office space. They may need less office space, but they want it to be in a nicer building where they can reconfigure their space with new contemporary finishes.”

Kaduce said he expects some office tenants to walk away from leases or try to sublease their current spaces. If that happens, it could mean even less new office space construction, he said.

“I think the only caveat to that is that a lot of the vacancy will occur in our older products,” Kaduce said. “If that happens, there may demand for new Class A [office] development that may help facilitate some construction.”
Justin Lossner, managing director at JLL’s Des Moines office, said many of his clients in March put on hold decisions about lease renewals and new leases. As they realized the impact of COVID-19 would last longer than a few weeks, some began making decisions for the short term, he said. For instance, instead of signing leases for five or seven years, one-year leases were negotiated, he said.

There are some bright spots, Lossner said.

Intercontinental Capital Group, with a home office in Melville, N.Y., is opening a branch office in Westridge III at 2829 Westown Parkway in West Des Moines. The group had been considering expanding into the Des Moines area before the pandemic, put the breaks on its plans for a few weeks, and then, when interest rates for mortgages continued to decline, decided to make the move, Lossner said.

“A company like ICG had basically put out a short-term search for workspace that had furniture, easy parking and limited shared common area space,” Lossner said. “Those are the types of deals we’ve seen that are new and organic, not only in Des Moines but across the state.”

Lossner said he expects to see more activity similar to that of the out-of-state mortgage company in which prospective tenants are looking for space with minimal improvement costs and with shorter-term leases.

“Any of the relocation activity that is going to happen is going to be in spaces that are almost turn-key,” he said.