Demand for downtown office space low as companies wait out pandemic

By Michael Crumb

When the coronavirus pandemic set in and companies sent workers home in March 2020, the streets of downtown Des Moines – which were once vibrant and bustling as workers shuffled between buildings for meetings, coffee runs and lunches – quickly fell silent.

As companies and their employees learned the art of working remotely, it raised the question: What would it mean for the 5.4 million square feet of office space that makes up the downtown skyline? Would some companies reduce their footprint? Would others leave altogether? Or would they stay put and welcome employees back, either full time or as part of a new hybrid model as the pandemic eased its grip on the community?

The answers to those questions are mixed.

Has there been a large exodus of companies from the downtown area? No. But that doesn’t mean the landscape is the same or that it might not continue to change and evolve in the years to come.

Justin Lossner, managing director at real estate brokerage firm JLL, said his data shows downtown commercial space had a vacancy rate of about 21.4% in the fourth quarter of 2021. That’s about the same as it was before the pandemic, although it may feel higher because of the number of companies who still have employees working remotely, he said.

In the fourth quarter of 2019, vacancies were 21.1%. In 2020, that increased slightly to 22.4%.

“There hasn’t been a rush of vacancies downtown,” Lossner said. “It may feel that way, and as someone who does work downtown, it does feel that way, but from a statistical standpoint that’s just not the case.”

In some cases, companies with offices downtown are operating at about 50% capacity, leading to the feeling of there being higher vacancies than there are, he said. 

The downtown district also tends to have a larger concentration of big companies that have higher numbers of employees, compared with the suburbs. That resulted in a greater, more noticeable exodus of workers when companies transitioned to remote work, Lossner said.

Another factor to watch is the sublease market, Lossner said, or those companies with existing leases who are putting that space back on the market.

“That kind of establishes a trend line to say, hey, there’s still activity downtown and leases are still getting signed, as evidenced by the positive absorption rate. However, what we’re all kind of watching is what’s happening in the sublease markets,” he said. “Direct vacancy is still seeing activity, but sublease activity is on the rise.”

Absorption rates apply to space that was either put back on or taken off the market.

For Des Moines’ downtown commercial district, 2021 ended with net absorption of just over 38,000 square feet, despite a negative absorption of about 23,800 square feet in the fourth quarter.

Bill Wright, senior vice president and managing director of CRBE/Hubbell Commercial, said vacancies are more than just what space is on a rent roll. There are also “shadow vacancies,” which are vacant space a company leases or owns that isn’t on the market, he said.

“The main reason for that is COVID,” he said. “COVID has created a lot of work-from-home, hybrid strategies where companies have vacant space that they are, for lack of a better term, storing it, or warehousing it until all this gets figured out,” he said.

Wright said data from Hubbell surveys shows current vacancies are around 19.6%. If you consider those “shadow vacancies,” that jumps to around 30%. The discrepancy in vacancy rates shared by JLL and Hubbell 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.

Two years ago, the vacancy rate was about 12.5%, according to Wright. The biggest reason for the jump since then is the decision by Nationwide to put 370,000 square feet on the market.

“You put that much in any market the size of Des Moines, and that’s going to have a big impact on your vacancy rate,” Wright said.

Other space became available in the Ruan Center when the Iowa Insurance Division moved to state-owned space on Bell Avenue.

There have also been companies who have made decisions to sell off some of their property. 

EMC Insurance Cos. announced plans in January to sell four properties it owns in downtown Des Moines — among them the 21-floor Hub Tower and the Kaleidsoscope building — in a move to realign its real estate holdings.

Cindy McCauley, vice president of administrative services at EMC, said the COVID-19 pandemic played a strong role in the company’s decision to sell off four of its buildings. The decision follows the move to not build on the site of the former Younkers building downtown and instead turn that space into a park for the community.

“Our intentions at that time [pre-COVID] were that we’d need space,” she said. “We were kind of full on our corporate campus and we thought we’d need space for additional team members and growth.”

The pandemic altered the company’s plans, McCauley said, as the company remained primarily in a remote work setting in early 2022 with tentative plans for broader-scale return to the office for EMC employees.

Two of the buildings EMC will sell include warehouse space along Martin Luther King Jr. Parkway that it has used for storage. 

McCauley said the company feels there is a better use for those buildings and storage can be consolidated at other locations. EMC doesn’t occupy a huge percentage of the Hub Tower and Kaleidoscope buildings, which were purchased when EMC moved its national life company downtown.

“We are not seeing a future need for that space so it’s a good time, since it is majority occupied by non-EMC tenants. We just have a desire now to move out of the landlord business, so we’re going to put those up for sale,” she said.

