Economy
St. Louis labor market fundamentals ended the year with continued
growth and optimism as unemployment reached further historical
lows during the fourth quarter of 2018. Seasonally adjusted
unemployment reached 3.3% as of quarter-end, which is 40 basis
points (bps) lower than the national average of 3.7%. In addition,
office-using employment has added nearly 8,100 jobs to the St. Louis
economy over the past 24 months. As the U.S. economy grew at a
steady clip, the Federal Open Market Committee (FOMC) committed
to raising interest rates by 25 bps during their December meeting,
marking the fourth increase in 2018. This will adjust the new range
to 2.25%-2.50%, the highest level since 2008. Heading into 2019, the
FOMC has lowered its projection for the number of rate hikes from
three to two.
Office product in St. Louis experienced roughly 73,000 square
feet (sf) of positive net absorption in the fourth quarter, totaling
228,000 sf of positive absorption for the year. In fact, 2018 marked
the fifth consecutive year with positive absorption. Occupier demand
continued to drive up rental rates, which increased another 2.6% over
the past three quarters, totaling an increase of $0.50 per square foot
(psf). Conversely, this demand has driven supply-side fundamentals
such as construction, which registered 1.4 million square feet (msf) of
activity throughout the quarter.
West County
In 2018, West County’s vacancy rate increased 210 bps relative
to year-end 2017. Though an increase in vacancy can be a cause
for concern, West County’s bump was largely the result of TD
Ameritrade’s (TDA) acquisition of Scottrade and the resulting
office space consolidation. TDA vacated nearly 133,000 sf at 13075
Manchester Road during the first half of the year, 50,000 sf at 12855
Flushing Meadows Drive in the fourth quarter and is expected to
vacate approximately 180,000 sf of space at 12800 Corporate Hill
Drive in the first quarter of 2019. Because of TDA’s activity, West
County now leads all markets in aggregate square footage of
contiguous blocks of space upwards of 20,000 sf, totaling roughly
580,000 sf across ten spaces. Given the recent influx of Class A
contiguous space, the expectation is that continued occupier demand
across St. Louis will soak up a significant portion of this supply over
the mid-term. In fact, a portion of TDA’s large vacancies are already
spoken for as Drury Development, which acquired 13075 Manchester
Road from TDA in early 2018, plans to occupy a portion of the building
in late 2019.
ST. LOUIS OFFICE
Overall Vacancy
Overall Net Absorption/Overall Asking Rent
4-QTR TRAILING AVERAGE
Market Indicators (Overall, All Classes)
Q4 17 Q4 18 12-Month
Forecast
Vacancy 11.7% 11.8%
Net Absorption (sf) 282k 73k
Under Construction (sf) 2.2M 1.4M
Average Asking Rent* $19.61 $19.40
Economic Indicators
Q4 17 Q4 18 12-Month
Forecast
St. Louis Employment* 1,379k 1,389k
St. Louis Unemployment* 3.6% 3.3%
U.S. Unemployment 4.1% 3.7%
Class A Contiguous Space
FEW LARGE BLOCKS OF CLASS A SPACE AVAILABLE
Class A Submarket Comparison
SUBURBAN CLASS A OCCUPANCY CURRENTLY EXCEEDS 92.4%
Vacant Space by Submarket
ST. LOUIS CITY CONTAINS 35.0% OF THE VACANT SPACE IN THE METRO
Outlook
• Keep an eye on the impact of Opportunity Zone legislation,
a new federal initiative that provides a tax advantage to
investors who invest capital gains into historically disinvested
areas. Of the top ten Opportunity Zones in Missouri as
defined by a December 2018 study by Smart Growth
America, four large tracts of downtown St. Louis make the
list.
• Looking ahead through 2019, expect continued rental rate
growth coupled with additional vacancy decline. A strong
economic outlook and controlled speculative development
bodes well for the office market across the St. Louis
metropolitan area.