Market Overview

The St. Louis region is reflective of the current economic conditions impacting the country although not as severe as the top U.S. areas. The February 2009 unemployment rate was 9.2% (unadjusted for seasonal discrepancies). Approximately 1,600 jobs were lost in February 2009, the sixth month of falling employment. While education and healthcare services experienced job growth over the last year, manufacturing lost 8.1% of its jobs, principally in the automobile industry.

Multifamily permits declined 89% in January and February 2009 when compared to the same period in 2008. Demand has improved for rental apartments; however, for-sale condominiums converted to rental units are increasing supply. Rental rate increases have slowed due to the weak economy and additional inventory. Sales of condominiums, especially of luxury units, have tanked, and a number of planned developments have been cancelled.

The retail market continues to weaken as vacancies increase to over 8%, still better, however, than the national vacancy rate of near 12%. Little new construction is occurring as retailers pull back. At older malls, department stores are being closed. The Nordstrom’s store at the Galleria is on-hold until 2010, and Target has withdrawn as anchor of a new 200,000 sq. ft. in-fill center in the city of Rock Hill.

The industrial market is also struggling and may be overbuilt. In the last few months, it has become a tenant’s market. Absorption is declining. Lease rates are falling because of available speculative and sublease space. In the South County submarket, Chrysler suppliers have vacated over one million sq. ft, and more space is expected to become available for sublease in 2009. Most of the industrial activity has occurred in Illinois where large distribution facilities are being located.

The office market is probably the most stable of the commercial real estate markets. Activity was slow in the first quarter 2009, however. Most new speculative space has been leased. Proposed buildings are on-hold and require substantial pre-leasing before construction can begin. Vacancies are increasing in some submarkets, and pressure is building on lease rates. After a period of few incentives, rent abatement and tenant improvement allowances are slowly returning to the marketplace, and most new projects have been placed on-hold. Large contiguous spaces are few except in the Downtown submarket.

In Clayton, Centene Corp. still plans to develop an office project although it has been scaled back. The existing buildings on the site have been demolished and construction has started on the first building and garage. And, still looking for a lead tenant is the 175,000 sq. ft. Meridian in Brentwood, which is close to completion.

At first quarter 2009, total available office space was nearly 10.5 million sq. ft., 13.6% of inventory, two tenths of a percent higher than year-end 2008. First quarter 2009 overall absorption was a negative (173,000) sq. ft. The CBD, Clayton, Creve Coeur/Westport, North and South County submarkets experienced negative absorption. New deliveries totaled 171,800 sq. ft., all Class A or B space. Average asking rent for all properties was $18.85 per sq. ft., continuing to decline slowly since third quarter 2008. Asking price in the new prime buildings is $29-31 per sq. ft.

The Class A market improved slightly during the first quarter of 2009. The overall availability for Class A office space rose to 14.7%, and available space rose to 4.9 million sq. ft. The Downtown availability rate increased to 20.2% during the quarter or 2.1 million sq. ft. from 19.8% at year-end 2008. Availability in the suburban markets remained at 12.3% through first quarter 2009. Absorption for Class A properties was negative 44,000 sq. ft. Available Class A suburban space is 2.9 million sq. ft.

Class A sublease space almost doubled in the fourth quarter of 2008, increasing from 274,300 sq. ft. to 507,300 sq. ft. or 10.4% of all available Class A space. It declined somewhat during the first quarter of 2009 to 9.2% or 454,000 sq. ft. The largest amounts in available Class A sublease space are in West County (88,000 sq. ft.), North County (85,200 sq. ft.) and St. Charles County (81,500 sq. ft). Average Class A asking rents remained stable through early 2008 at or near $22.40 per sq. ft., but dropped to $21.98 per sq. ft. during the fourth quarter of 2008. During the first quarter, average asking rent increased slightly to $22.04 per sq. ft.

The availability rate for Class B office space rose to 12.7% during the first quarter 2009 from 12.4% at year-end 2008. Total available Class B space is just over 3.6 million sq. ft. Absorption for first quarter 2009 was a negative (95,800) sq. ft., with four submarkets experiencing negative absorption. Asking average rent per sq. ft. was $17.85 per sq. ft. at first quarter 2009. Average asking rent had been $18.00 per sq. ft. or better since third quarter 2007.

