Capstone

Economics and Vacancy in St. Louis Page 1 of 59
Class A office vacancy rates and the relationship with other economic factors in the
central business district of St. Louis
Jesse W. Bray
May 2016
Masters Degree in Urban Planning and Real Estate Development, Saint Louis
University
Economic Development
Advisor: Dr. Jae Teuk Chin

Introduction……………………………………………………………………………………....4
Literature Review…………………………………………………………………………….….4
Factors of Correlation…………………………………………………………………26
Significance/Application……………………………………………………………….26
Vacancy…………………………………………………………………………………27
Stability………………………………………………………………………………….30
Population………………………………………………………………………………31
Housing…………………………………………………………………………………33
Business………………………………………………………………………………..37
Methods…………………………………………………………………………………………38
Findings………………………………………………………………………………………...39
Recommendations…………………………………………………………………………….48
Further Study……………………………………………………………………..……………49
References……………………………………………………………………………………..54

Commercial real estate vacancy rates are tied to many other factors when
considering starting a business in a particular region or city. Taking into consideration
other economic indicators, can we identify how a city or market is doing, economically,
by only the vacancy rate?
Photo: Class A office buildings in downtown St. Louis. (Cupples 9
redevelopment, Deloitte building, and the Laclede group which was also a
redevelopment.)
Literature Review
Economic Developers from across the country have tried to come up with
indicators of market performance. Those indicators of success have included vacancy
and occupancy, appraisal values, civic center space leased, hotel occupancy, job
retention and creation, job-resident ratio, capital expenditures, new business and
startups, site searches, information packets mailed, sales tax, and participants in
training programs. Ammons and Morgan say that a sure sign of economic vitality is  a
high occupancy or low vacancy rate  for existing office, retail, and industrial buildings
(2011). St. Louis is the 19th largest metropolitan area with a population of 2.8 million

people. St. Louis is also the 19th largest U.S. office market, with 130 million square feet
of space, and the 22nd largest warehousing market, with 245 million square feet of
industrial warehouse space according to CoStar. Much of that space is strategically
located near business centers as well as major transportation and intermodal hubs,
making travel and the distribution of goods seamless and efficient. Businesses can
lease these sites at prices substantially lower than U.S. averages (St. Louis Regional
Chamber).
Downtown St. Louis, a district of roughly one-and-a-half square miles that begins
at the riverfront, has about 13 million square feet of office space, down almost a third
from 20 years ago (These figures omit single-user buildings.) Much of the remaining
space is in buildings from the 1920s and earlier. (Sharoff, 2011) Class A does not have
to be newly constructed building it can be a redevelopment, which is what we have in
downtown St. Louis. The last Class A office building in downtown St. Louis was built
over 20 years ago. Not just absent in St. Louis but you are not seeing large office
buildings being built in downtown any more unless you’re in a major market like NY or
SF.
If people aren’t filling these buildings then does that mean the cities economy is
in peril?
I quote a longtime commercial broker in saying that “Real estate brokers and
developers are property-centric. By that I mean that we often think real estate drives

the project, when we should be mindful to factor in the space users other issues, e.g.
wages and reliability of the workforce, transportation, etc.’”
Much of the literature review around this topic discussed the fact that vacancy
rates are a lagging indicator of market conditions, sometimes up to 2 years. It also
became prevalent that vacancy rates themselves have a cyclical effect. The
overbuilding of office real estate that occurred in the 1980s has been widely
documented and written about. Rather than an isolated event, there is growing evidence
that the office market was also overbuilt during the late 1960s through mid-1970s
(Grebler and Bums 1982, Wheaton 1987, King and McCue 1987) (Wheaton, 1999).
The Wall Street Journal characterized this phenomenon that began in the southwest in
the mid-1980s, moved to the northeast by the late 1980s, and worked its way across the
continent to the west coast in the early 1990s as a ‘‘rolling real estate recession.’’ The
combination of the deregulation of financial institutions in 1981, the increased demand
for U.S. commercial real estate by foreign investors and U.S. pension funds, and the
favorable tax treatment of real estate enacted in 1981 has been blamed for this
imbalance between the supply and demand of office space of the cause, it is clear that
scarce resources were over-allocated to commercial real estate in the 1980s and that
the U.S. economy has suffered (Webb and Fisher, 1996). You can imagine new space
being built before a tenant moves in would cause vacancy rates to increase, then as
soon as someone moves in the rate decreases again. The argument is further made
that real estate is particularly prone to such instabilities or oscillations because of its
durability and because of the long lag between capital demand and delivery. Within

