Office Space Pulls a Vanishing Act
By Eric Heisler
ST. LOUIS POST
Sunday, Apr. 23 2006
The weakest office buildings in St. Louis are disappearing amid a flurry of building conversions and tear-downs, improving the image -- if not the health -- of the office market.
After peaking in 2003, the level of empty office space has fallen sharply to below 15 percent this year, according to real estate firm Colliers Turley
Martin Tucker.
Conventional wisdom says the drop is caused by an improving economy and a spate of local hiring.
But a much less obvious trend is at work, too. In several cases, large, empty office buildings are becoming condo or retail sites. As that happens through demolition or redevelopment, the vacancy rate is driven down.
It's a trend that's taking shape at downtown sites such as the Union Pacific building and on suburban corners in Ellisville. Some believe it could spell relief for landlords and eventually encourage new office construction.
For now, however, real estate brokers say the trend means the office market might not be as healthy as vacancy stats would indicate.
"What it really takes to fill office buildings is office jobs, and we just haven't had that many new ones yet," said Dennis DeSantis, senior director for Gateway Commercial LLC, a local real estate brokerage.
Still, "Whenever you can take away some supply, it helps," he said
The majority of these projects involve redeveloping historic office towers. That trend marks an evolution from the recent flood of renovations of downtown warehouses into residential lofts.
As developers began to rehab these empty industrial buildings, the market for industrial leasing in St. Louis tightened up. Now, the same might be happening
with office buildings.
In the most recent example, the Lawrence Group announced plans this month to redevelop the empty Union Pacific office building at Tucker and Market streets
downtown.
The 1920s-era building held office workers until last year, when Union Pacific railroad moved 1,000 jobs to Omaha, Neb. When the $125 million project is finished, only a small swath of the building will be offices. The rest will be retail, apartments and condos.
Steve Smith, president of the Lawrence Group, said the "tremendous oveover-supply of older office space on the market" led his firm to seek a new use for the building.
"It's simply supply and demand at work here," Smith said. "There's more demand for housing than there is for offices, but there's less supply of housing."
Both locally and nationally, the office market went into a funk after the tech bust and recession of 2001. As thousands of workers lost jobs, large patches of
office space went vacant.
Locally, the hardest hit areas were downtown St. Louis and west St. Louis County. The regional office vacancy level topped 17 percent in 2003.
In 2004, employment in the St. Louis area began to grow for the first time in four years. As the vacancy rate has dipped to 14.5 percent, some landlords have
cheered.
But folks like DeSantis argue the main factor may not be an uptick in leasing. DeSantis counts 1.3 million square feet that's been taken off the market in the
form of conversions and tear-downs.
Depending on how the vacancy rate is calculated, that could mean a drop of up to 2 percentage points as weak buildings have gone away, he said.
One example is the former CitiMortgage building in Ellisville, which was demolished last year.
The sea green office building, which once held more than 1,000 employees, was emptied when CitiMortgage announced it would build a new headquarters in
O'Fallon, Mo.
Developer TriStar Business Communities took over the 275,000-square-foot building, at the corner Clayton and Clarkson roads, and tried to lease it to a new tenant before giving up last year.
Now, after tearing down the 1980s-era building, Centrum Properties of Chicago plans to build 80 townhouses, 120 condos and 185,000 square feet of retail shops.
Tony Bosworth, a local broker and developer, said the building was poorly located for a large office.
"The problem is that the office corridor is now clearly Highway 40 all the way out to Wentzville, and this site is away from that corridor," Bosworth said.
Other office sites that will become something else include the Pet Inc. headquarters building near Busch Stadium and the Marquette building in the heart of downtown. Both will become residential towers.
In pursuing these conversions, St. Louis area developers are following their peers in other large cities.
Locally, "I think you're eventually going to see two things happen," Smith said. "Eventually, all of the historic building will be converted. And then you're going to see new construction of office buildings again."
Or maybe, St. Louis will see the redevelopment of older offices into more-modern ones.
Still, the region isn't there yet, Smith said.
At a building in Midtown St. Louis, Hany Abounader faces a decision. Abounader, a real estate developer and broker, recently acquired the 1960s-era Council Plaza office building at South Grand Boulevard and Highway 40 (Interstate 64).
His quandary: Should the building be renovated into offices or residential units?
The answer, he said, could be offices, but only if a single large tenant emerges -- a long shot at best. Absent one, he'll go the more conservative route of condos, shunning a speculative development of an office building without tenants lined up.
