The St. Louis office market has been impacted by the introduction of multiple large spaces to the market. This is good for office tenants because blocks of large contiguous space have been sparse in previous quarters. There are still some prime submarkets where availabilities are constrained. This can be seen by the vastly different vacancy rates and absorption levels throughout the submarkets. Even with the negative numbers, the St. Louis office market has positive momentum. Construction activity is going strong and direct asking rents are higher than they have been since the end of 2009.
The overall vacancy rate for the St. Louis office market has increased year-over-year to 13.36%, a 0.46 percentage point increase from the third quarter of 2017. This is a decrease, however, from the 13.54% rate from last quarter. The change from 2017 can be attributed to the additions of multiple large blocks of space within the St. Charles County (Verizon Wireless Complex and CenturyLink Campus) and Olive/I-270 (HBE Building) submarkets. These spaces are being actively marketed to third-party tenants and have caused large negative absorption levels within those submarkets. It is important to note that overall absorption was positive for the quarter due to a strong showing by the St. Louis City submarket, and largely because of the tenants entering the new 4220 Duncan Avenue building within Cortex. Microsoft Corporation, Aon, and the Cambridge Innovation Center are among the tenants in the new, state-of-the-art 180,000-SF building.
Direct asking rental rates for the total market continue to rise, hitting $20.15 per square foot (PSF) for the third quarter. This is an increase of nearly $1.00 from the third quarter of 2017 when the rate was $19.19 psf. This is the highest average asking rent since 2009 when it was above $20.50 for two quarters before dropping to a low of $18.31 psf in 2012. Class A rates are also on the rise with the average direct asking rental rate for Class A space in Clayton currently at $29.43 psf. This is 32% higher than the total market Class A average of $22.16 psf and is the highest ever recorded average rate achieved in the market. The Chesterfield Class A submarket is also at a record high reaching $28.06 psf.
The overall economy in the St. Louis region has made steady progress. According to the Federal Reserve, the August unemployment rates for the nation, and for the St. Louis area, dropped to 3.9% and 3.3% respectively. The Bureau of Labor Statistics reported that the Professional and Business Services sector reached over 221,000 employees in June of this year which is the highest level of employment in that sector ever recorded in St. Louis. The stability of the economy is allowing the business community to invest in St. Louis and new construction projects are popping up around the region. The St. Louis Business Journal reported that over $7.9 billion of projects are completed or underway in the City of St. Louis, and the office sector is a part of this flurry of activity. The Lawrence Group’s City Foundry Phase I is a $200 million project involving retail, restaurants, a movie theatre, and office space. Within the Cortex district, the Washington University-owned Crescent building is being redeveloped. The $44 million rehab will house BioGenerator Labs and later-stage startups. The $8 billion tally only includes projects that are over $10 million dollars; there are many smaller projects that are improving neighborhoods and communities around the St. Louis region. This is an exciting time to be involved in St. Louis real estate.