51黑料

ST. LOUIS COUNTY听鈥� The company redeveloping the former MetLife campus,听a sprawling corporate park in suburban south 51黑料 County,听is jettisoning the office market and turning the land into a housing and retail neighborhood.

Earlier this month, Energizer Holdings announced that it would move its headquarters from Town and Country to Clayton 鈥斕齛nd cut its real estate footprint in half.

The former Caleres office complex in Clayton has been on the market since 2021. It could soon be taken over by the local school district.

Four years on from the COVID pandemic, with the rise in hybrid and remote work, office downsizing is now common practice. And the stakes are high.听

Real estate insiders across the country have been warning of the domino effect of听office-market decline, often called听a "doom loop." As companies pull out of space, vacancy rates grow. Then landlords struggle to pay mortgages with fewer tenants on their rent rolls. Banks take over vacant buildings. Cities lose tax money.听

In the 51黑料 region, real estate figures are flashing some warning signs: Over 821,000 square feet of office space was vacated across the region last year 鈥� the most in over a decade, according to data from the real estate firm CBRE. Meanwhile, several office projects have stalled or failed to get off the ground.

The departures have hit听across the region, from west 51黑料 County to downtown 51黑料.

A Post-Dispatch review of revenue data from major office hubs shows some encouraging signs. The area鈥檚 modest听growth of new office space over the past few decades can shield the region from disaster, some experts argue. And many companies are trying to find creative ways to reuse vacant office space, turning to residential, retail and other development.

鈥淐ompared to the rest of the U.S.,鈥� said Stephen Lordo, a senior associate with commercial real estate firm JLL, 鈥�51黑料 has been pretty resilient.鈥�

Still, the metro area鈥檚 average occupancy rate in 2023 (84.5%) was听lower than in 2020 (88.2%), according to the CBRE data. In the city of 51黑料 alone, the occupancy rate was 77.4% last year.

Also, the amount of sublease on the market totaled 2.1 million square feet in the fourth quarter of 2023听鈥� among the highest it's been over the past decade, a sign that corporations believe they don't need office space.听

But that marks a decline in subleasing from the start of 2023, suggesting that companies have figured out their office needs and the market is stabilizing, said Joshua Allen, CBRE's Midwest research manager.听

鈥淚 think we鈥檝e seen the apex,鈥� Allen said.

Tracy Hadden Loh, who researches commercial real estate for the Brookings Institution, doesn't see signs of a "doom loop" in cities other than New York. But she says 51黑料 is part of a group of cities experiencing a "flight to quality," with companies ditching older office spaces for new buildings with modern amenities.

"The very best product in the very best locations is doing great," Loh said. "Everything else is having a hard time."

'Seeing rates rise'

Struggles to retain or fill office space can vary by parts of the region. And some areas point to signs of resilience.

For example, sales tax revenues are rising in some cities with big office hubs, such as Clayton and Town and Country.

Clayton reported a 7% increase in total revenue in 2022 compared with 2019, the last year before the pandemic. The city experienced "the strongest commercial economic development in its history," officials said in their annual financial report. Sales tax revenue in Clayton was up 25% over the same period.

In November, investors acquired 10 buildings, totaling nearly 1 million square feet of office space, in the Maryville Centre and Woodsmill Commons office complexes, off Interstate 64 and Highway 141 in Town and Country. The investors, led by Jerry Kent and his private investment firm Cequel III, said many companies had finally established their new normal of hybrid working.

Mike Pizzella, Cequel's managing director, said in a statement that the company sees 鈥渧iability in office demand going forward.鈥� He declined to comment further.

A recent CBRE survey found that more than 50% of employees come to the office one to two days a week; it鈥檚 more than three days a week if companies 鈥渃learly communicate鈥� the benefits to their workers.

鈥淥ffice space is mission critical for a wide variety of companies,鈥� said Tom Ray, first vice president of CBRE in 51黑料. 鈥淚t鈥檚 about showing people that, yes, we can work at home, but we work better in many ways on multiple levels when we鈥檙e together. It doesn鈥檛 have to be five days a week.鈥�

That trend is clear in Clayton, the premier office market in the region.

