Downtown office vacancy spike coming

For office property owners in downtown Cedar Rapids, the 2008 Cedar River flood is about to yield a deluge of a different kind.

A wave of office vacancies is expected to crest as government agencies move into new and restored public buildings later this year, the most dramatic of which will be a new 288,000-square-foot federal building.

Federal branches and agencies such as the U.S. Bankruptcy Court and U.S. Attorney's Office that have been leasing downtown space will migrate to the building, along with some federal officeholders' district staffs.

The impact on office vacancies will be amplified by a raft of private projects, including the Physicians' Clinic of Iowa's 221,000-square-foot Iowa Medical Pavilion set for completion in January 2013, construction of a new Intermec Corp. facility at 601 Third St. SE to replace two existing downtown spaces and construction of a 45,000-square-foot multi-tenant office building on Third Avenue SE.

By 2013, downtown office vacancies will edge up from current levels of around 12 percent to about 15 percent for older buildings, and around 5 percent for newer Class-A office space.

“We will have up to 380,000 square feet of office space available downtown by the end of this year,” said Scott Olson, commercial real estate consultant at Skogman Commercial Realty, adding that more space outside the downtown area also will open up.

A 380,000-square-foot space could hold about four of Hy-Vee's new full-service markets, or three Walmart stores.

Olson doesn't believe the amount of office vacancy will set a new high water mark for Cedar Rapids, but he does think it will take a couple years for the market to absorb - and keep downtown office lease rates stagnant during that period.

“We've never seen any time in the history of this city this dynamic of a shift in space,” said Olson, who serves on the Cedar Rapids City Council.

GROWING APPEAL

The biggest positive in the office vacancy surge may be that competition for tenants is likely to bring new businesses downtown and create a better market for the restaurants, bars and shops that have opened since the June 2008 flood.

And four or five “large block” office tenants are interested in the downtown area, Olson added.

The downtown also has growing appeal from smaller users, Olson said, and a wide variety of space options are available with significant variations in lease rates and amenities.

However, it's unlikely that larger office users will relocate downtown until the middle of 2013 because of a parking crunch caused by the demolition of existing parking garages as part of flood recovery, Olson and other observers predicted. The first of two parking garages planned by the city is expected to open next year across from the city's new convention center complex on First Avenue.

Jon Dusek, president of Armstrong Development Corp., one of the largest downtown office owners with properties such as the Armstrong Centre, agreed vacancies have recently been a little higher than usual,

But he said he's never been more optimistic about the downtown market because of projects such as the new downtown convention center, public library and courthouse that are under construction.

“The federal building is definitely going to pull some people out, and it's probably going to take a year or two to fill it,” Dusek said. “There's no doubt it will increase vacancy.”

Steve Emerson, who owns more downtown office space than any other property owner, including the Town Centre, Paramount, ITC and Principal building, isn't losing sleep over the impending vacancy spike. He has no tenants that he could lose to the new federal building or to the medical pavilion.

Tiffany Earl of Skogman Commercial handles leasing for Emerson's downtown properties. Earl said she sees opportunities coming out of the office shift because there aren't many spaces left for large office users.

Prospective tenants already are looking beyond the parking crunch because they see it will be temporary, Earl said, and employees of companies such as Rockwell Collins that have arrived in recent years appreciate the downtown amenities.

“Lease rates are still good,” Earl said. “It's a very comfortable situation. I think we're in a good place.”

PLUSES AND MINUSES

One of Emerson's tenants is Michaels Energy, which performs industrial and commercial energy efficiency work. The company, with two employees, opened about 18 months ago at 102 Second St. SE above La Cantina restaurant, in a 1,200-square-foot space with high ceilings and big windows.

Michaels EnergyOffice Manager David Werner said the downtown has pluses and minuses.

“Paying for parking is bad, but that's happens anywhere downtown,” Werner said.

“It's very centralized. There are a lot of places to eat downtown.”

The company recently decided because of new business to double the size of its office to take up the entire second floor of its building and add eight employees by the end of the year.

Olson said the need to pay for parking is often a rap against downtown office space, but tenants at suburban office locations typically pay for their on-site parking through their lease rates. They simply don't know how much of it is going for parking.

RIPPLES

The downtown office rotation will have so many moving parts that it would be difficult to detail them all. The ripples will extend out to places such as northwest Cedar Rapids - where the temporary Cedar Rapids City Hall will vacate a building owned by Transamerica - and southwest Cedar Rapids, where a temporary federal courthouse will vacate space at 4200 C. St. SW.

Both Cedar Rapids hospitals also will be affected.

St. Luke's Hospital spokeswoman Sarah Corrizo said physician practices are expected to backfill some of the spaces being vacated by hospital departments and affiliated clinics moving into the new medical mall. The vacancies will include the current Cardiologists LC building at 1002 Fourth Ave. SE, which will be taken by physicians' offices after the heart specialty practices moves into the medical mall.

Mercy Medical Center owns the current home of PCI's main location at 600 Seventh St. SE.

PCI, the multi-specialty medical practice developing the medical mall, will vacate about 70,000 square feet on two floors of the PCI building when it moves into the medical mall, Mercy Medical Center spokeswoman Karen Vander Sanden said. The hospital has a lease with the physician practice for about 18 more months, and has no definite plans for the space after that time.

The Eastern Iowa Sleep Center, a joint venture of Mercy Medical and St. Luke's, will remain on the PCI Building's second floor.