HEARTLAND SNAPSHOT, MARCH 2008

Des Moines, Iowa, Office Market

Aggressive new office development will continue in Des Moines, Iowa, even though considerable second-generation space will be vacated over the next 36 months due to new owner-occupied projects. Major finance and insurance companies such as Wellmark Blue Cross Blue Shield and Aviva are building new owner-occupied offices in the Des Moines metro area. As these projects are completed, the companies will likely relocate 800,000 to 1 million square feet of occupied-office space during the next 36 months.

Nationwide-Allied is continuing construction on the $142 million expansion of its campus in the central business district (CBD). The second phase of the new campus is complete, comprising 308,000 square feet. The 350,000-square-foot third phase began in 2007, and includes construction of a new parking ramp at 12th and Mulberry streets. The entire project is scheduled for completion late this year. When complete, the campus will total more than 1.1 million square feet.

Wellmark Blue Cross Blue Shield of Iowa has also announced plans for construction of a 500,000-square-foot corporate headquarters along the 1300 block of Grand Avenue in the CBD. The $194 million project will include a 1,500-stall parking structure, connected to the main building by a skywalk.

Aviva Insurance Company plans to build its United States headquarters in West Des Moines. The campus will be located at the southwest corner of Jordan Creek and Mills Civic parkways. Phase I will consist of a 360,000-square-foot building with later expansion planned for a total of 1.3 million square feet.

Some companies have already finished their relocation. Wells Fargo Financial moved into a new 300,000-square-foot office building in 2007, located at 8th and Walnut streets in the CBD.

Development of owner-occupied space has picked up steam in Des Moines. Completion of the new 215,000-square-foot office building for Marsh Insurance Company, located in the Paragon Office Park in Urbandale, is scheduled for the second quarter. An expansion of the new building, containing approximately 40,000 square feet, is already being planned.

The former Mercy Capitol hospital located at 630 East 12th Street in the CBD fringe will be sold to the state of Iowa this year. The state plans to convert the space and relocate some leased offices into the 289,000-square-foot building.

These owner-occupied office developments are occurring primarily in the Des Moines CBD, in West Des Moines adjacent to Jordan Creek Town Center, and in the newly developed Paragon Office Park located in Urbandale, Iowa. These new developments have come about to answer demand for financial and insurance industry headquarters, expansions in the financial and insurance industry, and auxiliary professional service providers.

Speculative office development is part of several mixed-use developments, a trend encouraged by a “town center” concept that has recently been introduced to the market.  Due to the nature of the development, the square footage exposure per project is much smaller.

These new office developments are mainly located in the East Village, a revitalized historic district on the fringes of the CBD, and in two separate developments adjacent to Jordan Creek Town Center at The Village of Ponderosa and West Glen in West Des Moines.  These are being constructed to accommodate the smaller professional business owner that is auxiliary to the insurance and financial industry, or gain some benefit by being located in close proximity to these businesses.

In West Des Moines, two projects are under construction that will likely impact the surrounding office market. The $90 million Mercy West Lakes hospital is under construction at 1755 59th Place, and is planned for completion in late 2009. Additionally, Iowa Health is building a $110 million hospital along South 60th Street in West Des Moines in the West Lakes development.

With an overall market inventory of approximately 25.5 million square feet, Des Moines is seeing Class A, full-service lease rates of $17 to $24 per square foot. Vacancy rates have also remained positive, coming in marketwide at 7.6 percent for the first quarter of 2008. This average breaks down to 8.6 percent in the western suburbs and 6.2 percent in the CBD.

With the majority of expansions being absorbed in new owner-occupied developments, the brunt of anticipated vacancies is expected to occur in the CBD.  Although vacancy rates have typically been quite low and stable over the past 20 years, we did experience an upward movement in vacancy of approximately 1 million square feet of excess Class C office space in the CBD vacated in the 2001 and 2002, because of the construction of expansion space and/or new headquarters for some of the submarket’s key players. 

With the similar vacancies expected to hit the market in the near future as some of Des Moines’ major tenants relocate to newer space, it will be interesting to see how the real estate industry works to fill the existing space. I see this as an opportunity to bring new businesses into Des Moines.  Frankly, the city’s downtown has been overlooked in some cases because it hasn’t had large blocks of space available when businesses were considering expansion into tertiary markets.  This time we will have larger blocks of Class A office available, which will be considered desirable.

— Jan Berg is a senior broker associate with West Des Moines, Iowa-based CB Richard Ellis/Hubbell Commercial.

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