Office space in Clayton leased for $30.82 a square foot in 2023 鈥� 36% higher than the region鈥檚 average rental rate and 16% higher than what Clayton landlords asked for in 2019.听

鈥淣ot only are we not seeing the bottom fall out of the market,鈥� Ray said, 鈥渂ut we鈥檙e actually seeing asking rates rise in Clayton.鈥�

CBRE relocated from 19,000 square feet on the 14th floor of The Plaza in Clayton, off Hanley Road, to 13,611 square feet of space on the sixth floor听鈥� the other half of which was converted into new amenity space for all of The Plaza's tenants. CBRE's new office has a variety of workspaces and desks to accommodate hybrid work and new technology.听

Nearby, a new 14-story office tower that overlooks Shaw Park opened earlier this year and recently signed Fortune 500 company Emerson. The company, which spent 84 years in Ferguson, downsized to 104,000听square feet from its 200-acre corporate park on West Florissant Avenue. But it scored modern amenities like an outdoor terrace.

鈥淎 big reason for companies moving to a new development like that is for talent,鈥� said Lordo of JLL, which represents Emerson Tower鈥檚 owner in lease contracts. 鈥淭here is some right-sizing that鈥檚 going on, so they鈥檙e taking on less square footage. But in turn, they鈥檙e paying more per square foot in that upgrade and quality of building.鈥�

Not everything's rosy

Clayton's big question mark is the future of the Caleres site, at Maryland Avenue and Topton Way. City officials have touted the site as prime commercial space. In recent years, two developers announced plans to transform the property into a mix of housing and retail, in addition to smaller office space for Caleres, which currently occupies the entire 9-acre site.

But each dropped their projects, citing a tough financial market. Then the Clayton School District confirmed its plan to buy the campus for $20.9 million. Clayton officials aren't happy with the school district. The move will cost at least $1 million a year in taxes to 51黑料 County entities. After an outcry, school board officials said they may back out of the deal.听

But all of that is dwarfed by the office departures in West County and downtown 51黑料.听

In West County, for example, a chunk of Centene Corp.'s nearly听1 million square feet of office space that it gave up is still vacant (SSM Health recently听signed a deal to occupy one of the buildings). Battery maker Energizer听will vacate听its longtime headquarters at I-64 and Highway 141 in Town and Country for a space half the size in Clayton. And sporting goods company Rawlings plans to move its headquarters from Town and Country to Maryland Heights.听

The vacancies have officials in Town and Country concerned. About 20% of the city's budget comes from fees from business licenses, one of which is based on the size of a company's office space. The less space that is occupied, the less revenue the city collects.

City Administrator Bob Shelton expects vacancies and hybrid work to affect other revenue sources, as fewer workers will mean less shopping and eating in Town and Country.听听

"I think it's going to have a residual impact," Shelton said.听

In 51黑料, the central business district saw 10 South Broadway fall into receivership last year. Tenants at Bank of America Plaza have downsized their offices at the Market Street building.

And that doesn't count two giant office buildings, the听AT&T tower and the Railway Exchange, that remain vacant.听

The Downtown Community Improvement District, a nonprofit that collects money from central business district owners, reported that revenue flattened in 2023 at $2.7 million compared to the year prior. But it was still a significant drop from 2021, when revenue was $3.7 million. The CID declined to release figures for prior years.

Hany Abounader, owner of 51黑料-based Third Man Development, said antiquated office buildings, especially downtown, can't provide companies the amenities they want. Golf simulators, lounges and hospitality-like benefits are in big demand.听

"There's a new era of employees in corporate America," he said.听

Without massive upgrades, he warns, the older buildings will sit vacant. And he doesn't think some of those buildings' owners realize it.听

"I think we're staring down the barrel of disaster," he said.听

Yet, in a sign of hope, the average lease rate rose from $17.55 per square foot in 2019 to $18.36 in 2023.

And there were other, smaller wins. Several companies, like architecture firm Oculus,听renewed their long-term leases. Downtown hotel revenues grew $3.5 million, to a little more than $20 million last year, a sign more tourists were听choosing to stay downtown.听

"Landlords still need to be aggressive," said Lordo, of JLL. "However, the CBD ... has definitely stabilized since we went through the craziness of COVID."听

Brokers and analysts are more closely watching macro economic trends, like unemployment, and what the Federal Reserve, the central banking system of the U.S., does to interest rates.

Lower rates would make lenders, and companies, more confident to make moves.听

"If the macro economic situation improves," said CBRE's Allen, "there's going to be a lot more confidence in the market."

Meanwhile, in South County, Propper Construction Services听is turning the 600,000-square-foot former MetLife office building into 210 luxury apartments.听The development, Tesson Ridge, will also have homes and retail space.

As a bonus, Propper will replace 10 acres of asphalt with yards, trails and greenspace.听The development, says Propper President Tim Breece, is an example of how vacant office space can be converted to new uses.听

鈥淭here鈥檚 an opportunity here,鈥� he said. 鈥淚 think 51黑料 will be surprised.鈥