A view of vacancies

Central business district vacancy rates dip but uncertainty continues

By Michael Crumb

From balancing hybrid work to adapting unused space, and even parking, there is no past experience to help companies and building owners navigate challenges in Des Moines’ central business district as they continue to move on from the pandemic, experts say.

Those challenges grow as more space opens up with MidAmerican Energy Co.’s decision to leave the Ruan Center as it purchased one of Dotdash Meredith’s properties and Wells Fargo’s announcement that it will leave some of its downtown spaces for the suburbs.

It all adds to the continued uncertainty about what the future of downtown Des Moines will look like, said Peter Brown, a commercial real estate agent in Des Moines for more than 30 years and the listing agent for the Ruan Center.

Downtown vacancy rates improved in 2022, but barriers remain as employers continue to adapt their work culture to more people returning to the office while still accommodating employees who want a hybrid or remote schedule.

The Business Record reviewed reports from CBRE and JLL to look at vacancy rates in the central business district, which has more than 6.5 million square feet of commercial office space.

CBRE’s market report for the fourth quarter of 2022 showed that 17.9% of the office space remained vacant. The downtown vacancy rate was 13% in the fourth quarter of 2022, according to JLL’s report. (The discrepancy in vacancy rates shared by JLL and CBRE is the result of differences in properties they track, which can affect the vacancy rates when data is tallied. There is no universal vacancy rate for a market.)

JLL also provided data that showed the impact the Wells Fargo move will have on the vacancy rates they track. According to JLL, Wells Fargo’s departure from downtown will cause vacancy rates to jump to 17%.

Eric Land, research manager for JLL, said there was some good leasing in 2022 with some sizable tenants moving into spaces on Southwest Ninth Street, the Financial Center and on Southwest Seventh Street. There was also good activity in medium and small spaces, he said.

Brown said that despite some improvement, uncertainty persists in the downtown district.

“Clearly, the office market has been rattled since COVID and I don’t think we’ve quite seen the end game on that, but I think there will always be demand for office space downtown,” he said.

What’s next?

The 34-story Ruan Center has four full floors and a couple of partial floors available, for a vacancy rate of between 12% and 15%, Brown said.

That is before MidAmerican Energy Co. leaves the building this year as it plans to move into Dotdash Meredith’s north building at 1615 Locust St. The sale of the building was announced in December 2022 and closed in March. 

Officials with MidAmerican, which occupies four floors in the Ruan Center, declined to discuss the move or their plans for the former Dotdash Meredith building because the sale was still pending at the time this story was reported.

Brown said the market remains strong for competitive office space downtown, and the Ruan Center is no exception, adding that the floors occupied by MidAmerican are “in fantastic condition.”

The question, he said, as it is with all open office space downtown, is not if it will be leased but when.

One trend Brown said he sees continuing is the conversion of empty office space into residential housing.

“My best guess is it will continue to evolve as it has been in recent years, and that means buildings that are obsolete will be converted to residential — the residential leasing market is holding up very strongly, and building owners have to find a use for their building,” Brown said. “Over time it will become a more mixed-use environment downtown, and that’s a trend that’s been going on for a while, way before the pandemic.”

He said another factor is how companies use their space downtown.

“Will the design of offices change?” Brown said. “Yes, it’s changing. It’s changing right now. It’s changing under our feet, but I don’t think a model has emerged yet. Everything is evolving and every company is making up their own mind on what to do and how to handle it.

“It’s not all clean cut,” he said. “It’s a lot of grinding because there’s no playbook right now and everybody gets to make up their own mind about what works for them.”

Justin Lossner of JLL, which manages the Principal-owned 801 Grand, said a continuing factor is shadow vacancies, or space that is leased but remains empty as employees continue to work from home. 

“It’s a lot more definitive that Tuesday, Wednesday and Thursday, you’re seeing — even year to year — you’re seeing more of a significant presence on those days, but Monday and Friday are brutal,” he said. 

801 Grand is about 89% leased, Lossner said.

Companies that continue to have a high number of remote workers and have lease renewals coming up are having conversations about renewing that space.

“I think we’ve already started to see a lot of that play out with companies downsizing to accommodate a more broad work-from-home [strategy],” Lossner said. 

Another influence may be whether companies transition to a neighborhood concept in the office to provide more flexibility as they adjust their space based on the number of employees in the office on a given day. 

A neighborhood concept is unassigned seating in a larger open space where the bulk of work happens. Employees who are working remotely come in and plug into a workstation that’s available.

Lossner said that culture began before the pandemic, but has only increased in the past few years.

“I thought neighborhoods were going to go away based on a lot of the concerns about desk sharing and this fear you could cross-contaminate from a health perspective, but I’ve been wrong on that,” he said. “Companies are still embracing neighborhoods and maybe more so now than pre-pandemic.”

Jason Lozano, senior vice president with JLL, said that despite some ongoing challenges, the fact that MidAmerican is staying downtown and that the city of Des Moines is moving into the Nationwide Building is a “win-win” for downtown Des Moines. The moves will help drive foot traffic for other downtown businesses, he said.

