Market Overview

Like other areas of the nation, the St. Louis region continues on the road to economic recovery, albeit slow. The August 2009 unemployment rate was 9.9% (seasonally adjusted). Over 36,000 jobs have been lost since August 2008. The Missouri Economic Development Commission, however, reports that 2,200 jobs were gained in September in the private education and local government sectors. The manufacturing sector continues to decline, with the resulting job loss. General Motors cut one of its two shifts in August, eliminating almost 900 jobs. On the bright side, Major League Baseball’s All Star game held at Busch Stadium was a major hit for St. Louis providing a positive economic impact in St. Louis’ CBD.

Median price and existing home sales in the St. Louis region generally follow national trends. The housing market appears to be turning, with sales increasing on a monthly basis; however, large quantities of residential lots remain vacant due to developers’ financial problems. The local median housing price fell only 10.1% between second quarters 2008 and 2009 to $133,600. For the same period, the U.S. median housing price decreased 15.6% to $174,100. The number of foreclosures continues to decline.

Multifamily permits declined 37.8 % for the year through August 2009 when compared to the same period in 2008. Because of the economy, demand is weak for high-end apartment units and strong for moderately priced units (under $600 a month). Likewise, rental rate increases have slowed due to the weak economy and additional inventory from for-sale condominiums, a market that is barely moving. Sales of apartment complexes have continued where the developments had assumable long-term financing or provided large down payments. The largest sale of the year so far occurred during third quarter when St. Louis-based Midwest Diversified Properties purchased the 694-unit Baxter Crossing in West St. Louis County for more than $42 million.

The retail market continues to weaken with consumers still not ready to spend. The St. Louis regional vacancy is over 11%, with St. Charles County being the most overbuilt. The average rate for retail space has declined to just over $12 per sq. ft. with many concessions and shorter lease periods. Minimal construction is occurring and finding tenants is difficult. The industrial market is also troubled. Absorption has been positive for year-to-date, primarily due to the expansion of Proctor & Gamble into 372,000 sq. ft. of the Hershey Foods building in Edwardsville, Illinois. As the vacancy rate has increased to about 8%, sale prices and lease rates have fallen and new construction has almost stopped. In the South County submarket, the addition of the closed 5.1 million sq. ft. Chrysler plants and its suppliers will add more than two percentage points to the overall vacancy rate.

During third quarter 2009, the office market experienced a decline in vacancy, slightly increased rents for Class A and B space, and a small decrease in amount of Class A sublease space available. Some things, however, have not changed. There are few large office spaces available, financing is tight and very few speculative buildings are under construction. In third quarter 2009, some were taking advantage of deals in the marketplace or were renegotiating existing leases with different rates and terms. Leases, especially renewals, tend to be short-term, one to five years. Tenants are occasionally using lower lease rates to move to better quality buildings. Rent abatement, tenant improvement allowances and higher brokerage commissions are common in the marketplace.

At third quarter 2009, total available office space was 11.1 million sq. ft., or 14.6% of inventory, about the same as second quarter, but still up from 10.5 million sq. ft. at first quarter 2009. Year-to-date overall absorption was a negative (880,200) sq. ft. All the submarkets experienced negative overall absorption except North County, West County and St. Charles. Of these three, only St. Charles experienced over 100,000 sq. ft. of absorption. New deliveries for year-to-date totaled 308,300 sq. ft., mostly Class B space. Average asking rent for all properties was $18.45 per sq. ft., up $0.13 per sq. ft. over second quarter 2009 and reversing its decline since third quarter 2008.

Demand for Class A space increased during third quarter 2009. The overall availability for Class A office space declined to 15.8% at third quarter 2009 from 16.2% at second quarter, and available space decreased by about 100,000 sq. ft. or 5.3 million sq. ft. Absorption for Class A properties was a negative (520,400) sq. ft. The CBD Class A availability rate decreased to 19.8% or 2.0 million sq. ft. at third quarter from 20.8% at second quarter 2009. Availability in the suburban markets decreased to 14.0% at third quarter 2009 from 14.2% at second quarter 2009. Available Class A suburban space remains at 3.3 million sq. ft. Average Class A asking rents rose to $21.76 per
sq. ft. during third quarter from $21.53 per sq. ft. during the second quarter of 2009. Class A sublease space almost doubled during second quarter 2009, increasing from 453,600 sq. ft. to 822,000 sq. ft. or 15.1% of all available Class A space. During third quarter, sublease Class A space decreased by 6,000 sq. ft. to 816,000 sq. ft. The largest amounts of available Class A sublease space are in South County (232,400 sq. ft.), the CBD (157,300 sq. ft.), West County (139,300 sq. ft.) and St. Charles County (101,400 sq. ft).

