Office market continues to strengthen throughout 2017

Building on the momentum of the previous few years, the St. Louis office market continued its positive trend throughout 2017. This put a premium on high-quality office space and created an environment favorable to owners, particularly in the region’s suburban submarkets.

The St. Louis market ended 2017 with an overall vacancy rate of 11.5 percent, accounting for all classes of office space in all submarkets. This represents a relatively flat year-over-year comparison to 2016, primarily driven by a lack of supply. High-quality space is in demand and large blocks of it are scarce in most submarkets across the region.

Not only are many submarkets strong, many ended 2017 at historically low vacancy levels. Clayton, arguably the most desired submarket by office tenants, ended 2017 with an overall vacancy rate of 6.2 percent. Even more impressive is the 4.25 percent vacancy rate for Class A space in Clayton, the lowest level over the last five years.

Clayton, however, isn’t the only submarket to perform well in 2017. Numerous other submarkets also ended 2017 with Class A vacancy rates at their lowest point in the last five years, including Westport, Creve Coeur, South County and Earth City.

What’s New and What’s Coming

Low suburban vacancy rates have fueled the appetite for new office development. In 2017, we had four notable office buildings delivered to the market: the World Wide Technology building in Westport, Sunset Ridge in Des Peres, Delmar Gardens III in Chesterfield and Bunge North America’s new headquarters in Chesterfield. Combined, these four buildings delivered approximately 528,000 square feet of Class A space to the market. Of that, only 48,000 square feet remains available today, with the largest contiguous block being less than 20,000 square feet. All four of these developments broke ground with significant tenants committed, versus being built on a speculative basis, limiting the available space today.

As for what’s ahead, Centene Corporation broke ground on the initial phase of their Clayton campus expansion. The initial phase will deliver a 27-story, 640,000-square-foot office tower to Clayton’s skyline. The top six floors, totaling 140,000 square feet, will be available for lease with the balance of the office space being occupied by Centene Corporation.

Centene’s top-tier office tower helps meet the demand of the submarket and is generating interest from numerous users. Future Clayton office development is not expected to stop there. Multiple proposed projects in Clayton could add additional Class A space to the market, in an effort to meet pent up demand.

The Novelly family is proposing the Apogee Office Tower, a 14-story, 233,000-square-foot office building, on the northwest side of downtown Clayton. Just south of downtown Clayton, Condor Partners and Edwards Realty are planning a second phase of the mixed-use development known as The Boulevard, which will include 200,000 square feet of Class A office space.

Also catching the attention of real estate professionals are a number of desirable Clayton sites owned by St. Louis County. The future of these sites is not yet known, but have the potential for future office development.

Clayton isn’t the only area of St. Louis County primed for development. Burkhill Real Estate has acquired 16 acres in Chesterfield Valley. The site is zoned for 260,000 square feet of office space and is sure to get the attention of users looking for large blocks of space.

St. Louis City: Statistics Versus Reality

Statistically speaking, the St. Louis City submarket continues to lag in comparison to the suburban submarkets. The city ended 2017 with an overall vacancy rate of 20.22 percent for all classes of office space and 15.6 percent for Class A space. These numbers do not factor in AT&T vacating 1.4 million square feet at 909 Chestnut, which now stands vacant. Despite the high level of vacancy and availability of large blocks of space in the city, positive things occurred in 2017.

Last March, Microsoft announced it would move its regional headquarters from Creve Coeur into midtown’s Cortex Innovation Community. To accommodate Microsoft and others, Wexford Science & Technology broke ground on a new five-story, 180,000-square-foot building scheduled to deliver in April, continuing the momentum of the midtown redevelopment trend.

Other notable projects planned in the city’s midtown neighborhoods include the Lawrence Group’s City Foundry and Green Street’s renovation of the Armory. Both projects, similar to Cortex, reflect the creative, innovative and amenity-driven environment that has become increasingly attractive to users.

Downtown, the St. Louis Cardinals and The Cordish Companies broke ground on the second phase of Ballpark Village, which will include a multi-tenant office building anchored by the accounting firm PwC. This will be the first office building built in downtown St. Louis in nearly 30 years and is planned to deliver in mid-2019.

With the relatively high vacancy rate for office space in the city, why are we seeing new construction? There is a shift in demand in terms of what tenants need to recruit and retain talent. Tenants are desiring high quality office space with collaboration space, on-site amenity packages and in many cases, live-work-play environments.This is why it is important to look beyond the numbers to truly understand the dynamics of the city’s office market.

At the SIOR Metro Market Forecast, look for a more thorough review of the region’s leasing and investment activity in 2017. Perhaps more importantly, we will provide insight into potential disruptors to our progress and discuss predictions for 2018 and beyond.

Authored for the Annual SIOR Metro Market Forecast 2018 and published in the St. Louis Business Journal