The availability rate for Class C space increased to 12.7% during first quarter 2009 from 12.5% at fourth quarter 2008. Available Class C space is nearly 2.0 million sq. ft. Absorption during the first quarter of 2009 was a negative (33,600) sq. ft. The CBD has the most Class C space available with 1.2 million sq. ft. The average asking rental rate for Class C space has hovered in the mid to upper $16 per sq. ft. for the past year.

With the national credit crunch, investment office sales have virtually stopped. During the first quarter of 2009, only a few purchases were made in the St. Louis region. Scottrade acquired two buildings and a 4.7-acre parcel in Maryville Centre and a 9.4 acre tract across I-64 from Maryville Centre from Duke Realty to expand its operations.

Market Highlights

• The overall availability rate rose slightly during first quarter 2009 and is now at 13.6%, six tenths of a percent higher than one year ago.
• Overall average asking rents fell during the quarter to $18.85 per sq. ft., from $18.95 per sq. ft. at year-end 2008.
• Overall absorption at the end of the first quarter 2009 was negative (173,000) sq. ft. while Class A absorption was negative (43,600) sq. ft. Class B absorption ended the quarter at negative (95,800) sq. ft. and Class C was negative (33,600) sq. ft.
• Class A average asking rents rose slightly over the quarter and are now at $22.04 per sq. ft., which is slightly higher than last quarter.
• Class A sublease space fell one percentage point during first quarter 2009 to 453,600 sq. ft. or 9.4% of inventory.
• Major transactions this quarter include the Monsanto’s 116,000-sq.-ft. lease in the Creve Coeur/Westport submarket and Fireman’s Fund Insurance Company’s 109,300-sq.-ft. lease in the St. Charles submarket.

Market by Market Review

Central Business District

Total Inventory: 26.4 mil. sq. ft.
No. of Buildings: 201
Average Asking Class A Rent: $18.12
Average Asking Class B Rent: $15.54
Availability Rate: 17.4%
Available Space: 4.6 mil. sq. ft.
New Deliveries: 0 sq. ft.
Net Absorption (YTD): (63,000) sq. ft.

Downtown St. Louis has seen a number of projects downsized, postponed or awaiting financing. Concerns about sales of the historic tax credit are also delaying projects. The good news is that the downtown population rose 6% in 2008 to nearly 12,000 people.

The market for condominium and rental units has slowed but not entirely crashed as many of the proposed developments did not start construction before the economy soured. In addition, some condo units have been switched to rentals.

The 22-story, former headquarters for the Missouri Pacific Railroad, repositioned into “Park Pacific,“ a mixed-use development of apartments, retail space, parking and 88,000 sq. ft.
of office space, has been delayed because of the economy. Several other buildings are planned for commercial and residential usage, including the Laurel (former Dillard’s department store), Cupples Station 9, Syndicate Trust and the Farm & Home buildings, but are delaying while awaiting financing. Two Clayton-based advertising firms, Osborn & Barr Communications and Adamson Advertising, are planning to move their headquarters in to Downtown.

The Roberts Tower, a high-rise condominium building, and the 20,800 sq. ft. Schnucks supermarket are underway. Work on the proposed $300-600 million, multi-use Ballpark Village will be limited to a softball field and parking lot during 2009. The developer, Cordish Company and the Baseball Cardinals, will delay the sale of over $100 million
in bonds for the first phase until the municipal bond market improves.

Two major law firms are leaving Downtown. Husch Blackwell Sanders will vacant about 80,000 sq. ft. in the Laclede Gas building to consolidate offices at its base in Clayton. Armstrong Teasdale plans to move to the new Centene property in Clayton from 125,000 sq. ft. at Metropolitan Square in 2010.

