Is demand strong for commercial real estate in St. Louis? Are investors looking for industrial and multifamily space here in which to sink their dollars? Are vacancy rates falling in retail strip centers? Are companies searching out Class-A office space?
The answers depend upon how you define the St. Louis area.
As with most major cities today, St. Louis’ downtown area is in flux. Development has slowed here, and far too much office space in the city’s center remains empty. Restaurants are closing early, and many never re-opened after COVID-19 shutdowns. Uncertainty reigns in downtown St. Louis.
But throughout the suburbs and the rest of the far-larger St. Louis County area? That’s different. Demand for industrial space throughout the county is soaring. Renters are flocking to multifamily buildings in walkable communities. Retailers are applying the strategies they embraced during the pandemic to keep the customers coming.
And investors? They see commercial real estate in St. Louis County as a safe bet for their dollars.
What is uncertain is how long this split between downtown St. Louis and its surrounding communities will remain. For that, the commercial real estate community – as is common today in many major cities – is firmly in wait-and-see mode.
What you see depends on where you look
James Fredericks, partner with the St. Louis office of law firm Armstrong Teasdale, said that the difference between commercial real estate development, sales and leasing activity is stark between downtown St. Louis and the rest of the St. Louis-area market.
“You are still seeing growth in other areas, but not in downtown St. Louis,” Fredericks said. “The downtown has its own problems. I have friends who won’t go to a baseball game downtown because they are afraid of crime. The restaurants close early. The residential community downtown should be increasing and appears to be dwindling in the core area except for the Ballpark Village development.”
St. Louis isn’t alone in this. Across the Midwest downtowns from Chicago to Minneapolis are struggling to bring the crowds back. Part of the problem remains the office sector. With so many people working from home, companies don’t need as much office space. All that empty space, and the reduction in daytime workers, is making running restaurants and retail spaces in downtowns more challenging, resulting in more closures and shorter operating hours.
Then there are safety issues. Many are worried about increasing crime rates in their downtown centers. That is keeping more tourists and residents alike from visiting the entertainment venues, museums, restaurants and shops of their downtowns. Until people again feel safe in their downtowns, these urban centers will struggle.
St. Louis has a unique challenge, too: As Fredericks says, St. Louis’ downtown offers dozens of entertainment areas. But these entertainment districts are smaller than the ones visitors would find in cities with urban centers that rely on only one or two entertainment centers.
“Having all these entertainment districts is great for people who live in St. Louis. For me, I don’t have to get bored going to the same place all the time,” Fredericks said. “For someone coming from another city, though, there is no real one place to go. That is part of the problem with the development activity in downtown. The downtown area is great if you live here, but a lot of people who don’t live in the downtown area don’t feel like searching for all these different entertainment areas, not when they are so spread out.”
Differing markets, differing results
Andrea Kendrick, managing director of investment sales in the St. Louis office of Berkadia, agreed that commercial real estate activity in the St. Louis market as a whole has been strong. She pointed to research from Berkadia showing that commercial deal activity hit a historic high in 2021 both nationally and in St. Louis.
Deal activity has been slowing, though, near the end of this year, probably because of rising interest rates. Berkadia’s numbers show that while the multifamily sector in St. Louis, for example, is outperforming other asset classes, deal activity was down in the third quarter of this year in this sector by 30% year-over-year.
“The capital markets landscape will continue to change rapidly,” Kendrick said. “Capital remains available, but investors have become more selective. We may see more loan assumption transactions as well as buyers and sellers becoming more creative with debt options.”
But in downtown St. Louis? Deal activity remains sluggish. Fredericks points out that the downtown core has seen very few new buildings during the last two decades. But the Clayton submarket, which is just 10 miles away, is extremely hot, one that is attracting a steady stream of new development.
That highlights Fredericks’ second big point: Yes, development and commercial activity is sluggish in downtown St. Louis. But the communities surrounding the urban core and those dotting St. Louis County are seeing strong leasing, sales and development activity in several commercial sectors.
An example? The multifamily sector is booming throughout suburban St. Louis communities, Fredericks said.
