Continued softness in the office market discouraged investor interest in large multi-tenant product. Average cap rates drifted higher in both the CBD and suburban markets as the jobless recovery undermined demand and forced vacancy rates up throughout the year. As a result, several portfolio offerings were withdrawn from the market during 2003, including a 700,000-square-foot Class A office tower in the heart of the CBD. While most office product is relatively well occupied, the lack of meaningful absorption has forced potential buyers to discount prices to compensate for rollover risk, higher than usual vacancies and limited upside potential in the near term. At the same time, low interest rates have improved performance of otherwise marginal properties.
This situation is likely to continue until interest rates begin to increase, forcing sellers to be more realistic about pricing, which could significantly increase the volume of investment transactions in the office sector West Coast Valuers Conditions should improve during 2004 as the economy gains momentum and job growth translates into increased demand for multi-housing product.
The five Midwestern markets covered in the Great Plains represent small to mid-sized metropolitan areas that are largely influenced by the national economy and experience similar trends as first-tier markets. The region’s central location is a beneficial aspect, and provides a bridge between the active coastal mega-metropolitan markets.
The region’s commercial real estate markets are nearly parallel. In each of the five markets, retail is the leading product type with vast growth and limited ramifications of the economic downturn. However, the question remains whether or not retail can sustain the same rate of growth for much longer. Meanwhile, office and industrial are making a comeback in most of the cities after enduring a two-year slowdown.
St. Louis, the largest metropolitan area in the region, is the healthiest. Nearly every property type in the St. Louis market is performing well and is poised for further growth. The St. Louis office market is recovering with a gradual uptick in demand and a shallow speculative construction pipeline. The recent trend towards corporate consolidations is further fueling activity. Companies such as MCI WorldCom, MasterCard International and Express Scripts constructed new corporate facilities. Now, two more companies are continuing this trend, as CitiGroup and A.G. Edwards move into their new headquarters facilities.