A New Round of Office Development Appears Imminent in Metro St. Louis

by Danielle Everson

Lisa Prinster, NAI DESCO

Lisa Prinster, NAI DESCO

The big story in the St. Louis office market is that available Class A space continues to become more scarce. As we watch the larger blocks of space being absorbed, and as Class A asking rates continue to increase, the probability for new development seems inevitable, leaving some property owners wondering if they should move forward and build.

Although little new office construction is underway, the tightening market has undoubtedly prompted conversations. Expect projects to surface once developers land their first major tenant. The most likely submarkets for new development are in Clayton and West County, where many tenants requiring more than 25,000 contiguous square feet of office space are looking.

You cannot have a full recovery for office occupancy until employment increases and the abundance of empty desks is absorbed. The local unemployment rate reached its peak of 10.9 percent in February 2010. The good news is that the unemployment rate hit a six-year low of 5.4 percent in October 2014. This significant drop can be attributed to the gain of over 11,000 jobs since January 2014 in the professional and business services sector.

The St. Louis office market ended the year at a 10.5 vacancy rate, with Class A product at 8.5 percent and Class B at 12.5 percent. The vacancy rate is down from the previous quarter. Net absorption totaled 1.26 million square feet at the end of 2014.

Class A office product accounted for more than 75 percent of absorption in the fourth quarter — over 950,000 square feet — including the delivery of the 405,000-square-foot headquarters for Reinsurance Group of America.

The North County submarkets are suffering the most. The Bridgeton/I-70 submarket posted a vacancy rate of 29.9 percent at the end of 2014, while Earth City/Riverport posted a 14.8 percent vacancy rate, even after some noteworthy lease transactions.

Downtown St. Louis, with nearly 50 million square feet of office space, still lags behind most other submarkets when it comes to substantial growth with a vacancy rate of over 14 percent.

Significant Sales
Investment activity continues to be strong. Recent notable deals include the sale of the CityPlace portfolio of six buildings totaling 884,000 square feet to Redico. Laclede Gas Co. signed a lease for 128,250 square feet at the GenAmerica Building downtown and sold the building it had occupied for a long time to developer Brian Hayden, who plans to turn the downtown St. Louis offices into apartments.

Three buildings in Clayton on Meramec Avenue, known as Old Town Buildings I, II and III, were sold in October 2014 to a local investor. Meanwhile, KBS Realty Advisors acquired the building at 101 S. Hanley. KBS had already made several other office investments in the St. Louis market.

Signature Developments
St. Louis begins 2015 with a plate full of development projects that will give a boost to the St. Louis job market. Projects expected to have an impact on economic growth include:

• the Cortex district, a 200-acre innovation community near Midtown that boasts more than $500 million of development to date;

• an $85 million dollar, two-phase multifamily and retail development in the works in The Grove;

• Express Scripts at NorthPark, an expansion of an existing building that will add 1,500 employees;

• possible expansion of Ballpark Village to add office and residential space that could attract more people to the downtown district.

One project that could end up having the biggest impact on the St. Louis market is CityArchRiver 2015. This venture will transform the entrance to St. Louis by connecting the Gateway Arch and the Mississippi River riverfront to downtown St. Louis.

The plan calls for a park to be built over I-70 that will connect the Arch grounds to the Old Courthouse and Keiner Plaza, both of which are also being renovated. A grass amphitheater, a new museum of Westward Expansion under the Arch, and new walking and bike paths along the entire area are some of the other projects that are part of this $380 million plan.

St. Louis joins other cities like Nashville, Pittsburgh, Washington D.C. and Hartford, Conn., that see value in vital urban assets.

By Lisa Prinster, senior vice president, NAI DESCO. This article originally appeared in the February 2015 edition of Heartland Real Estate Business magazine.

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