The Edward Jones Dome, home of the St. Louis Rams is getting $30 million in upgrades. A new $16 million parking garage and 10,000 sq. ft. of retail space is underway at Tucker Boulevard and Clark Avenue, a welcome resource for Market Street and the Federal Courthouse. The Missouri Valley Conference plans to build a $10.5 million head-
quarters building downtown, south of Scottrade Center. SCP Worldwide, owner of the St. Louis Blues, Scottrade Center and adjoining opera house, will submit plans to the city for a $50-60 million renovation of Kiel Opera House into an entertainment venue this year.

Development of the stunning $30 million City Garden by the Gateway Foundation on two blocks along the Gateway Mall (Market Street, bordered by 8th and 10th Streets) should be complete by June 2009. An $8 million plaza, a part
of Old Post Office Square, was completed in March.

The office market in the CBD got a little worse during the first quarter of 2009. Current overall availability rose to 4.6 million sq. ft. or 17.4% of total inventory. Absorption was a negative (62,600) sq. ft. Available Class A stayed near 2.0 million sq. ft. or 20.2% at first quarter 2009. Class A space experienced negative absorption of (43,600) sq. ft. for first quarter 2009. Available Class A sublease space is only 3.7% of available Class A space or 75,200 sq. ft., and is not a major factor in the marketplace. Average asking rent for Class A space rose to $18.12 per sq. ft. at first quarter 2009 but is still lower than the $18.80 per sq. ft. of first quarter 2008.

After a good year in 2008, available Class B space increased slightly to 1.3 million sq. ft. or 15.2% of inventory as of first quarter 2009. Absorption during the first quarter was a negative (27,600) sq. ft. Another 1.2 million sq. ft. or 16.1% of Class C space is available. Average asking rent for Class B space declined slightly to $15.54 per sq. ft. and Class C to $14.00 per sq. ft. Rents in the CBD are the lowest in the region.

Midtown

Total Inventory: 2.2 mil. sq. ft.
No. of Buildings: 19
Average Asking Class A Rent: $24.94
Average Asking Class B Rent: $15.22
Availability Rate: 3.9%
Available Space: 0.1 mil. sq. ft.
New Deliveries: 0 sq. ft.
Net Absorption (YTD): 500 sq. ft.

This small submarket has the lowest availability rate again for first quarter 2009. The submarket is tight with only 3.9% or 84,100 sq. ft. available. Available Class A space remained at only 33,500 sq. ft. All average asking rents in the submarket changed slightly during the first quarter of 2009 with Class A space increasing and Class B declining. Two buildings, 64,000 sq. ft. and 59,000 sq. ft. are being constructed at the Highlands Plaza across from Forest Park. Much of the space has been pre-leased to Renaissance Financial and Korte Construction.

The University of Missouri-St. Louis will move its radio station to Grand Center. A third of the three-level, 27,000 sq. ft. building will include classroom and arts and performance space.

A Request For Proposal for city-owned 634 N. Grand Avenue (Old Missouri Theater building) brought responses from five developers. Plans include a hotel, apartments and ground floor retail. The Metropolitan building at 500 N. Grand is also planned for redevelopment. 

CLAYTON

Total Inventory: 9.0 mil. sq. ft.
No. of Buildings: 117
Average Asking Class A Rent: $25.38
Average Asking Class B Rent: $19.62
Availability Rate: 11.5%
Available Space: 1.0 mil. sq. ft.
New Deliveries: 0 sq. ft.
Net Absorption (YTD): (63,000) sq. ft.

Even though the availability rate increased and absorption was negative in first quarter 2009, Clayton remains the strongest market in the region. The availability rate rose from 10.8% at fourth quarter 2008 to 11.5% at first quarter 2009. Overall absorption in the first quarter was a negative (62,500) sq. ft., the first negative quarter since fourth quarter 2007.

Space, both large and small, in the premium office buildings is difficult to find. Only three buildings have contiguous spaces of 25,000 sq. ft., the largest spaces available. Class A availability is currently 10.7%. Absorption during the first quarter 2009 was only 3,700 sq. ft. Nearly 0.5 million sq. ft. of Class A space is available, 5.5% or 27,000 sq. ft. of which is sublease space. The average asking rental rate for Class A space declined slightly to $25.38 per sq. ft. The availability rate for Class B space rose again during the first quarter of 2009 to 14.9% or 0.45 million sq. ft. Absorption during first quarter 2009 was a negative (61,900) sq. ft., less than any other submarket. Average asking rent declined to $19.62 per sq. ft. at first quarter 2009 from $19.96 per sq. ft. at year-end 2008.

