News Column

St. Louis Commercial Real Estate

Feb 8, 2013

Tim Bryant

The St. Louis area's commercial real estate market may not make experts' top lists for 2013, but the region will perform well enough to stay out of the basement.

Stable rents and slowing falling vacancy rates in many parts of the region show a broad recovery is happening, according to new studies by commercial real estate companies.

Tepid job growth is holding back a stronger recovery. Rising employment is the main driver of commercial real estate, and St. Louis' slow job growth means it will remain a middle-ground office market, the new studies show.

The recovery already showed its impact in last year's numbers.

In 2012, net occupied office space in the St. Louis area grew by 667,000 square feet, according to the latest report by Colliers International. Last year's growth looks especially good compared with 2011, when the net figure declined by 1.1 million square feet of office space as tenants steadily vacated premises.

New construction in the region will be negligible this year, meaning rents should edge up but not enough to goad developers into building speculative office space. As a result, vacancy rates should continue to fall in most areas as employment continues to slowly rise.

The region's vacancy rate was about 20 percent last month, according to Solon Gershman Inc.

Meanwhile, downtown St. Louis is experiencing what Cassidy Turley Commercial Real Estate Services describes in its latest report as smaller successes. Expansions last year by Hudson's Bay and Stifel Financial helped propel downtown to its second-best year in more than a decade, the company said.

While regional job growth will remain slow, the labor market is expanding where it counts -- the professional, business services, information and financial sectors, Cassidy Turley said. It notes that those sectors, where employment rose 3 percent last year, are heavy users of office space.

At the same time, continued development of the CORTEX biotech and medical research park will "dramatically change" its midtown neighborhood, according to Cresa, a nationwide tenants' broker with an office in Brentwood.

Trends point to some construction of outpatient and ambulatory health care facilities, loan modifications allowing downtown St. Louis building owners to fund tenant improvements and greater competition for fully equipped "plug and play" office space, Cresa's study added.

In Solon Gershman's 2013 outlook, the firm said that market improvement is expected to be spotty despite an overall fourth-quarter rise last year. Average rents in the region's 51.4 million-square-foot office market slipped last month to $18.93 from $19.17 per square foot in January 2012, the company said.

Clayton leads the area's office submarkets with an asking rate of $22.39 and one of the lowest vacancy rates -- 11.4 percent, Solon Gershman found. Despite a flat 2012, Clayton remains the region's premier office market, where rents should remain steady this year, experts said.

Downtown is by far the region's largest office market. But some of its biggest buildings have struggled.

St. Louis Place, a 20-story tower built in the 1980s, changed hands last year for $13 million in a foreclosure sale. Its previous owner paid $30 million in 2004.

In April, a settlement approved by the city tax commission lowered the value of One AT&T Center to $135 million, one-third less than the amount a real estate investment trust paid for the 44-story building in 2006. AT&T leases the entire building but has slashed the number of workers there.

A tax commission agreement in June provided property tax cuts for Metropolitan Square, downtown's tallest office building. The agreement put Met Square's market value at $95 million. Its owners paid nearly $166 million for the building in 2005, which turned out to be near the peak of commercial real estate values in recent years.

In this environment, rents at downtown's most modern buildings struggle to stay above $18 per foot. Until that rate rises significantly, new construction makes little financial sense even though downtown's vacancy rate continues to fall.

Bob Lewis, president of Development Strategies, a consulting firm, said that just as important to builders as rents is market demand, as measured by vacancy rates. A 10 percent rate is a magic number, he said.

"If it looks like it's approaching 10 percent, people start snooping," Lewis said. "That also starts to put (upward) pressure on rents."

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Distributed by MCT Information Services


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