Exclusive analysis: How much have downtown Des Moines office, hotel values slipped? (2023)

Tyler JettDes Moines Register

These days, a journey down dim Des Moines skywalk corridors yields numerous glimpses of Jesse Bunney's name and phone number on signs stuck on the glass walls of empty offices.

Bunney, director of operations at LawMark Capital, has hustled to find tenants for the last three years in the commercial real estate firm's collection of downtown Des Moines properties. In 2019, Wells Fargo & Co. exited 130,000 square feet at LawMark-owned offices at 606 Walnut St. and 207 Seventh St., costing the firm about $2 million in annual rent.

Then the COVID-19 pandemic hit. Companies soured on continuing to pay the price for big spaces as many white-collar employees worked from home, a shift that has endured even as infection rates have dropped. Bunney said LawMark has adapted by welcoming smaller tenants: 12,000 square feet for Iowa Legal Aid; 11,000 square feet for a Medicare auditor.

"Any pulse that came into our building," Bunney said, "we worked them aggressively."

Those smaller renters haven't made up for the loss of Wells Fargo. But at least LawMark's tax bills have gone down ― and so have those for office, hotel and other properties across the city's core.

In 2021, the last time the Polk County Assessor's Office reevaluated properties, it decreased the taxable value of 606 Walnut St. and 207 Seventh St. by a combined $3.3 million. Taxable value determines how much property tax an owner pays.

In terms of actual bills, the reevaluation translated to a 28% decline for LawMark, which is on track to pay about $524,000 for tax year 2021 for those buildings after paying $728,000 in 2019 , according to the Polk County Treasurer's Office. (Property owners pay 2021 tax year bills in September 2022 and March 2023.)

Exclusive Register analysis shows sharp growth in downtown values going negative with onset of COVID-19

That drop alone doesn't make a huge difference for the city. But LawMark's bills reflect a broader trend for local public finance since the start of the pandemic. As employees work from home and substitute video calls for business travel, the once solid source of downtown property tax revenue for the city ― boosted by 40 years of public and private projects aimed at bringing vibrancy to an area once known as "Dead Moines" ― has slipped.

After increasing by 7.8% in 2018 and 9.2% in 2019, the total taxable value of the district that comprises downtown and the East Village grew by 2.4% in 2020 and 1.4% in 2021, then declined 0.4% in 2022, according to a Des Moines Register analysis of data from the Polk County Auditor's Office.

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The slowdown occurred as the county assessor's office dropped values for downtown hotels and offices, mostly because it concluded that the owners of those properties couldn't make money from them during the pandemic.

The assessor's office is in the midst of another reevaluation. But Bunney doesn't expect much of a change for commercial landlords like him.

"I would hope they go down again," he said of office property values. "They haven't gotten better, on average."

Tax burden shifting away from downtown

While Polk County Assessor Randy Ripperger's office hasn't issued individual valuations for 2023, he wrote in a report last month that the total value of commercial properties in the county will increase by 20% this year.

His report doesn't break down those values by city or neighborhood. But Chief Deputy Assessor Bryan Tack said in an email that downtown Des Moines property values, as a whole, won't increase.

Despite that, the city of Des Moines' overall property value has continued to rise since the start of the pandemic ― although at a slightly slower pace than before 2020. The falling values of downtown buildings shifted some of the tax burden to other parts of the community.

City officials said they have not analyzed trends about who has paid a greater share of Des Moines' property taxes as downtown office and hotel owners receive smaller bills.

"You'll see growth in home values," Finance Director Nick Schaul said. "And you'll see growth in other nodes."

Downtown's property tax declines appear likely to continue. Wells Fargo officials announced in January that employees will vacate the company's offices at 800 Walnut St. and 206 Eighth St., potentially dropping those buildings' values.

The city also plans to buy an office building and a parking garage from Nationwide Mutual Insurance Co., taking $42 million off the tax rolls. The city, in turn, will try to vacate and sell offices along the east bank of the Des Moines River, potentially offsetting the Nationwide acquisition.

Schaul said the city has not projected what the work-from-home shift could mean for property tax revenue in years to come.

"There are times when valuations are changing," he said. "We look at different revenue sources and different ways to balance the budget."

County assessor to raise hotel values this year

Downtown's hotels are among the properties that have lost the most value since the pandemic began.

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The Hilton Des Moines Downtown on Park Street, which was built with private and public funding and is operated by a nonprofit, is on track to pay $1.2 million for tax year 2021, down from $1.8 million in 2019.

The bill for the Marriott on Grand Avenue declined to $835,000 from $1.3 million. The Embassy Suites on East Locust Street saw its bill drop to $541,000 from $841,000.

Tack said the assessor's office has pivoted on how it evaluates hotels. Typically, he said, assessors value the properties based on how much money other local hotels sell for, adjusting the dollar amount based on factors like the age, size and location of the building.

But in 2021, the assessor's office couldn't find enough records of recent hotel sales.

"Owner(s) don't like to sell at the bottom of the market," Tack said.

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The assessors calculated values with other data, looking at estimations of occupancy rates and how much hotel-motel tax the county received in 2020, when the pandemic cratered the hospitality industry.

Heart of America Group CEO Mike Whalen, whose company owns the AC Hotel by Marriott on East Grand Avenue, said the Polk County assessors were more sympathetic to the industry than evaluators in other areas.

"We were functionally out of business. ... Polk County was the only jurisdiction that acknowledged that," said Whalen, whose company owns hotels in Illinois and Wisconsin. "Some jurisdictions actually increased assessed values."

