St. Louis - CRE Market Minute

May 3, 2023

Downtown metros have been hit the hardest post-pandemic; there is a lack of office activity, foot traffic, and investment demand. Some markets have been able to revitalize their downtown and execute a swift recovery, but like its mid-west counterparts, St. Louis' downtown is suffering. According to our featured guest Joseph Dusch, the deterioration of St. Louis' downtown was an ongoing issue prior to the pandemic.

Joseph Dusch is relatively young in his commercial real estate career but has proven to be an expert in the St. Louis market. Before a career in commercial real estate, Dusch worked in the restaurant industry. Once he got his license, residential brokerage after brokerage turned him down, saying, "you can't start in commercial." After not taking no for an answer, Dusch began his career at Gundaker Commercial. With less than two years in the industry, he was one of the top performers at his firm last year and was recently promoted to Vice President. As a new broker, Dusch learned you had to stick up for yourself as more seasoned brokers try to exploit their inexperience. Dusch covers all asset classes and primarily focuses on working with small businesses.

Downtown Woes

Downtown St. Louis has been on a downward trajectory for over five years, and many of its residents have moved to the suburbs with no plan of returning. The area has gained a bad reputation for crime but can the city's incentives revive downtown? Currently, the city has incentivized redevelopment projects through tax abatements. The most notable is the 1.4 million-square-foot former AT&T/SWBell building. This $300 million project will consist of retail, 150 hotel rooms, office space, and 189 residential apartments. In addition to redevelopment, the city's sports teams play a significant role in getting people to return downtown. The St. Louis Cardinals are expected to make a $350 million economic impact during the 2023 season. Dusch says the downtown area is improving, but it will take time for the residents to recognize this.


By far the hottest sector not only nationally but also in St. Louis. Its centralized location and well-developed rail system allows distribution across the nation. The vacancy rate is 3.4%, pushing YOY rents higher by nearly 5%. Last year total absorption recorded over 6 million square feet, and over 8 million square feet were delivered. According to Dusch, most of the 3 million square feet under construction have already been pre-leased, a good indication of the demand for the market. Industrial cap rates are by far the most compressed, as of Q4 2022, the median securitized cap rate for industrial properties was 5.4%.

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Median Securitized Cap Rate
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The retail market remained strong in the metro, especially in the fast-growing suburbs of St. Charles and South County. Retail sales had a strong rebound in 2022 and a boom going into Q1 of this year. St. Louis was the only city out of Columbia, Kansas City, and Springfield to record an increase in retail sales for this year.

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Source: St. Louis Post-Dispatch

As of Q4 of last year, the vacancy rate in St. Louis City has increased by 20 basis points YOY. Another indication of the slow return to downtown, but in an effort to increase foot-traffic downtown, Top Golf is opening its second location late this year in Midtown. On the other hand, the metro recorded a decrease in vacancy, averaging 5.2%. The average rent has increased to $14/sf compared to $13.50 at the start of 2022.

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Data set through Q1 2023
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Businesses in St. Louis have had a dreadfully slow return to the office. Office vacancy rates rose 320 basis points in the last year to 18%. However, the technology sector has grown substantially in recent years because of the low cost of doing business. As a result, many startups have decided to St. Louis home, and according to Stl.Works, their analysis determines a 13% growth increase in tech jobs between 2016 - 2026. Nevertheless, tenants still hold the upper hand, and landlords are working rapidly to update their existing space. The demand for Class A office space is expected to continue throughout this year but companies are still in a "holding period." In addition, Dusch noted the increasing amount of satellite offices. Satellite offices are becoming increasingly popular with the implementation of hybrid work schedules. Employees opt for an office close to home rather than commuting downtown.

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Data set through Q1 2023
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Re:Cap Key Takeaway

St. Louis might be an underrated market, but the strong economic growth sheds a bright future for commercial real estate. Currently, the suburbs are the driving force for the market, but as the city's initiatives begin to revitalize downtown you can expect a major return to the office and residential sector. The market still provides a significant discount compared to coastal markets and will continue to attract millennials and technology startups looking to capitalize on a lower cost of living and business. Industrial assets are poised to lead the market in rent growth as development has taken a significant dip with the economic concerns. The industrial market also has the most room to grow compared to similar mid-west metros.

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