The availability rate for Class B office space rose to 13.5% during the quarter from 13.3% at second quarter 2009. Total available Class B space is still 3.7 million sq. ft. Absorption for year-to-date 2009 was a negative (178,200)
sq. ft., with four submarkets experiencing negative absorption. Asking average rent was $17.69 per sq. ft. at third quarter 2009. The Class C availability rate increased to 13.8% during the quarter from 13.4% at second quarter 2009. Available Class C space is 2.1 million sq. ft. Absorption is now negative (181,600) sq. ft. The average asking rental rate for Class C space declined to $15.89 per sq. ft. at third quarter.

With the national credit crunch, investment office sales have virtually stopped. No major purchases were made in the St. Louis region during third quarter 2009 although there are rumors that Macy’s has sold the 1.1 million sq. ft. Railway Exchange Building for $35 million, to close later. The Pierre Laclede Center in Clayton is now on the market.

The five-mile section of I-64, east of I-170 into the City of St. Louis, is progressing rapidly and is to reopen probably before year-end 2009. Funding for the new toll-free, four-lane, $900 million bridge north of Downtown St. Louis is considered secure, and construction expected to begin in 2010.

Lambert St. Louis International Airport has established a $1.7 million airline incentive program to attract replacement airlines. American Airlines has announced a plan to significantly cut its flight schedule in St. Louis in April 2010. Southwest is expected to take a hard look at some of the dropped routes.

Investments in Madison and St. Clair counties in Illinois are strong. Work continued on Scott Air Force Base’s $388 million makeover, the Conoco and EnCana’s Conoco Phillips $4 billion Wood River refinery expansion, Albingoa Bioenergy’s $200 million ethanol production facility, and the $2.9 billion Prairie State Energy synthetic natural gas plant about 40 miles southeast of St. Louis. Sunoco/U.S. Steel’s new $355 coke-making facility will begin supplying the steel mill in the fourth quarter of 2009 in Granite City. Local governments are also developing a $200-500 million levee restoration plan.

Market Highlights

• The overall availability rate remained steady at 14.6% during the third quarter and is 1.4% higher than one
  year prior.
• Overall average asking rents rose during the quarter to $18.45 per sq. ft., from $18.32 per sq. ft. at the end
  of second quarter 2009.
• Overall absorption at the end of third quarter 2009 was negative (880,000) sq. ft. compared to 340,000 sq. ft. one year prior. Class A absorption ended the quarter at negative (520,000) sq. ft., Class B absorption was negative (178,000) sq. ft. and Class C was negative (182,000) sq. ft.
• Class A average asking rents rose $0.23 per sq. ft. over the quarter to $21.76 per sq. ft. with the Clayton submarket commanding the highest average rental rate at $25.95 per sq. ft.
• Class A sublease space rose 0.3% during third quarter 2009 to 816,000 sq. ft. or 15.4% of inventory, compared
  to only 6.0% one year prior.
• Major transactions this quarter include BDK Accounting’s 28,200-sq.-ft. lease in the CBD submarket and
  St. John’s Mercy Healthcare’s 23,300-sq.-ft. lease in the West County submarket.

Market by Market Review

Central Business District

Total Inventory: 26.2 mil. sq. ft.
No. of Buildings: 200
Average Asking Class A Rent: $17.99
Average Asking Class B Rent: $15.65
Availability Rate: 17.4%
Available Space: 4.6 mil. sq. ft.
New Deliveries: 33,000 sq. ft.
Net Absorption (YTD): (131,700) sq. ft.

The most exciting event this year has been the opening of the widely acclaimed $30 million Citygarden on two blocks along the Gateway Mall. This interactive sculpture garden has become a destination for many people as well as a welcoming spot for Downtown workers.

The CBD is the only submarket with large contiguous spaces readily available in One City Centre, 1010 Market and the former General American building. Additional spaces will be available when Husch Blackwell Sanders and Armstrong Teasdale move from the Downtown area.

The office market in the CBD has remained stalled for some time now. Current overall availability is 4.6 million sq. ft. or 17.4% of total inventory. Year-to-date absorption is a negative (131,700) sq. ft. As of the third quarter, available Class A space was 2.0 million sq. ft. or 19.8%. Available Class A sublease space jumped during second quarter 2009 to 150,200 sq. ft. or 7.1% of available Class A space, and increased to only 157,000 sq. ft. or 7.8% of available Class A space during third quarter 2009. Class A space had negative absorption of (87,800) sq. ft. for year-to-date 2009. Average asking rent for Class A space rose slightly during third quarter 2009 to $17.99 per sq. ft. from $17.86 per sq. ft. at second quarter 2009.

