Mike Mallaro spent the better part of last year touring office space to lease or purchase for his growing company, VGM Group Inc., in Waterloo.
The plan was to expand into at least 50,000 square feet of additional space, with the goal of adding hundreds of employees. Then the coronavirus pandemic hit, and, as with workplaces across the country, 90% of VGM’s staff began working from home. VGM is an employee-owned company that offers professional services to help businesses grow.
As businesses reopened, Mallaro started planning his staff’s return to the office, and “came to a realization that I didn’t have before that: ‘Jeez, just about all of our jobs can be done remotely.'”
His plans to expand the company’s office space are on hold — indefinitely.
“We’re still a growth business so I believe we’ll continue to add positions, and I can’t say we’ll never need more office space,” said Mallaro, CEO of VGM Group. “Whereas I would have said by 2021 we would definitely have additional office space, now I would say definitely in the next five years we will not have it.
“We can accommodate a lot more employees without having to add space.”
As the U.S. marks the Labor Day weekend, the way Americans work is undergoing a massive change. Companies across the country are announcing plans to reduce the size of their offices in favor of a remote workforce, even if a coronavirus vaccine becomes available and other aspects of life return to their pre-pandemic normal.
The value of teleconferencing software company Zoom has increased almost seven-fold this year, and tech companies like Facebook, Twitter, Square and Shopify have unveiled plans to let a majority of their employees work from home in the long term.
So has Nationwide, which in April announced a “hybrid” model where some employees will work primarily in the office at its four main campuses, including in downtown Des Moines, while others across the country will permanently work from home.
While the insurer is planning to bring Des Moines workers back to the office, it also is shedding an entire building downtown. A majority of the five-story, 372,000-square-foot office at 1200 Locust St. — built by Nationwide just 12 years ago — is up for lease.
Nationwide will move employees into its main downtown office at 1100 Locust St. “over the next couple of years,” said Joe Case, associate vice president of corporate communications.
“This will allow us to maximize associate collaboration, ensure health and safety and be efficient with our facilities,” he said.
Nationwide employs 3,000 people in the Des Moines metro.
Commercial vacancies in the Des Moines metro have ticked up slightly in the second quarter to 13.6%, according to CBRE/Hubbell Commercial, which tracks the real estate market. Downtown vacancies are higher, at 16.1%, up from 12.5% at the end of 2019.
In addition, new lease deals are down 30% over this time last year.
Bill Wright, senior vice president and managing director of CBRE/Hubbell Commercial, said he expects vacancies to gradually increase over the next year and a half as companies continue to make decisions about the future of their workforces.
Because most companies have long-term leases in place, “We really feel as though it’s going to be a slow, more gradual increase in vacancies because, frankly, a lot of corporate office users, it’s not as though they will immediately dump space on the market,” he said.
“They’re taking this time to evaluate,” Wright said.
Should more decide to have employees work from home, it’s likely they will need less square footage in offices across the metro and in Iowa.
That change could have ripple effects: With fewer workers downtown and elsewhere, nearby stores, restaurants and coffee shops will suffer. So too will commercial property values.
“There’s going to be kind of a multiplier effect of no longer having those employees on site,” said Tracy Turner, associate professor of finance at Iowa State University.
‘The genie is out of the bottle’
When it became clear that the coronavirus was easily transmittable, companies around the world that didn’t provide essential, in-person services shut down their offices and transitioned to a work-from-home model.
According to a Stanford University study, 42% of U.S. workers are now working from home full time, accounting for more than two-thirds of all economic activity in the nation.
That’s up from just 3.6% who were working from home either full- or part-time in 2018, according to Global Workplace Analytics, a consulting firm that researches the future of work.
The question is how much of the work-from-home model will continue post-pandemic.
Based on how many U.S. jobs feasibly can be done from home, Global Workplace Analytics predicts 25% to 30% of the workforce — upwards of 47 million people — will be home for at least part of each week by the end of 2021.