The size of the office and retail complex, Centene Plaza, has been reduced, with the first office building now 17 stories instead of 21 stories and the parking garage now 7 levels instead of 9 levels. The $186 million project will now include 481,000 sq. ft. of office space and 28,125 sq. ft. of retail space. Permanent financing has not been announced.

A number of other office developments are being discussed, but are not committed at this time. The development arm of Sikeston-based Montgomery Bank and St. Louis County had announced plans for a $100 million, 25-30 story mixed-use building, but the project is delayed until financial markets improve and significant pre-leasing occurs. The prospects for two other projects have not been announced. Apex Oil Co. and Koman Properties had proposed a 300,000 sq. ft. mixed-use building, Shaw Park Pointe, on Forsyth near Apex Oil’s headquarters. Conrad Properties planned two buildings, one with 130 luxury apartment units and one with 75-80,000 sq. ft. of office space, on the north side of the Clayton CBD. Currently under construction is the 175,000 sq. ft. at the Meridian, south of the city of Clayton at the I-64/Highway 40 and Hanley Road interchange in Brentwood.

Several hotels and additional retail facilities are under construction or planned across from the Galleria in Richmond Heights. The Boulevard, a mixed-use development, will add a 70,000 sq. ft. Dick’s Sporting Goods in 125,000 sq. ft. of retail space, 35,000 sq. ft. of office space and a hotel. Construction is expected to start in November and be complete by spring 2010. 

Creve Coeur/Westport

Total Inventory: 9.4 mil. sq. ft.
No. of Buildings: 130
Average Asking Class A Rent: $22.71
Average Asking Class B Rent: $17.55
Availability Rate: 14.5%
Available Space: 1.4 mil. sq. ft.
New Deliveries: 140,000
Net Absorption (YTD): (110,000) sq. ft.

First quarter 2009 halted the slow but consistent improvement of the Creve Coeur/Westport office submarket. The availability rate increased from 13.5% at year-end 2008 to 14.5% at first quarter 2009. Available space is now 1.4 million sq. ft. Absorption in first quarter 2009 was a negative (110,500), the worst in the region. During the quarter, the average asking rental rate for Class A space rose slightly and Class B remained stable.

During the first quarter of 2009, the amount of available Class A jumped above 0.6 million sq. ft. with absorption a negative (83,900) sq. ft. The availability rate decreased from 11.9% at fourth quarter 2008 to 13.7% at first quarter 2009. Available sublease Class A space declined again in the first quarter. Class B space absorption was a negative (27,700) sq. ft. in the first quarter 2009. Available Class B space is nearly 0.6 million sq. ft. or 15.3% of total inventory. Only 160,200 sq. ft. or 15.5% of Class C space is available in the submarket.

A 138,000 sq. ft. corporate headquarters for Safety National Insurance is nearing completion on Schuetz Road. A 118,000 sq. ft. is being constructed in the Bio-Research & Development Growth Park at the Danforth Plant Science Center.

Several speculative buildings for the submarket, the 210,000 sq. ft. CityPlace VII, the 100,000 sq. ft. CityPlace North and an 80,000 sq. ft. office/retail project on Olive Boulevard, just west of I-270, have been announced, but none are under construction.

North County

Total Inventory: 9.5 mil. sq. ft.
No. of Buildings: 112
Average Asking Class A Rent: $18.94
Average Asking Class B Rent: $16.56
Availability Rate: 12.8%
Available Space: 1.2 mil. sq. ft.
New Deliveries: 0 sq. ft.
Net Absorption (YTD): (10,000) sq. ft.

The overall office market remained stable during the first quarter 2009. Available space remained at 1.2 million sq. ft. or 12.8% of inventory. Absorption during first quarter was a negative (9,500) sq. ft.

