Office Investors Find Higher Yields in St. Louis

On a clear day, visitors to the top of the St. Louis Gateway Arch can see for almost 30 miles in every direction. At roughly 58 stories high, the Arch offers a birds’ eye view of the transformation the region has undergone over the past 15 years.

St. Louis is one of the success stories coming out of the former “Rust Belt”. Yes, manufacturing still plays a role in the economy with automakers and other manufacturers that still have a presence in the metro. Yet St. Louis also has been working to reinvent itself and build a stronger economy backed by office jobs in tech, finance and insurance with results that are starting to pay off.

The city is home to 18 Fortune 1000 companies and has emerged as a hub for both established tech firms and start-ups with three thriving innovation districts and the hugely successful T-REX business incubator that has housed some 200 companies and created 2,200 jobs.

Business expansion has sparked steady demand for office space with an overall vacancy rate in the metro expected to improve to 8.9% this year, according to Marcus & Millichap. The firm also noted that St. Louis is offering buyers some of the highest cap rates on office properties among major metros in the Midwest with an average of around 7.75%.

Reonomy data also shows a robust market for office sales transactions with nearly $11 billion in properties that have traded over the past five years. Notably, 2015 and 2016 were exceptionally active years with $5.6 billion in sales across 215 separate transactions in 2015 followed by $3.4 billion in sales across 266 transactions in 2016. Sales have slowed so far in 2018 with just $72.4 million in offices properties trading year-to-date.

Development Projects Give Downtown a Boost

Downtown St. Louis has been the fastest growing area of the metro with an estimated $1.6 billion in new capital invested since 2005. These days, more than 85,000 people work in the CBD and the area also is home to a growing residential base. The Downtown and Downtown West neighborhoods boast a population of nearly 10,000 people, with an annual growth rate that has been hovering at about 7%, according to the Downtown STL Inc. (DSI). The positive momentum continues with more than $1 billion in development underway or announced.

One notable project set to open later this summer is the $380 million renovation of the Jefferson National Expansion Memorial and surrounding parks and riverfront that aims to improve the “Arch experience” and better connect downtown to the riverfront.

Developers also are preparing to launch phase two of Ballpark Village next to Busch Stadium. The $220 million, 550,000 square foot second phase will include the construction of a 29-story luxury high-rise residential tower, a 10-story office building (the first new Class-A office building built in Downtown St. Louis in nearly 30 years) and additional retail, restaurant and entertainment space.

The Cortex Innovation Community, which is the largest of three innovation districts in St. Louis, also broke ground on a new office building last year with the 182,000-square-foot 4220 Duncan building. The project has already attracted big name tenants including Microsoft and Accenture. Cortex, which is located in the historic Central WestEnd and Forest Park Southeast residential neighborhoods, has become a major anchor for the city.

Since its inception in 2002, Cortex has completed or has under construction 1.7 million square feet of new and rehabilitated space totaling over $550 million of investment and generating 4,200 technology-related jobs. The Cortex master plan calls for $2.3 billion in construction that will span 4.5 million square feet of mixed-use development and include a new MetroLink light-rail station.

Interest Branches Out to the Burbs

Downtown St. Louis is not without its challenges. For example, AT&T vacated the AT&T Tower last year, leaving the CBD with a big hole to fill within the 1.4 million-square-foot building. Another hurdle has been problems associated with graffiti, panhandling and crime. Concerns about public safety have helped to funnel more business to suburban hubs such as Clayton, which has emerged as a hot spot for business expansion and new development.

In fact, Downtown Clayton commands the region’s highest office rents and highest occupancies. Managed care company Centene Corp. announced a massive $770 million project this year. Plans for the mixed-use development include the construction of more than 1 million square feet of office towers and residential buildings.

But rather than pitting Downtown St. Louis vs. Downtown Clayton, many leaders in the region are hoping to create a stronger central corridor with other stable and growing neighborhoods that include the Delmar Loop, Forest Park and the Central West End along with other anchors such as Cortex, the St. Louis University and Washington University. That emerging corridor could represent investment opportunities for both private and institutional capital buyers across the risk spectrum of core, value-add and opportunistic strategies.

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