Kate Lister, president of Global Workplace Analytics, said she believes people who were working remotely a few days a week before the pandemic will likely increase their time at home, possibly to full time. Those who were new to remote work will want to increase their proportion of at-home work post pandemic.
“The genie is out of the bottle, and it’s not likely to go back in,” she said.
Given the expected shift, Moody’s Analytics predicts commercial vacancies will reach historic highs of nearly 20% in the next two years — levels not seen nationally since the recession of 1991.
Wright said it’s unlikely the Des Moines market will see such high vacancy rates. Historically, the metro has had fewer vacancies than the national average because it’s a “more conservative market,” with less new construction and a stable workforce grounded in industries such as finance, home mortgages and insurance, he said.
“There will be space available, that’s true,” Wright said. “It’s going to take a little bit of time because you need companies to start growing again.”
‘The future … is going to be very different’
For JLL Commercial Real Estate in Des Moines, 2020 was shaping up to be a record year for leasing and sales, said Justin Lossner, managing director.
When the pandemic hit, “our activity pipeline was at a record level,” he said. Many clients were looking to make “big business decisions” on expansion or capital expenditures. Now, given that real estate can account for 15% to 20% of a company’s budget, that’s on hold.
“Last year was a very strong year, and we had anticipated 2020 to be even stronger,” Lossner said.
Things screeched to a halt in March, and have slowly started to regain traction as companies look to bring employees back to offices.
JLL recently helped usher in a lease for a call center in West Des Moines for an out-of-state company that has yet to publicly announce its plans. The company didn’t reduce square footage, but it did negotiate a shorter lease — two years instead of the typical seven to 10 years for this market.
Lossner predicts that will become more common as companies face uncertain futures, particularly when it comes to their in-person head count.
As such, the Des Moines market likely will see a reduction in rents to help fill newly vacant space or encourage negotiation of lease terms, Wright said. And construction of new office space in the metro will halt in the short term, he said.
“I’d be surprised if anyone is going to come out of ground right now with spec construction,” Wright said. “It would be an extremely bold move, and you’d have to have a lender on your side saying ‘go, go, go.'”
But as far as shedding existing swaths of space, local experts say publicly that’s unlikely to happen on a large scale in the metro. At least, leaders are reluctant to share plans or are taking their time to make a final decision.
Local companies, especially, like having the brand recognition that comes with having a physical location, Turner said. Quite often, they occupy landmark buildings from which their departure would have broad consequences for the community — and many understand that.
A physical office also provides space for welcoming new employees, training and attracting workers who want a shared space, Lossner said. Other employers want to protect their investments in office technology and unique amenities such as rooftop patios, coffee bars and collaborative spaces.
“I think all those will continue to be important in the long term … but I think hand in hand will be that discussion around flexibility,” Lossner said.
Mallaro, the CEO of VGM Group, said his employees have expressed interest in a hybrid model, working in the office a few days a week and at home the others. They have particularly mentioned child care and online education as reasons to stay home.
Others want to leave behind their commute — about a third of VGM’s 1,000 employees live in small towns about 30 minutes outside Waterloo.
“For them to not have to drive that, it matters,” Mallaro said.
Des Moines-based Principal has said it will permanently close offices in Cedar Falls and Mason City, but has not announced plans for its headquarters at 711 High St., where just 700 employees are working in a space that can hold 6,000, CEO Dan Houston said in an interview with Fortune. What he does know, however, is that employees will be given the option to work from home as needed.
“We’ll extend that latitude because frankly it’s working,” Houston told the online publication.
While Nationwide and VGM have made bold decisions, and quickly, local experts say it will take some time before other companies decide whether to follow suit. No matter what companies decide, the commercial market is going to look different in Iowa for years to come.
“Clearly for some commercial properties, it appears that the future of the office is going to be very different,” said Peter Orazem, labor economist at Iowa State University. “What is going to happen to all that office space? Is that going to be converted into residential? I think a lot of businesses may be rethinking how much of their staff needs to be in leased space in any particular time.”
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