“People like the concept of being near the city of St. Louis,” Fredericks said. “We have good entertainment. We have one of the best-run baseball teams in America. People do want to live here. It is convenient and inexpensive. But they don’t necessarily want to live in downtown St. Louis. They do want to live in suburban areas like Webster Groves, Maplewood and Clayton. Those areas are on fire for multifamily demand. These areas are where investors are buying up buildings to turn them into multifamily properties.”
Kendrick said that there are several reasons for the strength of the industrial and multifamily sectors in St. Louis.
One of the most important? For many St. Louis residents, it remains more affordable to rent an apartment than it is to own a single-family home, Kendrick said. And as interest rates rise, this doesn’t look ready to change.
“With higher mortgage rates and continued market volatility, we’ve seen the cost of buying deterring homeownership,” she said. “Although multifamily experienced record rent growth, renting still remained cheaper.”
St. Louis’ third-quarter monthly effective rent of $1,220 was about 80% of the median monthly mortgage payment, Berkadia reported. This means that renting an apartment is an easier financial choice for many St. Louis residents, something that will keep the multifamily market strong.
And the industrial market throughout St. Louis County? It is thriving, too.
“The industrial market can’t be stronger,” Fredericks said. “St. Louis is in the middle of the country. It has access to multiple highways and railroads. From what I’m hearing from brokers and investors, developers can barely find enough land to build the next warehouse or industrial building. As a result, the price-per-square-foot on warehouse space has gone up in the St. Louis metro area.”
St. Louis has a price advantage in the industrial market, too. Kendrick said that businesses can rent industrial space in the St. Louis market for lower monthly payments than they can in several other Midwest markets.
Kendrick also pointed to employment growth as helping to fuel the industrial market across the country. In September of 2022, employment hit 99% of the pre-pandemic high of February, 2020. Manufacturing added 2,800 jobs annually and transportation, warehousing and utilities added 2,200 jobs through September of 2022.
The office market provides yet more evidence of the divide between downtown St. Louis and the rest of St. Louis County.
Berkadia research shows that the overall St. Louis-market office occupancy rate stood at 89.4% in the third quarter of this year, slightly outperforming the national average of 87.6%. St. Louis is also outperforming some major Midwest markets, including Chicago, which saw its office occupancy settle at 85% in the third quarter of this year, and Detroit, which saw this number hit 88.5%.
Kendrick said that the office market is seeing some positives as several of St. Louis’ biggest employers institute return-to-office plans. This includes BJC Healthcare, Washington University, Mercy, Boeing and SSM Health.
But not all submarkets are seeing as many positives. As Fredericks says, the downtown St. Louis office market is struggling today. That is impacting retail in these buildings, too. Fredericks says that office workers in downtown leave their buildings and go home without stopping at the restaurants and shops in their own buildings.
Large firms have moved from downtown to the suburbs, adding to the stagnant downtown office sector, Fredericks said.
Areas such as Webster Groves, Chesterfield, Clayton and Maplewood are walkable and bikeable. The restaurants are full of people. The shops are busy. It’s a better atmosphere, both for workers and multifamily residents, Fredericks said.
“Life is short,” Fredericks said. “It’s nice to live in a live-work-play area. I live two blocks from where I work and I am working for one of the largest law firms in the metro area of St. Louis.”
The retail sector in the St. Louis market is holding its own. Kendrick pointed to several new retail developments as evidence that there is life in this sector. This includes a Bass Pro store under construction in suburban Sunset Hills, Meijer opening its first St. Louis-area grocery store and Walmart’s announcement of a $240 million investment to update its Missouri stores.
The threat of rising interest rates
Commercial brokers, developers and lenders are concerned with the impact of rising interest rates. These higher rates have already scuttled some development and investment deals, in St. Louis and across the Midwest.
Fredericks, though, said that the industrial sector in particular is poised to overcome the hurdles of rising interest rates. The fundamentals of the industrial market are just too strong, he said.
“It is a trend in America to order items by mail. As a result, companies want to get you your products in one or two days or even one or two hours as opposed to one or two weeks,” Fredericks said. “Because of this, there are still a lot of warehouses going up.”