After a good year in 2008, available Class B space is nearly 1.4 million sq. ft. or 15.6% of inventory as of third quarter 2009. Year-to-date absorption ended the third quarter with a negative (42,600) sq. ft. Average asking rent for Class B space rose slightly to $15.65 per sq. ft.

Roberts Tower, a $70 million condominium building, is under construction. The 20,000 sq. ft. Schnucks Culinara, a supermarket, opened this summer. The Edward Jones Dome, home of the St. Louis Rams, is getting a $30 million upgrade, and a new $16 million parking garage and 10,000 sq. ft. of retail space is underway at Tucker Boulevard and Clark Avenue.

SCP Worldwide, owner of the St. Louis Blues, Scottrade Center and adjoining opera house, has plans for a $74 million renovation of Kiel Opera House into an entertainment venue. The Public Library has announced plans for a $70 million renovation of its nearly 100-year old Central building. In addition, Heisman Properties was selected to renovate the Municipal Courts building (now known as 1300 Market) into 160,000 sq. ft. of office and retail space.

Work on the proposed $550 million, multi-use Ballpark Village was limited to a softball field and parking lot during 2009. Final approval for the bonds is still needed. The developer, Cordish Company and the Baseball Cardinals, have said that they will delay the sale of over $100 million in bonds for the first phase until the municipal bond market improves.
.
Rehabilitation projects such as the Park Pacific, a mixed-use development of apartments, retail space, parking and 88,000 sq. ft. of office space, the Laurel (former Dillard’s department store), into a 212-room Embassy Suites, 205 apartments and first floor retail, Cupples Station 9, Syndicate Trust and the Farm & Home buildings have been delayed while awaiting financing.

Macy’s has announced plans to reduce the size of its Downtown store from seven stories to three stories. Rumor has it that the 22-story, 1.1 million sq. ft. Railway Exchange building on the market where the department store is located has been sold. Also on the market are the 555 Washington and 505 Washington buildings. The St. Louis Centre retail mall has been shuttered. However, Lewis, Rice and Fingersh will relocate its offices into the adjoining One City Centre tower. The building will be updated and the law firm will receive help with technology and furniture with subsidies from the state and city.

North of Downtown, Paul McKee continues to present plans to residents and the City for 4.5 million sq. ft. of new office buildings and stores and 10,000 new homes. Streets, sewers, power grids, parks and other amenities would be added over the next 15 years on roughly 500 acres. McKee owns much of the land needed and will require millions of dollars from the City for financing.

Midtown

Total Inventory: 1.2 mil. sq. ft.
No. of Buildings: 19
Average Asking Class A Rent: $21.50
Average Asking Class B Rent: $15.37
Availability Rate: 7.7%
Available Space: 0.1 mil. sq. ft.
New Deliveries: 0 sq. ft.
Net Absorption (YTD): (4,300) sq. ft.

This small submarket has the lowest availability rate still, despite its availability rate increasing to 7.7% at third quarter from 3.9% at first quarter 2009. Total available space is only 88,900 sq. ft. Available Class A space is 39,500 sq. ft., none is sublease space.

During third quarter 2009, average asking rent for Class A space decreased to $21.50 per sq. ft. from $23.63 per sq. ft. and Class B space rose to $15.37 per sq. ft.
.

CLAYTON

Total Inventory: 9.0 mil. sq. ft.
No. of Buildings: 117
Average Asking Class A Rent: $25.95
Average Asking Class B Rent: $20.06
Availability Rate: 12.6%
Available Space: 1.1 mil. sq. ft.
New Deliveries: 0 sq. ft.
Net Absorption (YTD): (136,500) sq. ft.

The Clayton submarket remains healthy. During third quarter, the overall availability rate declined to 12.6% from 13.2% at second quarter 2009. Absorption was positive for the quarter and year-to-date absorption declined to negative (136,500) sq. ft. During third quarter 2009, average asking rent for Class A space rose to $25.95 per sq. ft. from $24.30 per sq. ft. while Class B increased only slightly from $19.86 per sq. ft. to $20.06 per sq. ft.

Class A availability is currently 11.2%, with 0.5 million sq. ft. available. Available sublease Class A space almost doubled during second quarter 2009 to 48,000 sq. ft. or 8.9% of total Class A space, but declined during the third quarter to 41,800 sq. ft.
or 8.2% of total Class A space. Absorption for third quarter 2009 was a negative (18,300) sq. ft. Asking rent for the Centene building currently under construction is said to be $32.50 per sq. ft. , substantially higher than the submarket’s current average asking rent of $25.75 per sq. ft.