Available Class A space now totals nearly 0.6 million sq. ft. (19.0%), 15.0% or 85,200 sq. ft. of which is sublease space. Absorption for Class A space in first quarter 2009 was a negative (1,900) sq. ft. Average asking rent continued to decline, from $19.13 per sq. ft. at fourth quarter 2008 to $18.94 per sq. ft. at first quarter 2009.

Absorption for first quarter 2009 for Class B space was 6,200 sq. ft. About 0.4 million sq. ft. or 8.8% of Class B space is available. Class C space absorption was a negative (13,900) sq. ft. during first quarter 2009. Only 260,000 sq. ft. of Class C space is available, however. Class B average asking rent decreased slightly to $16.56 per sq. ft. while Class C average asking rent rose to $17.01 per sq. ft.

Build-to-suit developments are popular in the submarket. Express Scripts has a $30 million, 180,000 sq. ft. building under construction near its headquarters at NorthPark and is considering a third building. Duke Realty has three buildings underway, a 127,000 sq. ft. and a 116,000 sq. ft. building at Lakeside Crossing for Monsanto and a 146,000 sq. ft. building at Riverport for Elsevier.

Edward D. Jones has completed the first of three office buildings and a parking garage totaling 817,000 sq. ft. at its Maryland Heights campus. The second building of 372,000 sq. ft. should be finished by September 2009. Covidien Ltd., a health care products provider, will do a $100 million expansion of its Hazelwood facilities over the next 5 years.

Fireman’s Fund Insurance is closing its Earth City regional office and relocating to O’Fallon, Mo., at year-end. Expansion of the Foreign-Trade zone to 820-acres to include North County business parks should improve activity. No speculative office buildings are now under construction although McEagle Properties and Clayco Construction have announced a 150,000 sq. ft. speculative office building, NorthPark High Performance Office building. 

South County

Total Inventory: 8.3 mil. sq. ft.
No. of Buildings: 155
Average Asking Class A Rent: $21.89
Average Asking Class B Rent: $19.96
Availability Rate: 8.2%
Available Space: 0.7 mil. sq. ft.
New Deliveries: 0
Net Absorption (YTD): (69,000) sq. ft.

The South County office submarket is being hit hard in the office sector. Anheuser-Busch InBev is expected to vacate over 200,000
sq. ft. at its Sunset Hills campus. Available office space rose in the first quarter 2009 to nearly 0.7 million sq. ft. or 8.2%. While still the second lowest rate in the region, it is high for this submarket. Absorption for the first quarter was a negative (69,200) sq. ft., with negative absorption in all classes of space.

Only 241,800 sq. ft. of Class A space is currently available, 67,000
sq. ft. or 27.7% of which is sublease space. Average asking price for Class A space continued to decline, from $22.03 per sq. ft. at year-end 2008 to $21.89 per sq. ft. at first quarter 2009. Available Class B space has been climbing since year-end 2007. It is now 322,700 sq. ft. or 9.2% of inventory. Average asking rent has risen to $19.96 per sq. ft., however, over the same period. Available Class C space is minor in the submarket. Only 122,600 sq. ft. is available. Average Class C asking rent has declined from $17.90 per sq. ft. year-end 2008 to $17.34 per sq. ft.

In the Manchester/I-270 area, Edward D. Jones has a 225,000 sq. ft. expansion to its headquarters under construction. No speculative space is under construction although McEagle has proposed up to 300,000 sq. ft. at Eddie Park Road and Lindbergh Boulevard.

West County

Total Inventory: 8.3 mil. sq. ft.
No. of Buildings: 129
Average Asking Class A Rent: $23.67
Average Asking Class B Rent: $20.33
Availability Rate: 13.1%
Available Space: 1.1 mil. sq. ft.
New Deliveries: 32,000 sq. ft.
Net Absorption (YTD): 29,000 sq. ft.

During first quarter 2009, availability in the West County submarket declined after increasing in the fourth quarter of 2008. The availability rate decreased from to 13.5% at fourth quarter 2008 to 13.1% at first quarter 2009. Available space remains at 1.1 million sq. ft. Absorption during first quarter 2009 was 29,300 sq. ft.

