Uptick in Speculative Development Bodes Well for Tenants in St. Louis Office Market

by Kristin Harlow

Welcome to St. Louis, Missouri. Home to nine Fortune 500 companies and the 11-time world champion St. Louis Cardinals franchise. St. Louis currently lays claim to nearly 3 million residents in the metropolitan statistical area and has exemplified economic stability and consistent growth since the Great Recession.

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Matthew Ruck, NAI Desco

Herein we’ll explore one key indicator of the economic health of the region: the slow but steady growth of the St. Louis office market.

Demand drivers

With approximately 136 million square feet of space, St. Louis is one of the largest office markets in the Midwest, and it is getting larger. Increased demand in the local office market has been predominantly driven by job growth and the consistent decrease in unemployment since its high mark of 10.4 percent in the fourth quarter of 2009. As of November 2017, the region’s unemployment rate is down to a healthy 3.3 percent, compared to a national average of 4.1 percent.

Consequently, this demand for office space has resulted in decreased vacancy, increased rental rates and, ultimately, new construction.

At the end of the third quarter of 2017, the vacancy rate was 7.6 percent, down from 8.7 percent in 2016. Average asking rental rates were up to $18.59 per square foot, compared with $18.23 per square foot a year ago.

With decreased vacancy and rising rates comes opportunity and new construction. Today, over 1.2 million square feet of office space is under construction with another proposed 2 million plus square feet of office space on deck.

How we got here

This past year was a great year for the St. Louis office market. While fourth- quarter market statistics were not yet available at the time of this writing, the market has experienced positive net absorption of 1.6 million square feet since the third quarter of 2016.

There was also plenty of sales activity in 2017 to go along with the leasing absorption. The region experienced more than 7 million square feet of
office sales at a median price of $88.69 per square foot, the highest average since 2008.

Among the notable deliveries in 2017 were the Worldwide Technologies headquarters at Westport Plaza and the BJC Medical Office Tower in the Central West End. The Worldwide Technologies headquarters is a 210,000-square-foot, Class A office building that was delivered in the third quarter. Further east, the 510,000-square-foot medical office tower for BJC, and its affiliate Washington University, also delivered this year.

While highlighting the positive growth of the market in 2017, it is also important to note the pending sale of the 1.4 million-square-foot office building at 909 Chestnut St., recently vacated by AT&T. A decision by AT&T to downsize locally provides a unique opportunity to occupy or repurpose one of the true trophy buildings of downtown St. Louis.

Looking ahead

Leading the way is Phase I of the Centene development, a 551,000-square-foot mixed-use project in Clayton, which will feature approximately 500,000 square feet of Class A office space. About 140,000 square feet will be available for lease with the remainder being utilized by Centene Corp. Construction is well underway and delivery is anticipated for 2020.

Maybe the most exciting and unique growth area of the region is the “midtown” neighborhood, the future home of the City Foundry and the redeveloped Armory building. The City Foundry is the ultimate mixed-use concept, featuring a significant retail component to complement 80,000 square feet of new office space. The nearby Armory building will provide approximately 160,000 square feet of new creative office space.

Moving east into the heart of downtown, the Offices at Ballpark Village will serve as Phase II of the Ballpark Village development, located immediately north of Busch Stadium (home of the St. Louis Cardinals). Totaling 200,000 square feet, the mixed-use live/work/play project will include 120,000 square feet of office space with an anticipated delivery of summer 2019.

Also projected to deliver in 2019 is Phase II of The Boulevard in Richmond Heights, which will add approximately 200,000 square feet of Class A office space to the existing mix of office, retail and multifamily space.

While volume of new construction is at a decade-high level, it is important to note the nature of this construction. In the years since the Great Recession, the majority of new deliveries to hit the market have been user-driven with limited speculative development, showing the caution exercised by office developers.

But times have changed. The mood in town has shifted and developers and users alike are optimistic, as evidenced by the uptick in speculative development.

— By Matthew Ruck, Associate, NAI Desco. This article first appeared in the January 2018 issue of Heartland Real Estate Business magazine.

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