Rents in the major Class A office buildings in downtown St. Louis in 2008 are the same, or very similar, to the rents paid twenty five years ago in 1985. As St. Louis reels from several major corporate takeovers, corporate relocations leaving St. Louis and a struggling rebirth of the residential hip urban life, the commercial real estate housing corporations is at amazingly low occupancy costs…perhaps the lowest for a major US city. The question is: do these low prices represent a solid market value to attract and retain tenants in St. Louis; or does it portend a more sinister fatal economic reality – that there has been plunging negative growth in commercial real estate income – in effect revealing that downtown St. Louis commercial real estate is dead in terms of return on investment, equity appreciation or value? By any standard, leasing rates that are the same or similar in 2008 as they were in 1985 are beyond intelligent explanation. Any attempt at positive spin – other than expressing what a bargain to tenants to keep and expand their presence – would appear to be ridiculous.
PROBLEM OR OPPORTUNITY? It takes only a brief review of actual examples to get a barometer of St. Louis economic positioning. (Rates shown are per rentable sq. ft. per year, full service leases). The following list is submitted in the following order: Building name, Rate in 2008 Source: The building’s current publicly-quoted rates, Rate in 1985 Source: BOMA Leasing Guides 1983-85 and past leasing manager, and the change over twenty-five years.
1010 Market $16.50 $18.00 loss of $1.50
Mercantile/USBank $19.50 $18.00 gain of $1.50
St. Louis Place $17.00 $18.50 loss of $1.50
MCI/Delloitte $21.00 $21.00 no change
One Financial Plaza $19.50 $19.50 no change
Centerre/Bank of Am $20.00 $19.00 gain of $1.00
701 Market $22.00 $21.00 gain of $1.00
Metropolitan Square $21.00 $20.00 gain of $1.00
Real estate industry market data and trends use known facts of vacancy factors and rental rates to report to the media the “status” of the market…actually the status of the buildings and from which the reader is left to discern market conditions. The ranges of vacancy, often sold to the media by real estate brokers and landlords, conveys the impact to the owner of the real estate, investors and builders and developers while leaving no real value to the engine of the economy, the tenant. Tenants of all business types and sizes have no real eyesight as to how the market data impacts their occupancy costs, opportunities or threats. Accordingly, when information is available that is both tenant-relative and a telling indicator of underlying market conditions, this information should be shared. In the past, all this data is kept private among real estate brokers and data houses like CoStar and Loopnet, both of which report only building-related information. It is not in the interest of any owner or broker to convey the actual economics of proposed or closed lease transactions; or how the current rates compare to twenty-five years ago.
In these examples you can see that rather than viewing old tracking information on non-tenant-related information (e.g. vacancy factors, shadow vacancies, construction starts) tenants can get a crisp, real-time snapshot of present market realities never before provided. In effect, with inflation over the last 25 years having been approximately 118% (CPI, all urban consumers 1983=99.6 and 2008=216.63), rents in downtown St. Louis simply stopped dead in time like a fly in ancient sap.
What is somewhat worse is that during the 1980s when a number of these buildings were built, they were provided with tax abatement effectively lowering the then current real estate tax by half thereby allowing the owner to expend less on tax and pass this through to the tenants. That abatement is now expired and the buildings have been at full tax for some time; yet in spite of this, the rents are still frozen in the Reagan administration.
The larger question is: Does this data suggest building owners and investors have no good investment in downtown St. Louis, or Do tenants realize the great bargain of downtown St. Louis compared to the county or even to 1985, or is downtown St. Louis simply not able to compete with other cities or St. Louis County, and or is this data an indicia of the burden of the city earnings tax?
On this premise, over the course of the last year, there are numerous examples of additional information which is NOT a part of the routinely reported real estate market data, however is a part of the actual occurring market realities. One publicly-traded company tenant (whose lease is a part of the public record), moving within St. Louis County was successful in having the new landlord pay for an entire year of the tenant’s existing lease; another tenant in St. Charles County (a sprawling suburban market west of St. Louis) was offered one year free rent, plus an extremely high tenant improvement allowance as an inducement to lease in their building, as two examples.
St. Louis has long tried to respond to the shifting gravity from more progressive cities. The old river town once heavy in rail business, hat and shoe manufacturing, department store businesses and beer producers, now faces an additional burden of attempting to convince investors of commercial real estate of the bargains in value, and the hopeful elevation of rental rates to bring about the payoff in the future.
The immutable data for office rents suggests that 1) tenants in downtown St. Louis ought to thank their lucky stars, 2) present owners have little hope of market appreciation, 3) sellers will have no choice but to sell on the cheap, and 4) new investors can buy on the cheap, but will likely face flat or negative growth and asset appreciation (based on capitalization). Take your pick. It is good news for tenants, bad news for owners and investors; and perhaps very troubling for St. Louis as a downtown urban center trying to gain competitive ground within its region and with other major cities.
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