Available Class A space is now 0.8 million sq. ft., 11.6% or 88,000 sq. ft. of which is sublease space. Sublease space rose nearly 24,000 sq. ft. during the first quarter of 2009 and is expected to increase with upcoming vacancies. The Class A availability rate was 14.6% at first quarter 2009. Class A absorption during the first quarter was a negative (4,800) sq. ft. Average asking rent for Class A space increased from $23.00 per sq. ft. at year-end 2008 to $23.67 per sq. ft. at first quarter 2009. Absorption was positive in 2008 in both Class B and Class C space, with 32,500 sq. ft. and 1,600 sq. ft. respectively. Available Class B space is 0.3 million sq. ft., while available Class C space is only 15,500 sq. ft.

Speculative buildings are being announced and appear to be in response to the lack of large contiguous space in the submarket. Sachs Properties had planned a second building of 150,000 sq. ft. in Chesterfield Village for late 2008, but the building has yet to be started. Opus Northwest is planning a two-building, 340,000 sq. ft. speculative office building on Conway Road, but the building is now on-hold. Additional buildings have been announced for the former County jail site and in business parks near the Spirit of St. Louis Airport in the Chesterfield Valley. Several large acreages (75-130 acres) have been approved for mixed-use development in the Valley, including office, retail and industrial space.

Scottrade has acquired two buildings and two parcels of land in the Maryville Centre area from Duke Realty, 500-510 Maryville Drive, 700 Maryville Drive, 4.7 acres across from the 700 building and a 9.4 acre parcel across I-64.
Centre.

St. Charles

Total Inventory: 4.5 mil. sq. ft.
No. of Buildings: 66
Average Asking Class A Rent: $20.63
Average Asking Class B Rent: $18.00
Availability Rate: 10.5%
Available Space: 0.5 mil. sq. ft.
New Deliveries: 0 sq. ft.
Net Absorption (YTD): 112,000 sq. ft.

After concerns in the small St. Charles County submarket in 2008, first quarter 2009 brought improvement. Absorption was 111,600 sq. ft., the best in the region because Fireman’s Fund Insurance leased 110,000 sq. ft. at the new Progress Point Parkway. The remainder of the 123,000 sq. ft. building is still available. The overall availability rate declined from 13.1% at year-end 2008 to 10.5% at first quarter 2009.

Available Class A space is now 145,900 sq. ft. or 5.8%. The amount of Class A sublease space at year-end was 94,200 sq. ft., 36.7% of Class A available space, but is now 81,500 sq. ft. or 55.8% of the total available. Absorption in 2008 was 110,700 sq. ft., and average asking rent rose to $20.63 per sq. ft. at first quarter 2009 from $19.97 per sq. ft at year-end 2008 because of the shortage of available space.

Class B availability also decreased during first quarter 2009, from 16.7% at year-end 2008 to 16.1% or 224,600 sq. ft. Absorption in the first quarter was 4,000 sq. ft. The Class B average asking rent dropped from $18.22 per sq. ft. at year-end 2008 to $18.00 per sq. ft. during the first quarter 2009. Class C available space is only 102,000 sq. ft. Absorption in the first quarter was a negative (3,200) sq. ft. Average asking rent for Class C space rose to $14.30 per sq. ft. during the first quarter from $14.10 per sq. ft. at year-end 2008.

McEagle Properties has announced a 75,000 sq. ft. speculative office building in Winghaven, its 1,200 acre office/residential and retail development. A 60,000 sq. ft. building, Wall Street II, has been announced for St. Charles. Neither building is under construction. Peoria-based Cullinan Properties, the developer of the Streets of St. Charles (former Noah’s Ark site), says that construction will begin this spring on phase one. Plans for the development include 140,000 sq. ft. of retail, theater and restaurant space, 100,000 sq. ft. of office space, 125,000 sq. ft. of hotel and 250,000 sq. ft. of residential space.

Major Office Acquisitions

Significant Leasing Activity