ST. LOUIS, Sept. 22, 2016 – Cushman & Wakefield’s annual The State of Real Estate® St. Louis event highlighted the overall strength of the metro region’s industrial, office and capital markets sectors for an audience of owners, occupiers, investors and other decision makers at The Ritz Carlton.
Highlights of the program include:
With 5.4 million square feet of projected absorption by the end of the year; nearly 9 million square feet of space under construction or completed this year; and an expected industrial sales volume of over $350 million, the industrial market is experiencing a historic year. Ed Lampitt, Managing Director, indicated that there has never been more industrial space under construction at one time in the past 15 years. A combination of strong absorption and historically low vacancy rates are pushing developers and tenants to build. Currently, there is 5.8 million square feet of speculative space under construction or completed, and over 3 million square feet in build-to-suits under construction or completed, most of which is located along the Interstate 70 corridor. The second quarter ended with a vacancy rate of 7.3 percent with the completion of three speculative buildings.
And while industrial sales have been slow in the first half of 2016 with only one recorded Class A sale so far, what is currently on the market or soon to come, could push sales volume over that $350 million mark. Approximately $220 million of that, or 60 percent, is expected in the Metro East submarket alone. Ranging from 700,000 square feet to 1.1 million square feet, St. Louis will lay claim to five major deals in 2016, including auto manufacturer General Motors’ new $45 million Wentzville Logistics Center in St. Charles County and TriStar’s lease of a 717,000-square-foot newly constructed distribution center, Gateway East 717, in Gateway Commerce Center.
According to Jim Mosby, Executive Managing Director, the office market has been experiencing an imbalance in supply and demand over the last three years with demand outpacing supply. Absorption and asking rates have increased while vacancy rates have dropped, resulting in a scarce supply of large blocks of Class A space. The Class A vacancy rate is at 9 percent, and the Class A average asking rent is $25.36. New construction could be a potential solution. Companies are opting for new construction because current inventory does not meet their needs,or the cost for a new building is perceived to be attractive relative to existing options. A number of new construction projects are underway or have just been completed, including buildings for RaboAgrifinance, MiTek and WorldWide Technology. In 2017, expect to see more new users choosing new construction as a viable option.
While 2015 was a near-record year for national sales volume, 2016 is lagging by 15 percent compared with the same time last year, according to Paul Hilton, Senior Managing Director. However, 2016 is still anticipated to be a solid year. And while local sales volume is lagging behind the performance of 2015 as well, there is still time for the year to end strongly with over $600 million worth of commercial real estate currently on the market. There is strong demand across all Class A product types, as Class A properties are considered defensive investments should the market turn. There are fewer buyers interested in Class B product, which historically has had more volatility in a down market.
Current cap rates for the industrial market range between 5.5 and 6.5 percent for Class A product and 7 to 7.75 percent for Class B product. Office cap rates are in the 7.25 to 7.75 percent range for Class A product, and 8.5 percent to 9.5 percent for Class B product. Grocery-anchored product cap rates are between 6.5 and 7.5 percent while Class A Community product falls in the 7 to 8 percent range, and rates for Class B Community product are between 8.5 and 9.5 percent. Multi-family cap rates are between 5 and 5.5 percent for Class A product, and between 6 and 6.75 percent for Class B.
2017 is anticipated to be another strong year. While it is late in the cycle for commercial real estate, a downturn is not expected. Interest rates and inflation remain in check, and investors are looking for alternative investments to the bond and stock market. Demand for Class A product will be strong but unmet because there is not enough product available. Owners of Class B product will need to decide if they want to sell at higher returns or refinance and wait for a better day.
About Cushman & Wakefield
Cushman & Wakefield is a leading global real estate services firm that helps clients transform the way people work, shop, and live. Our 43,000 employees in more than 60 countries help investors optimize the value of their real estate by combining our global perspective and deep local knowledge with an impressive platform of real estate solutions. Cushman & Wakefield is among the largest commercial real estate services firms with revenue of $5 billion across core services of agency leasing, asset services, capital markets, facility services (C&W Services), global occupier services, investment & asset management (DTZ Investors), project & development services, tenant representation, and valuation & advisory. To learn more, visit www.cushmanwakefield.com or follow @CushWake on Twitter.