The availability rate for Class B space declined during third quarter 2009 from 17.0% to 16.4% or 0.5 million sq. ft. Absorption year-to-date 2009 was a negative (91,900) sq. ft., but was positive during the third quarter.

The first building in Centene Plaza is well underway. The 477,000 sq. ft. of office space will be mostly occupied by Centene Corp. and Armstrong Teasdale, a law firm. No announcement has been made of tenants for the 28,125
sq. ft. of retail space.

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 $568 million mixed-use development for Brown Group has also been placed on hold. RJ York has signed with Westin Hotels for a 245 room hotel with 16,000 sq. ft. of meeting space and 20,000 sq. ft. of retail space at the corner of Central and Maryland Avenue. Construction is awaiting financing but the developer hopes to begin construction by late spring 2010.

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.

Gateway Real Estate Partners has a 3.3 acre tract (formerly Schnucks supermarket) under contract at Hanley and Clayton Roads, Plans currently include 227,000 sq. ft. of retail and office space and a 200-room hotel. Nothing further has been announced.

The market for luxury condominiums in Clayton has slowed considerably, and it is unknown if approved developments that include condominiums will be built. The Trianon, a mixed-use development, including a six-story, 175-unit upscale apartment building, a 26-story condo development and 30,000 sq. ft. of retail space, was planned for Forsyth Boulevard in both University City and Clayton by Chicago-based Orchard Development. Carondelet Village, a mixed-use village of retail, residential and a hotel would also include 110,000 sq. ft. of boutique office space. All are waiting for financing to be secured.

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. 

Creve Coeur/Westport

Total Inventory: 9.5 mil. sq. ft.
No. of Buildings: 130
Average Asking Class A Rent: $22.13
Average Asking Class B Rent: $18.00
Availability Rate: 17.1%
Available Space: 1.6 mil. sq. ft.
New Deliveries: 165,000
Net Absorption (YTD): (363,000) sq. ft.

The Creve Coeur/Westport office submarket appears to be stepping backward. The availability rate increased to 17.1% at third quarter 2009 from 13.5% at year-end 2008. Available space is over 1.6 million sq. ft. Absorption for year-to-date 2009 was negative (363,000) sq. ft., the worst in the region. During the quarter, the average asking rental rate activity was mixed. Class A average asking rent decreased only slightly, but continues a decline that began several years ago. Average asking rent for Class B space increased slightly to $18.00 per sq. ft.

During third quarter 2009, the amount of available Class A rose to 0.8 million sq. ft. with absorption at negative (227,900) sq. ft. The availability rate increased to 16.7% at third quarter from 15.9% at second quarter 2009. Available sublease Class A space more than doubled during third quarter to 85,300 sq. ft. or 10.8% of Class A available space. Class B absorption ended the quarter at negative (29,500) sq. ft. Available Class B space is nearly 0.6 million sq. ft. or 15.3% of total inventory. 

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: 9.6 mil. sq. ft.
No. of Buildings: 111
Average Asking Class A Rent: $17.89
Average Asking Class B Rent: $16.17
Availability Rate: 12.5%
Available Space: 1.2 mil. sq. ft.
New Deliveries: 0 sq. ft.
Net Absorption (YTD): 7,000 sq. ft.

During third quarter 2009, the North County submarket was stable. Available space remained at 1.2 million sq. ft. or 12.5% of inventory. Absorption for the year-to-date at the end of third quarter was 7,000 sq. ft. The average asking rent for Class A space rose, however, during third quarter 2009 to $19.89 per sq. ft. Class B rents declined slightly.

Available Class A space now totals nearly 0.6 million sq. ft. or 18.5%, 10.5% or 58,400 sq. ft. of which is sublease space. Absorption for Class A space for year-end 2009 was 12,400 sq. ft. Absorption for three quarters of 2009 for Class B space was 5,300 sq. ft. About 0.4 million sq. ft. or 8.6% of Class B space is available, about the same as second quarter 2009.