Moving in

As some companies open up space downtown, others are moving in.

Landus Cooperative, the state’s largest agricultural cooperative, is looking at 25,000 square feet in the Grays Landing office building, at 220 S.W. Ninth St. 

Matt Carstens, Landus’ president and CEO, said the company’s decision to leave the Iowa State University Research Park in Ames and move to Des Moines was based on four things: connecting rural to urban, connecting to the world, collaboration and showcasing innovation.

“Not only did we feel like it was important to go into the Des Moines metropolitan area, but to be downtown, where there are a lot of good things going on,” he said.

Carstens said that the company has a strong rural presence in nearly 60 communities, and that the gap between those rural communities and urban areas of Iowa needs to be closed.

“The sooner we choose to do that, as an agriculture industry, the better this is going to be,” he said. “Agriculture doesn’t have anything to hide, but we sure think we do, based on our behaviors of ‘you can’t go to Des Moines’ or ‘you shouldn’t have an office here.’”

Carstens said Des Moines will be more convenient for Landus’ international customers because of the airport, and Des Moines provides greater opportunities for collaboration, not only among Landus employees, but with the farmers the company serves.

He said for those customers, Des Moines becomes a destination where they can see and experience new things that they might not otherwise experience in rural communities where they might do business.

Des Moines also provides an exciting location to showcase the work Landus does, Carstens said.

“What better place to showcase innovation than downtown Des Moines,” he said. “There’s so many things going on that can help us bridge that ag to the world innovation.”

Landus plans to move into its new space in early June.

Forecasting the future

Lossner said many companies are watching and waiting. More decisions on how space is occupied could be coming in the months and years to come.

“A significant portion of the office users we are tracking are expecting a change in how they occupy space, and maybe more importantly how flexible they are with employees in entering that space,” he said. “That feels overwhelmingly like it’s something that is going to stick. To what extent depends on the industry and how important company culture is to those companies.”

Lossner said the pandemic only expedited a trend that was already underway.

“I think the direction of the economy was really prepping some of these companies to make some large decisions anyway, and COVID just kind of sped that up,” he said. “For some companies, it’s allowed them to say, ‘Now we can put a flex work environment that we’ve already been testing in place.’”

He said the pandemic “thrust companies into the deep end right away,” and they found they could survive.

“Can they thrive is the real question. And to do that, what does that look like?” Lossner said. “That’s where we’re at today. With that still being relatively unknown, I think a lot of companies are being conservative in offering space back to the market in some sort of dramatic fashion.”

With many companies playing wait and see, is there demand for downtown office space should it become available? 

“Demand is slow, but I think it’s slow because of continued uncertainty,” Lossner said.

That is particularly true among larger companies that require more square feet.

Wright said that conditions are “tough” and that the list of companies looking for space downtown isn’t very long.

“You do have some movement and there are some people looking, but a lot of companies are kicking the can down the road,” he said. “They say, ‘Let’s just renew for a year or two and see how this all plays out and what our office needs will be.’ In those kinds of markets, you’re just not seeing the robust list of people looking for new space. There’s not a lot of that going on right now.”

Wright said it could take several years to fully recover.

“We have a lot of vacant space available, and it’s going to take a little time to eat through that,” he said. 

Wright said the vacancy rate directly affects downtown stores, restaurants and parking ramps that are dependent on the downtown workers.

He said his impression is that there were maybe 75,000 people working downtown before the pandemic.

“My guess is it’s maybe a third of that right now,” Wright said. “That’s what it feels like because a lot of people are still working from home.”

He said he doesn’t envision a complete return of the workforce for companies that already occupy downtown space, but he thinks that can be offset by bringing new companies and their employees to the area.

Wright also said he expects more and more landlords to look for creative, alternative uses for vacant space, citing the opening of Ricochet game bar in Capital Square.

“That’s one example of a creative use of office space, and Des Moines has always been resilient and I think you’ll see more of that,” he said.

A continuing challenge will be navigating the COVID-19 pandemic, Lossner said.

“I really think it’s contingent on us solving what COVID looks like from a stabilized perspective,” he said. “What I’ve experienced is momentum being detoured by the next variant. Until we really get COVID under control, the uncertainty for the market in general, and especially downtown, will continue.”

Lossner said he’s optimistic that downtown will be back 100% in the next few years.

“We’ll see companies once again circle downtown and say they want their workforce to have that walkability to the retail, to all the events that happen, to just the excitement that happens in a downtown,” he said. “Housing continues to grow all around downtown. As long as these major companies continue to see downtown as a value and commit to space downtown, I think that will filter down and waterfall to the rest of those companies. I’m very bullish on downtown. We’ll be back.”