St. Louis Office Market Report

Office tenants in St. Louis are adjusting their space needs downward as leases expire, leading to a decrease in square footage per worker. Concurrently, hiring in office-dependent industries has slowed, resulting in a vacancy rate of 10.4% at the start of 2024, one of the highest in a decade. However, occupancy losses have started to stabilize, with a positive absorption of 830,000 square feet last year, attributed to new developments and a significant occupier’s decision to bring employees back to the office.

The sublease market has shown improvement recently, although it’s still above the long-term average. There’s been a decrease from the peak, which has particularly affected areas like Chesterfield/Highway 40 and Earth City/Riverport due to existing vacant buildings. Despite this, St. Louis maintains a cost-effective office market, with rental rates at $22.00 per square foot, similar to rates seen in Kansas City and Indianapolis. However, rising rents and high construction costs pose challenges to new office developments, prompting interest in repurposing existing buildings. Notably, there’s a divergence in market segments, with properties in Clayton experiencing increased rates, while the CBD faces softening demand and receivership of large towers.

Investor activity has slowed significantly over the past year, with total investments of $156 million, contrasting sharply with previous peaks of $795 million in Q1 2022. Weak fundamentals and higher borrowing costs are expected to keep the investment market subdued, with the office market recovery likely to lag due to lingering demand uncertainties.

St. Louis Industrial Market Report

Despite the softening of industrial tenant demand in St. Louis, industrial space availability remains limited with a vacancy rate of 4.3% at the beginning of 2024. This rate has stayed flat over the past year, contrary to the national trend of rising vacancies in 2023. In recent quarters, the local tenant base has expanded, but the impact of declining macroeconomic conditions has been evident in leasing and absorption rates this year. Absorption in 2023 decreased to 1.8 million SF from the prior year’s 3.2 million SF, with some expansions offset by space givebacks from larger occupiers like Dial, ITF, and Walgreens.

As major tenants reduce their operations, leasing activity has decelerated, marking an 18% decline in 2023 from 2022 levels. This trend may result in a modest uptick in vacancy rates in the first half of 2024 if demand remains at its current level. Developers are scaling back due to higher interest rates and stricter lending requirements, resulting in primarily build-to-suit projects rather than speculative construction. The construction pipeline for the region is limited, measuring only 3.6 million SF at the start of 2024, which is considerably lower than the national average.

Rent growth has also slowed to 4.8% year-over-year, down from a peak of 7.9% in 2022, with projections indicating further slowing due to a cooling economy. However, downside risks for rents in St. Louis are comparatively limited due to constrained supply-side pressures.

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