Build-to-suit developments are popular in the submarket. Duke Realty has a 116,000 sq. ft. building underway for Monsanto. Edward D. Jones has opened its 372,000 sq. ft. building, half for training and half office space, on its Maryland Heights campus, and will add another 250 employees to its recently hired 500 employees. Emerson recently opened its $50 million, 35,000 sq. ft. data center on its campus. A $60 million, 221,000 sq. ft. building is under construction in NorthPark. The building is being considered by Express Scripts, headquartered nearby, for a drug distribution facility. No decision has been reached by the company, however.

south County

Total Inventory: 8.4 mil. sq. ft.
No. of Buildings: 155
Average Asking Class A Rent: $22.17
Average Asking Class B Rent: $18.97
Availability Rate: 11.7%
Available Space: 1.0 mil. sq. ft.
New Deliveries: 0
Net Absorption (YTD): (360,000) sq. ft.

The South County submarket is being hit hard in both the office and industrial sectors. Anheuser-Busch InBev is subleasing 150,000 sq. ft. at its Sunset Hills campus, with the potential for several thousand square feet of space to be vacated. Maritz is also marketing space at its campus. Closing of the Chrysler plants and its suppliers is putting nearly 6 million sq. ft. of industrial space on the market.

Available office space has risen to nearly 1.0 million sq. ft. and is now 11.7% of total inventory, down from 12.3% at second quarter 2009. Net absorption for year-to-date was negative (359,900) sq. ft. Nearly 0.5 million sq. ft. of Class A space is currently available, 232,400 sq. ft. or 47.5% of which is sublease space. Average asking price for Class A space rose slightly during the third quarter, to $22.17 per sq. ft. from $22.02 per sq. ft.

Available Class B space has been climbing since year-end 2007 but remained stable during third quarter 2009. Class B space is nearly 0.4 million sq. ft. or 10.1% of inventory. Average asking rent, however, continues its decline, and was $18.97 per sq. ft. at the end of third quarter of 2009.

Keane Insurance will move from leased space to a $6 million, 21,000 sq. ft. build-to-suit in Kirkwood. In the Manchester/I-270 area, Edward D. Jones has a 225,000 sq. ft. expansion to its headquarters under construction. No speculative office space is under construction. The first phase of Pinnacle’s $375 million River City casino and hotel complex is underway.

West County

Total Inventory: 8.3 mil. sq. ft.
No. of Buildings: 128
Average Asking Class A Rent: $22.94
Average Asking Class B Rent: $20.12
Availability Rate: 13.2%
Available Space: 1.1 mil. sq. ft.
New Deliveries: 63,700 sq. ft.
Net Absorption (YTD): 1,000 sq. ft.

The West County submarket is experiencing small fluctuations in availability over 2009. At third quarter 2009, 1.1 million sq. ft. was available or 13.2% of inventory. Year-to-date absorption was only 685 sq. ft. Available Class A space is now 0.7 million sq. ft., 19.3% or 139,300 sq. ft. of which is sublease space. Class A absorption during year-to-date 2009 was 9,800 sq. ft. Average asking rent for Class A space decreased to $22.94 per sq. ft. from $23.00 per sq. ft. at year-end 2008.

Scottrade plans a $36.3 million expansion, including a parking garage, to its headquarters in Town & Country. Sachs Properties had announced a second building of 150,000 sq. ft. in Chesterfield Village. 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. All appear to be awaiting improvements in the marketplace.

St. Charles

Total Inventory: 4.5 mil. sq. ft.
No. of Buildings: 66
Average Asking Class A Rent: $21.52
Average Asking Class B Rent: $17.19
Availability Rate: 10.5%
Available Space: 0.5 mil. sq. ft.
New Deliveries: 46,500 sq. ft.
Net Absorption (YTD): 107,500 sq. ft.

Third quarter 2009 brought little improvement to the St. Charles County submarket. Year-to-date absorption was 107,500 sq. ft., still the best in the region but down from second quarter 2009. Overall availability is 0.5 million sq. ft. or 10.5% of inventory at third quarter 2009.

Available Class A space is now 184,400 sq. ft. or 7.2%, 55.0% or 101,400 sq. ft. is sublease space. Year-to-date absorption was 72,300 sq. ft. The average asking rent rose to $21.52 per sq. ft. at third quarter from $21.06 per sq. ft. at second quarter 2009. Class B availability rose to 201,900 sq. ft. or 14.5% of inventory. Absorption year-to-date 2009 was 26,700 sq. ft. The Class B average asking rent has declined to $17.19 per sq. ft. from $18.22 per sq. ft. at year-end 2008.

BJC Healthcare is building a $30 million, 40,000 sq. ft. data center as part of its campus in O’Fallon. 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. A third building, the 132,000 sq. ft. West Highland office building will be financed by tax-exempt bonds.

Construction was expected on phase one this spring of Peoria-based Cullinan Properties’ Streets of St. Charles (former Noah’s Ark site), but to date nothing has happened on the site. 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