Optimism in the St. Louis office market is as palpable as the energy that enveloped the city when the Cardinals won the 2006 World Series. Riding that wave of euphoria, THF Realty last September sold the 16-story Plaza in Clayton building to KBS Real Estate Investment Trust for $93.2 million. The deal set a record of $290 per sq. ft. for a Class-A building in the St. Louis market.
The whopper of a deal occurred in the midst of a 12-month period ending March 31 in which the market tallied a robust $829 million in office investment sales, according to New York-based Real Capital Analytics. “A lot of owners of real estate are trying to capitalize on this level of activity,” observes Chris Fox, who is managing director of brokerage for Gateway Commercial/Cushman & Wakefield. “They recognize that at some point, it has to come to an end.”
But perhaps the run isn't over just yet. The Gateway to the West is generally insulated from the more severe ebbs and flows seen in the larger markets, explains Fox, who brokered the Plaza sale for its owner, THF Realty, a St. Louis developer. “What's really pushed investors to such a high level in St. Louis is the competition for properties in markets like Chicago, New York or Los Angeles.” The downtown office market, which has lagged behind the rest of the metro area, is starting to see signs of a resurgence, with new residential, restaurants, retail and office.
The largest buyers of office properties in St. Louis are private investors that raise both public and private capital to invest in real estate as well as pension funds. KBS REIT of Newport Beach, Calif., for example, is a non-traded REIT that taps into the wealth of private investors. “There's a lot of institutional investment going on as those entities continue to allocate a substantial amount of funds to commercial real estate, which is a big driver in St. Louis,” says Fox.
The increased activity occurred despite limited demand for office space and weak rents in the first quarter of 2007, according to Reis, which reported a metro vacancy rate of 15.2%, down 130 basis points from the first quarter of 2006.
As cap rates compress across the nation, investors are turning to the Gateway City for higher returns. “It's not a growing city like Vegas or Phoenix, but it is steady,” says Danny Prosky, managing director of healthcare properties for Santa Ana, Calif.-based Triple Net Properties LLC.
In June, Triple Net Properties purchased a 315,000 sq. ft. headquarters building for Express Scripts from Northpark Partners ESI for an undisclosed amount. The build-to-suit facility, located on the campus of the University of Missouri-St. Louis, is leased to Express Scripts, a Fortune 1000 healthcare company.
Triple Net's cap rate on the transaction was 7.3% — on par with St. Louis' average office cap rate for the first quarter of 7.4%, but high compared with the U.S. average of 6.9%, reports Real Capital Analytics. Prosky says if Express Scripts opts to move forward with a second building on the site as planned, Triple Net will seek to snap up that property as well. “Because of cap-rate compression elsewhere, places like St. Louis are nice to invest,” Prosky says.
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