HEARTLAND SNAPSHOT, NOVEMBER 2011

St. Louis Office: Still A Tenant’s Market

Schmelzle

Flat is the new up. That quip came from a Federal Reserve economist in September after confirming that we are in another recession. His words are reflected in the St. Louis office market, which continues to be anemic. The overall availability of office space inched up to 11.2 percent in the third quarter compared with 10.8 percent during the same period a year ago.

 As with all markets, disappointing economic and job growth setbacks, the European fiscal turmoil and political gridlock in Washington impact the St. Louis region. A full recovery may be months, if not years, away. We do not expect the market to bounce back until unemployment rates drop to pre-recession levels.

Granted, there are signs of increased market activity, but the uptick is sporadic with minimal actual growth across the region. Net absorption for office space in the third quarter was 121,405 square feet compared with 414,688 square feet in the same quarter a year ago, a drop of 71 percent.

The St. Louis CBD market remains slow. Yet, Stifel Nicholas’ pending acquisition of One Financial Plaza, a 430,000-square-foot Class A building, plus Ralcorp’s decision to renew its approximately 200,000 square foot lease in the Bank of America Plaza building are positive signs of some market stability for now.

The national availability rate of 17.3 percent is slightly down from the third quarter of 2010, the high point since 1993, according to
CresaPartners. The average rents are still well below the highs by more than 25 percent in 2008 in most markets.

In most places it remains a tenant’s market and an especially good time for creditworthy tenants to exercise their leverage in negotiations with landlords. While some owners are becoming more bullish, most are focusing on tenant retention at almost any cost, as demand remains sluggish.

Modest job growth remains an issue and unused “shadow space” puts further pressure on owners. Companies will backfill that space first as they hire rather than expand. At the same time, more than 70 percent of transactions continue to be renewals rather than relocations.

Corporate objectives

Over the last decade, the corporate real estate environment has changed dramatically. Today’s large corporate users continue to raise their performance expectations of real estate service advisors.

This demand typically requires a single point of contact to meet these heightened expectations and to assist the corporate user in reaching its strategic real estate goals and objectives.

As corporations continue to gauge business trends, companies are addressing changes in the workforce and reviewing space utilization. Often referred to as creative workplace solutions, companies focus on increasing productivity and reducing real estate expenses.

Companies look for more flexible lease terms to accommodate changing work environments and to help create a more efficient work space that leads to lower expenses.

Overall, the challenge centers on how to best utilize your space and manage change. Real estate providers can best meet this challenge by securing the support of management and setting realistic expectations.

The common goal we often hear from clients is that they want more flexibility in their term lengths without paying a premium or funding a majority of required tenant improvements (TIs).

Today’s tenants depend on their advisors to not only secure economic concessions, but also to secure rights for future flexibility, such as contraction, termination and/or possible expansion options.

Tenants also are placing greater emphasis on a landlord’s ability to perform under the Subordination, Attornment and Non-Disturbance Agreement (SNDA) and other protections under the lease.

The commercial industry forecast for St. Louis reflects realistic expectations of a modest return to “the new normal.” Here’s what we can expect:

• An increase of defaults on high-profile assets will become more evident.

• Corporations will remain cautious about their real estate decisions, large or small.

• Tenants will weigh the need for flexible lease terms against likely rent hikes in the next two to three years as market conditions improve.

• Corporations need to consider the impact of the impending Financial Accounting Standards Board (FASB) changes when making real estate decisions. 

• The wall of debt maturity that will come due between now and 2015 still may present short- and long-term challenges for the remainder of 2011 and into 2012.

• Markets that will continue to expand and look for opportunities to build new facilities include health care and senior living.

— Ann Schmelzle is director of corporate services in the St. Louis office of CresaPartners.

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