“For the restaurants and the other amenities that all the office users require, having that concentration of employees downtown stay there is great,” Lozano said.

Lossner said downtown parking is another factor companies are looking at as they evaluate their needs.

“If I’ve got 80 people and on any given day 30 to 40 of them are showing up, that’s a tough challenge because a stall still costs the same as a stall and until we figure out how to create flexible, cost-effective parking solutions, that will continue to cause strain for the downtown market, and that has made us a little nervous as well,” he said. “That’s something people need to focus on in 2023 big-time.”

That affects both companies that lease parking space for employees and employees who are required to lease parking space to work downtown.

“That’s harder to validate if I’m not someone that’s spending 40 hours a week downtown,” Lossner said.

Bill Wright, managing director of CBRE, said there is more space in the central business district than is being marketed.

“There’s large corporate occupiers that may either own space and it’s not being fully utilized or they leased space and it’s not being fully utilized,” he said.

Wright said that for some owners or companies, having unused space may turn into a revenue opportunity.

“At some point those corporate occupiers are going to make decisions that this inventory is not paying our building expenses or making us money; can we turn this vacancy into an opportunity to create revenue for the company?” he said.

Tenants will be making decisions about their growth, culture and their place in the market in determining their space needs, Wright said.

He said to make property profitable, some building owners may have to make considerable renovations.

“That kind of vacancy, once it hits the market it will be a significant change to the marketplace,” he said.

Challenges to watch

Lossner said the threat of shadow space becoming a real vacancy, as well as the influence the downtown population has on retail and restaurants staying open by giving them enough foot traffic during the week, will be closely watched in the next few years. 

Investing in amenities for employees and figuring out parking are two other challenges facing the central business district, he said.

“I think the buildings that do that will win the deals that come downtown,” Lossner said. 

Lozano echoed the need for buildings and companies to focus on amenities as they build strategies for the future.

“The amenity packages are one of the first things [prospective tenants] are asking about,” he said. “So I think that will continue to be a trend because everybody's trying to figure out, ‘How do we continue to encourage employees to be in the office?’”

Wright said adding amenities for tenants and their employees “really gives you a leg up in the marketing effort.”

He said that while downtown Des Moines is in a better position than it was a year ago, there are some challenges that persist.

“My biggest concern is those large floor plate users, the 50,000-square-foot users, where are those going to come from?” Wright said. “Anyone in the commercial real estate industry, we tend to think about big deals and you always want to know where the next big user is and who you can recruit to come downtown and take a block of 50,000 square feet of space.”

Examples of places that have that kind of space include the Ruan Building, 801 Grand, Capital Square and the Nationwide building at 1100 Locust St., he said.

“There are options,” Wright said.

Brown said while space is available, the big unknown is how long will it take to fill that space.

“Some buildings were designed and built for a specific use, and it’s not always easy to change the use even within office space categories,” he said. “There is some dynamism in the office market that is not getting reported because no one’s seeing it. There’s not two or three or four institutional users taking 100,000 square feet at a time. That’s not happening.”

What is happening, Brown said, is smaller users, those who require 2,000 to 7,000 square feet, retrofitting some of that large space.

“There are a lot of small users who are filling up buildings that fit them, and whether some of these large vacancies can be retrofitted to and adapt to a new office dynamic remains to be seen,” he said. 

Despite some challenges, newer Class A buildings are being leased in Des Moines and across the country, Brown said. 

“There are businesses willing to pay for the product that fits them.”

Wells Fargo move changes downtown dynamic

By Kathy A. Bolten

The announcement by Wells Fargo that it will move the majority of its downtown workers to its campus in West Des Moines will increase the central business district’s vacancy rate to 17%, according to data provided by JLL.

The move will be complete by the end of 2023, Wells Fargo told employees in January, as the company vacates buildings at 800 Walnut St. and 206. Eighth St. People in the company’s legal department and corporate and investment banking team will remain downtown, working out of the building at 801 Walnut St.

 Wells Fargo has not said how many downtown workers will be relocated to its Jordan Creek campus, but when the company announced plans in the early 2000s to build the office buildings, news reports estimated about 2,500 people would work in the buildings.

Wells Fargo owns 12 downtown properties, which have a total value of more than $125 million. They include six surface parking lots, four office buildings, a warehouse and a 1,600-space parking garage, according to data from the assessor’s office.

Officials have not said what their plans are for a smaller office building at 207 Ninth St., the parking garage or the surface parking lots. A company spokesman has said officials are “evaluating options” for the properties, including selling them.

The decision comes as companies try to navigate their needs for space as fewer employees spend five days a week in an office, said TJ Jacobs, a vice president at CBRE’s West Des Moines office.

That has resulted in a slow return of workers to downtown.

According to the Greater Des Moines Partnership, as many as 80,000 worked downtown before the pandemic. It’s not clear how many work downtown now, but the Partnership reported in January at its annual meeting that downtown Des Moines has seen a 24% increase in foot traffic Tuesday through Thursday, with a 17% increase overall in 2022 compared with 2021.

In January, a spokesman said downtown foot traffic has returned to 84% of prepandemic levels.