HEARTLAND SNAPSHOT, MARCH 2006

Des Moines, Iowa, Office Market

In an effort to attract quality tenants to new buildings, developers in Des Moines, Iowa, are offering both partnership interests and condominium purchases. Local and regional companies are often attracted to this opportunity as an investment vehicle or a strategy to offset occupancy cost in the long term. “To compete in today's market, new product needs to have efficient floor plates with plenty of glass line,” says Heath Bullock, vice president and broker associate of West Des Moines-based CB Richard Ellis/Hubbell Commercial. Additionally, office buildings constructed along major high-traffic arteries tend to win the lease-up battle.

According to Bullock, the most successful competitive office developments in Des Moines are located on the west side of the metro market. “From Paragon Office Park at 121st Street and Meredith Drive in [the   city of] Urbandale to West Glen Town Center located at George Civic Mills and Interstate 35 in West Des Moines, the western fringe has seen, and will continue to see, the most absorption in regard to tenants committing to new office product,” Bullock says.

Developers new to the area include Bill Van Orsdel, who currently plays an instrumental role in the design, construction and leasing of office product in the West Glen development, and Lado Development, which is making an impact in the medical office market.

Major players in Des Moines that support the demand for office space are Principal Financial Group, Mercy, Iowa Health and Pioneer. “In the past few years, additional commitments to the Des Moines metro office market have come from Wells Fargo Home Mortgage, Wells Fargo Financial, Nationwide/Allied Insurance and Citigroup,” Bullock adds.

The fourth quarter of 2005 was a good one for major leases. Seven companies signed leases ranging from 11,000 to 37,000 square feet. The larger leases included Midland National Life's 28,000-square-foot expansion in Three Fountains Office Park; Wells Fargo Credit Card's 30,000-square-foot expansion in Country Club Office Park; and Nationwide/Allied Insurance's 37,000-square-foot expansion in Regency West 8.

Class A rental rates in Des Moines continue to increase due to new construction costs, which cause rates on new office product to rise. Compression rates in the competitive second-generation market range from $16.50 to $25 per square foot full-service gross rent.

“Vacancy rates have improved by 2.5 percent in the competitive office market,” Bullock says. This improvement only includes properties that actively compete for tenants; however, there are other indicators of a healthy office market in Des Moines. There has been a net increase of nine new buildings and 280,000 square feet, including both competitive and owner-occupied space. Total absorption was close to 530,000 square feet for the entire office inventory in 2005. Wells Fargo Home Mortgage's occupancy of owner-occupied product is not included in these figures since that transaction began in late 2005 and extended into the first quarter of this year.

The lifestyle development at West Glen will be the first in the metro area to include office space. “West Glen offers unique opportunities to an area that has no track record of absorption of competitive space,” Bullock says. “If users find value in the amenities and the rates are able to compete with other new projects in West Des Moines, construction will continue at a fast pace.” Urbandale and Johnson, Iowa, are poised and ready for the development of new office product, as well as new employment along the Interstate 80/35 corridor.

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