Hotel owners won't see the same level of breaks this year. The occupancy rate of Des Moines hotels increased to 53% in 2022 from 37% in 2020, according to STR, a global hospitality data and analytics company.

While the numbers still lag the industry's pre-pandemic performance, Tack said in an email that the county's hotels overall will see a 30% increase in their values this year.

Bob Conley, who owns the Holiday Inn on Sixth Avenue, said he may protest such an increase. While the hotel is doing better than it was three years ago because of increased concerts at the nearby Wells Fargo Arena, he still doesn't see the weekday business travelers who were once core customers.

With employers leaving downtown, he isn't sure when those visitors will return.

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"The corporate business is gone," he said. "We're just holding on. That's all you can do right now."

Nationwide, Two Ruan and Principal get tax bill drops

While the hotel business has improved since the pandemic began, experts aren't sure what will happen with so much downtown office space.

From 2019 to 2021, the biggest valuation drop downtown occurred at 1200 Locust St., one of Nationwide's two office buildings. The insurer opened the space in 2008, part of a $142 million investment that helped transform the Western Gateway Park area.

When the pandemic hit, Nationwide executives let employees work from home ― a policy that remains in place. Nationwide tried to lease out 1200 Locust St., but a company spokesperson told the Register last September that its posting yielded only a couple of visits from local employers. Nationwide will now sell the building to the city, which saw it as a bargain-priced alternative to building a new police headquarters and other office space.

Before that deal, the county assessor priced 1200 Locust St. at $48 million, a pre-pandemic sum that generally held up against court challenges.

But in 2021, Nationwide argued that the property was worth just $24.5 million, telling the county that a third-party-leased office isn't worth nearly as much as an owner-occupied space. The two sides settled Nationwide's protest by valuing the property at $30 million.

Nationwide's tax bill for the property dropped by about 42%, to $1.2 million from $2.1 million. It will go off the tax rolls entirely when the city buys the building.

Closer to the center of downtown, Two Ruan Center's value dropped to $6 million in 2021 from $10.2 million in 2019. In terms of taxes, the building's owner, Ruan Center Corp., is on track to pay $268,000 in 2021, down from $491,000 in 2019.

Principal Financial Group is also paying a lower bill, as five of its downtown properties dropped taxable values since the start of the pandemic. Combined, the tax bills for those properties declined 16%, to about $3.9 million from about $4.7 million. A Principal spokesperson did not respond to an email seeking comment.

Two of the five Principal properties are parking garages. Tack said the assessor's office dropped their values after the company presented engineering reports showing maintenance projects Principal needs to perform to keep the structures open.

Another of the properties is a day care center with an unfinished second floor. Tack said assessors dropped the value when they realized that Principal was not using all of the space.

Meanwhile, the company's highest-valued property, 711 High St., is 84 years old. Tack said Principal had remodeled the building, stripping parts of the inside down to a shell and restarting, and the building's value quadrupled from 2016 to 2019. But Tack said the assessors decreased the value by about 3%, after Principal officials argued about some of the finer points of the newly remodeled space.

Greater Des Moines Partnership plan: Chop offices into smaller spaces

Downtown has seen an increase in revenue from another type of building: residential properties. Apartment and condo developments that arose after the past decade are starting to show up on tax rolls as abatements offered by the city are rolling off.

The owners of AP Lofts at 340 S.W. Fifth St. are on track to pay $222,000 in 2021, up from $55,000 in 2019. The bill for Metro Lofts at 100 Second Ave. will increase to $270,000 from $78,000.

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But those values might not offset the problems with commercial spaces. As of the fourth quarter of 2022, about 13% of offices were still vacant ― more than double the rate three years earlier, according to the real estate firm JLL.

Tony Leshen, a field research analyst with CBRE, said the city won't see "substantive new construction, especially in the downtown core" in the next couple of years. Beyond that, he isn't sure how the commercial real estate business will evolve.

"It has never been more difficult to forecast office market growth," he said.

He said small office buildings have fared best since the start of the pandemic. He highlighted the East Village and Gray's Landing, as well as Kettlestone in Waukee and areas around Grand Avenue in West Des Moines.

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The Greater Des Moines Partnership proposed ideas for reviving dead downtown office space in its recent "Future Forward Vision Plan and Action Plan." Among them:

  • Giving tech companies public assistance to lure them downtown.
  • Remodeling buildings to hold more small offices.
  • Building central amenity spaces like kitchens that workers in multiple small offices can share.

Mike Swesey, the Partnership's executive vice president for economic development, said in an email that he wasn't sure whether landlords are pursuing those options yet.

"It is still too early in the process to know exactly how this will play out," he said.

Geoff Wood , whose Gravitate Coworking allows workers to lease shared spaces, said demand for offices like his will continue to grow. Compared to before the pandemic, he said his company has attracted tenants at a faster pace after the government rolled out COVID-19 vaccines in spring 2021.

In addition to its office at 500 Locust St., Gravitate opened a location above the East Village Raygun store at 505 E. Grand Ave. at the beginning of 2022. Gravitate mostly caters to individual remote workers and startup entrepreneurs, but Wood said the company secured a lease from an information technology firm that moved its 20-employee office into one of his locations.

"We feel really good," he said. "We've seen the co-working market being really strong. ... Rolling forward, I can't imagine that stops."

Tyler Jett covers jobs and the economy for the Des Moines Register. Reach him at tjett@registermedia.com, 515-284-8215, or on Twitter at@LetsJett.



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