The COVID-19 pandemic era is driving change — and not only has that change not been bad for commercial real estate in the St. Louis area so far, but the region is expected to see continued growth and profit in the new year, according to the 37th SIOR Metro Market Forecast event of the St. Louis chapter held on Tuesday at the Ritz-Carlton in Clayton, Mo.
“We’re going through the biggest change in commercial real estate in all areas that have ever been seen,” said Patrick Sentner, SIOR, executive vice president of CBRE and SIOR global president. “The big question is when will we be going back to the office and what will that be like.”
On the national level, suburban CRE has been “OK” overall, but central business districts have suffered, Sentner noted. “Leases are being done, but done differently,” he said. “People are reducing the footprints (of their office spaces) by about 20 percent, and you have to have some flex patterns now.”
A major trend is flight to quality (FTQ) as companies move into Class A+ buildings, pay higher rents and sign for longer lease terms in return for free rents and major tenant improvement allowances, according to Sentner.
“The best buildings are the ones that make it easier to be in the office — those are winning. Tenants are having collaborative spaces. Rental rates are increasing and terms are increasing, but since tenants need less space, the money is the same. Responding to this trend can be an effective recruiting tool,” Sentner said.
While the office side is still adapting and reviving, the industrial side is a “completely different ballgame,” according to Sentner. “E-commerce has created incredible demand, and construction is at higher levels,” Sentner said.
Trends include open-ended pricing, with industrial land prices surpassing office and retail rates. Sentner predicted that there will be smaller tenants, and a need for holdover clauses and renewal rights will become “more important than ever.”
The St. Louis market has mirrored “unprecedented” national trends and headwinds in the industrial sector, said Wakeel Rahman, SIOR, vice president, acquisitions with NorthPoint Development.
“The numbers across the board are robust. The market is still fundamentally sound. Industrial is one of the tightest markets around town.”
St. Louis County has seen some of the largest deals. In 2021, more than 100 buildings sold at more square feet than Kansas City or Indianapolis for the first time, and sales volume was more than $1 billion.
“St. Louis has outpaced all competitors except Nashville,” Rahman said.
There has been compression of the cap rate across the country, with 3PLs driving growth more than general retail, Rahman said. An additional major driver is e-commerce penetration and increased inventory. From a demand perspective, that increase will continue.
There are some problems, such as “NIMBYism” (Not In My Back Yard resistance to industrial uses), supply chain delays and costs, permitting and entitlement concerns and construction costs.
“Warehouse fatigue is real,” Rahman said.
Rahman predicted that the pipeline of buildings to buy should improve, automation should continue to step up to offset the current labor shortage and the 2021 federal infrastructure legislation will create continued opportunities.
“Industrial will continue to be a healthy investment alternative,” he said.
While the overall picture for the office side of St. Louis commercial real estate looks good, there are some pain points caused by the pandemic, according to Michael Carlson, SIOR, executive managing director and principal at Newmark Zimmer. These include construction costs and timelines, a Catch-22 in budget prep, and older and dated buildings that will suffer in comparison to new ones or those that have been improved as companies seek a “wow factor” and create extensive amenity space.
“Separating (your building) from the pack can work,” Carlson said.
The future should see continued success in higher rents per square foot — in the low $40s and $50s. Campus conversions from owner to tenant also should increase — the Class B office sector, now at about 40 percent for both county and city, should see more user sales and more office space becoming residential.
National capital markets hit a record high of $717.46 billion in 2021 despite the pandemic, according to Rick Eiseman, senior vice president with CBRE.
“Capital continues to flow into the residential and industrial sectors. COVID appears to have been a momentary drop compared to the seven years it took to recover from 2008/2009 —2021 was definitely a year of portfolio sales.”
The overall impacts are familiar by now: working from home evolving into hybrid models are here to stay, pricing increases and replacement cost analysis in the construction industry, e-commerce with “a ton of money chasing these assets,” and a lack of distressed asset sales.
Eiseman called St. Louis “a great market” with fewer dramatic peaks and valleys than elsewhere.
“St. Louis generally mirrors national trends in office cap rates. The future should see a continuation of significant levels of investment in CRE and more value-added opportunities,” he predicted.
The event included recognition of David Randolph, first vice president, CBRE, as past chair of the Market Forecast and thanks to Scott Savacool, SIOR, CCIM, Sansone Group, and Christopher Fox, Gershman Commercial, as chairs of this year’s event.
Slides from the program will be available on the SIOR St. Louis website shortly.