David Kelpe, Cushman & Wakefield
Improving real estate fundamentals in the St. Louis office market are opening the floodgates to new construction that is greatly needed as large occupiers are finding limited, if any, existing available options. Over the past few years, the gap between rent for existing office properties and new properties was too great to justify construction. Until now, that is.
The St. Louis employment base is finally reaching a pre-recession level with continued growth in the healthcare, information technology and engineering industries. The centrally located and more affluent residential areas — the West County and Clayton submarkets in particular — are experiencing higher occupancies and increasing rental rates.
Clayton historically has been the best-performing submarket in St. Louis and still is today, while West County is situated near mid- to upper-level income workers.
Development has and will continue to follow these highly sought after submarkets as they offer the metro area’s best real estate fundamentals and returns. Add to all of those factors a lack of new product in the past several years — plus a Class A vacancy rate of 10 percent — and you have an ideal climate for new construction.
Pivotal project is catalyst
The announcement that St. Louis-based Delmar Gardens Enterprises, a privately held nursing services company, will begin construction on Delmar Gardens III this year in the West County submarket has buoyed the
office market. The 125,000-square-foot office building will be located at 14767 N. Outer 40 Road in Chesterfield, Mo., and will be completed in the summer of 2017.
Rabo AgriFinance, a financial services provider for agricultural producers and agribusinesses, will relocate its corporate headquarters to the multi-tenant Delmar Gardens III. Rabo AgriFinance will lease 62,500 square feet at the new building, relocating and expanding its footprint by almost 5,000 square feet.
The news that Delmar Gardens is breaking ground on a high-profile, Class A office building is just what the office market needed. The expectation is that this project will trigger more new development as a shift from “making do” to paying the rent required for a brand new building begins to occur.
With pent-up demand for new construction, other space users will follow suit, and both build-to-suit and speculative buildings are expected in the near future.
More than $36 million of office transactions have been completed at the Delmar Gardens campus so far this year. These transactions include Morgan Stanley Smith Barney’s lease renewal and expansion of 15,765 square feet and a new 1,486-square-foot lease for Enable Midstream Partners LP’s new St. Louis office.
The Orthopedic Center of St. Louis also renewed its lease of 31,538 square feet and Surgery Center Partners Inc. renewed its lease of 16,411 square feet.
Tenants hungry for space
West County is expected to post 230,000 square feet of positive net absorption in the fourth quarter of this year due to several large new deals.
St. Louis-based Centene Corp., which has a big appetite for space, has positively affected the West County submarket. Centene recently filled one of the only vacancies available in the submarket with its lease of 117,618 square feet at 1370 Timberlake Manor Parkway. The Fortune 500 company provides services to government healthcare programs.
Charter Communications has closed multiple deals, but most recently leased 65,544 square feet at Barrett Woods III and IV. MiTek Industries Inc. also is nearing completion of its new 99,000-square-foot building for its corporate headquarters.
The healthcare sector has undergone a great deal of growth in the West County submarket as well. Mercy Healthcare System, which reportedly considered building an administrative office building on property it currently owns, changed directions and instead renewed a significant amount of space in multiple buildings. This strategic move by Mercy Healthcare System is one of the key reasons for the submarket’s recent success.
Pendulum swings
While it has been a tenant’s market since 2006, the trend is turning in favor of landlords. There is increasing upward pressure on rental rates, and landlords are starting to back away from the concessions that had become commonplace in the aftermath of the Great Recession and the slow economic recovery that followed.
With the new Delmar Gardens project demonstrating the feasibility of new construction, the St. Louis office market is well positioned for more new office projects encompassing multiple build-to-suits and possibly even some speculative construction.
— By David Kelpe, SIOR, CCIM Senior Vice President, Cushman & Wakefield. This article originally appeared in the November 2015 issue of Heartland Real Estate Business.