"You'd have to be foolish to do that at this point," he said.
ST. LOUIS POST
Sunday, Apr. 23 2006
The weakest office buildings in St. Louis are disappearing amid a flurry of building conversions and tear-downs, improving the image -- if not the health -- of the office market.
After peaking in 2003, the level of empty office space has fallen sharply to below 15 percent this year, according to real estate firm Colliers Turley
Martin Tucker.
Conventional wisdom says the drop is caused by an improving economy and a spate of local hiring.
But a much less obvious trend is at work, too. In several cases, large, empty office buildings are becoming condo or retail sites. As that happens through demolition or redevelopment, the vacancy rate is driven down.
It's a trend that's taking shape at downtown sites such as the Union Pacific building and on suburban corners in Ellisville. Some believe it could spell relief for landlords and eventually encourage new office construction.
For now, however, real estate brokers say the trend means the office market might not be as healthy as vacancy stats would indicate.
"What it really takes to fill office buildings is office jobs, and we just haven't had that many new ones yet," said Dennis DeSantis, senior director for Gateway Commercial LLC, a local real estate brokerage.
Still, "Whenever you can take away some supply, it helps," he said
The majority of these projects involve redeveloping historic office towers. That trend marks an evolution from the recent flood of renovations of downtown warehouses into residential lofts.
As developers began to rehab these empty industrial buildings, the market for industrial leasing in St. Louis tightened up. Now, the same might be happening
with office buildings.
In the most recent example, the Lawrence Group announced plans this month to redevelop the empty Union Pacific office building at Tucker and Market streets
downtown.
The 1920s-era building held office workers until last year, when Union Pacific railroad moved 1,000 jobs to Omaha, Neb. When the $125 million project is finished, only a small swath of the building will be offices. The rest will be retail, apartments and condos.
Steve Smith, president of the Lawrence Group, said the "tremendous oveover-supply of older office space on the market" led his firm to seek a new use for the building.
"It's simply supply and demand at work here," Smith said. "There's more demand for housing than there is for offices, but there's less supply of housing."
Both locally and nationally, the office market went into a funk after the tech bust and recession of 2001. As thousands of workers lost jobs, large patches of
office space went vacant.
Locally, the hardest hit areas were downtown St. Louis and west St. Louis County. The regional office vacancy level topped 17 percent in 2003.
In 2004, employment in the St. Louis area began to grow for the first time in four years. As the vacancy rate has dipped to 14.5 percent, some landlords have
cheered.
But folks like DeSantis argue the main factor may not be an uptick in leasing. DeSantis counts 1.3 million square feet that's been taken off the market in the
form of conversions and tear-downs.
Depending on how the vacancy rate is calculated, that could mean a drop of up to 2 percentage points as weak buildings have gone away, he said.
One example is the former CitiMortgage building in Ellisville, which was demolished last year.
The sea green office building, which once held more than 1,000 employees, was emptied when CitiMortgage announced it would build a new headquarters in
O'Fallon, Mo.
Developer TriStar Business Communities took over the 275,000-square-foot building, at the corner Clayton and Clarkson roads, and tried to lease it to a new tenant before giving up last year.
Now, after tearing down the 1980s-era building, Centrum Properties of Chicago plans to build 80 townhouses, 120 condos and 185,000 square feet of retail shops.
Tony Bosworth, a local broker and developer, said the building was poorly located for a large office.
"The problem is that the office corridor is now clearly Highway 40 all the way out to Wentzville, and this site is away from that corridor," Bosworth said.
Other office sites that will become something else include the Pet Inc. headquarters building near Busch Stadium and the Marquette building in the heart of downtown. Both will become residential towers.
In pursuing these conversions, St. Louis area developers are following their peers in other large cities.
Locally, "I think you're eventually going to see two things happen," Smith said. "Eventually, all of the historic building will be converted. And then you're going to see new construction of office buildings again."
Or maybe, St. Louis will see the redevelopment of older offices into more-modern ones.
Still, the region isn't there yet, Smith said.
At a building in Midtown St. Louis, Hany Abounader faces a decision. Abounader, a real estate developer and broker, recently acquired the 1960s-era Council Plaza office building at South Grand Boulevard and Highway 40 (Interstate 64).
His quandary: Should the building be renovated into offices or residential units?
The answer, he said, could be offices, but only if a single large tenant emerges -- a long shot at best. Absent one, he'll go the more conservative route of condos, shunning a speculative development of an office building without tenants lined up.
"You'd have to be foolish to do that at this point," he said.
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