CORONAVIRUS

Vacant downtown office space could 'spike' as demand slumps during coronavirus pandemic

Developers consider costly conversions to residential units

Signs advertise available commercial space in the Dows building in downtown Cedar Rapids on Tuesday, Nov. 10, 2020. As e
Signs advertise available commercial space in the Dows building in downtown Cedar Rapids on Tuesday, Nov. 10, 2020. As employees continue to work from home due to coronavirus concerns, many downtown offices remain vacant. (Liz Martin/The Gazette)
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As many businesses reach the eight-month mark of working predominantly from home, Cedar Rapids’ commercial office market is feeling the impact.

Scott Olson, a commercial real estate broker and a licensed Realtor with Skogman Realty since 1993, said the Cedar Rapids area has about 1 million square feet of vacant office space, as of Aug. 1.

The 1 million figure is not particularly different from pre-pandemic levels, Olson noted, as co-working spaces gained popularity.

But now developers are seeing office space interest dwindle.

“I think there’s going to be a spike in available office space,” Olson, a Cedar Rapids City Council member, said during The Gazette’s Iowa Ideas Conference in October.

Cedar Rapids developer Steve Emerson expects his vacant office space to remain vacant for a while.

“There’s not necessarily more available because of COVID,” Emerson said. “The space that is available doesn’t seem to have much activity in terms of people looking.”

Many office leases last 10 years, so it’s still early to see how many companies will cut back on office space leasing with more employees working from home.

“We’re going to know that shortly, especially as 2021 starts,” Olson said. “Are they coming back? Are they coming back at half-force? What is it going to be?”

When those decisions are made, Olson expects many companies will reduce their office footprint.

“I think that’s going to happen, and it’s already happening,” he said.

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Olson said he’s heard of two companies — one national and one locally based — in Cedar Rapids trying either to terminate their lease early or sublet it “because they’re not going to need it anymore.”

As someone who “owns a lot of office space,” Emerson said, “that’s an awful thing.”

Many other companies still are not using their full office spaces in downtown Cedar Rapids.

“We have companies that are major employers in Cedar Rapids — Alliant Energy, United Fire Group and others — they’re not back,” Olson said.

And this isn’t exclusive to the north end of the Corridor.

Jeff Edberg, a commercial real estate broker in Iowa City, said he has about 100,000 square feet of office space available. He estimated Johnson County has a total of 200,000 square feet.

While coronavirus has dealt Edberg a set of challenges, he said this is not entirely a new problem in the Iowa City area.

“In pre-pandemic, office space leasing was slow anyway,” said Edberg, who is with Lepic-Kroeger Realtors.

Coronavirus, Edberg said, “magnifies these problems and adds new ones.”

“When (coronavirus) becomes manageable, we still have other issues to have a healthy retail and business market in terms of real estate,” Edberg said, referring to a slowing of the commercial real estate market even before the pandemic.

And after the pandemic, commercial real estate experts have mixed expectations for the future of office space.

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Emerson envisions some companies looking for more spread-out office space with “less forced interaction.” But he said that could result in cheaper rent per square foot because of companies’ budget limitations.

“Any time you do that, you’ll house less people in more space,” Emerson said. “The companies still have a finite income.”

Olson added the older-style office spaces may see newfound popularity because of their socially distant nature.

“They have walls,” Olson said. “You can go and social-distance in an office — a closed office versus out in a cube, so it’s going to be interesting to see if the old office style comes back into style.”

As designs change to accommodate pandemic safety, Olson has seen plans with “one-way aisles in office buildings like you found at the grocery stores.”

Edberg said he’s experienced some success dividing larger offices into smaller units that one person could rent out.

But even with these adjustments, Olson doesn’t anticipate much new office space construction because “you can’t charge the rents to be able to cover that cost.”

The drop-off in office space demand is forcing many developers to get creative.

An analysis from the Albany, N.Y.-based Rockefeller Institute of Government said converting commercial office space into residential units is a “natural consideration” and “appealing to policymakers both as a way of encouraging population and tax-based growth.”

Olson said every recent downtown apartment project in Cedar Rapids has been leased before it opened.

“We’ll see if that same demand occurs after the pandemic,” Olson said.

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Emerson added he “can and will” convert some of the vacant office space into housing, including the former Skogman Realty building on First Avenue East.

“I was talking to some potential tenants or buyers that were going to use it for office space,” Emerson said. “Those conversations haven’t progressed, so that would be a good building to convert to apartments.”

That’s not an inexpensive process, though.

“You have to put in all the infrastructure associated with it,” Emerson said. “There’s bathrooms everywhere and kitchens. ... Everything is more or less new except for the shell of the building.”

But not every building is well-suited for conversion to residential units, Emerson explained.

The former Gazette building on Third Avenue SE, which the newspaper left in August in favor of another downtown space, doesn’t have enough windows for residential conversion — but it has “a ton of parking,” so Emerson believes it would be better suited for a call center.

Meanwhile, businesses relying on many of the employees who once occupied downtown cubicles are bearing the brunt of the vacancies as well.

Blue Strawberry Coffee, a longtime staple in downtown Cedar Rapids, closed its doors Aug. 10 and switched exclusively to online ordering. Owner Wesley Bryant said it was necessary because of the lack of downtown foot traffic.

“Who knows what downtown looks like ... in four months, six months, a year,” Bryant told The Gazette in August. “I can’t hold out and hope that something will change.”

Comments: (319) 398-8394; john.steppe@thegazette.com

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