modern economics, however, such cyclic behavior is most often dismissed as being the
product of uninformed agents making systematic errors about future market conditions.
With rational expectations, such endogenous market cycles should not occur (Wheaton,
1999). While traditional models in urban economics have largely dealt with the demand
side of business location an pricing, as viewed from the perspective of the firm, some
interest has emerged lately on the role that worker amenities and, most importantly,
supply-side factors play in shaping the intra-urban business rent (and vacancy rate)
variations. In a recent theoretical paper, for example, Sivitanidou and Wheaton argued
that within regulated multimodal metropolises, differences in across nodes in business
rents (vacancy) should be attributed not only to the differences in their amenity
packages, but also to differences in the rigidity of their institutional restrictions
(Sivitanidou, 1994)
Factors like unemployment, workforce development, housing and transportation
are among the many other factors that contribute to the location a business choose to
open or expand. A look at the years of 2005 and 2015 will be compared to examine any
trends and correlation with economic conditions in the central business district of St.
Louis. My focus is on downtown, specifically the CBD. Despite the renewed interest in
acquiring office properties, the sector is not without its problems—as noted by the
increase in distressed assets relative to the percentage of workouts during the quarter.
This increase was particularly pronounced among suburban office markets, which
experienced more than a 35% increase in distressed assets on a year-over basis. At the
same time, the pace of workouts is higher for CBD assets than for their suburban

counterparts, as is the recovery rate. As a percentage of total office sales, distressed
properties fell below the 10% figure after peaking in the upper teens in mid-2010
(DeLisle, 2011).
St Louis’s epic sprawl has established office parks throughout the region and not
focused on downtown. Much of the newer office parks have followed the rooftops and
moved to the suburbs. Those suburban areas include Sunset Hills, Westport Plaza,
Clayton, Earth City, Chesterfield, recent expansions into St. Charles along I-64
Microsoft, etc. Much of the Class A multi-tenant buildings are being used in Clayton
and single use class A buildings are locating in Chesterfield.
Absorption rates were not examined in this research because I wanted to look
solely at vacancy rates as a single indicator of the market as a whole. Although
Downtown has the lowest overall office market absorption rate. Absorption rate is how
quickly it will take to exhaust the current supply.
The Mississippi River on the East, Tucker Boulevard on the West, Chouteau
Avenue to the South and Cole St to the North border the Central Business District
(CBD). St. Louis in all of its uniqueness (locally the lines are drawn differently) and
most analysis of the CBD include the “Downtown West” neighborhood, which will be
included in my analysis as part of the CBD. Downtown St. Louis is the metropolitan
areas largest employment center with over 90,000 daily workers.

Who locates in the CBD, and why? Historically it has been the FIRE industry.
(Finance, insurance and real estate. Those industries that work closely with each other
and need that face-to-face interaction (closing deals, signing paperwork, etc.) and
needed to locate within close proximity. Which is where you get those downtown
couriers for fast paperwork delivery. Recent changes due to technology and industry
realignments, there have been a shift in the CBD office market to tech firms including
data centers, and collaborative companies.
The Mississippi River on the East, Tucker Boulevard on the West, and Chouteau
Avenue to the South and Cole St to the North border Downtown St. Louis, the Central
Business District (CBD). St. Louis in all of its uniqueness also has a “Downtown West”
subdivision that will be included in my analysis as part of the CBD. The boundaries will
extend the downtown and CBD West to Jefferson Avenue. The CBD or Central
Business District is the focal point of a city. It is the commercial, office, retail, and
cultural center of the city and usually is the center point for transportation networks. It is
also important to mention that St. Louis is a polycentric city. Polycentrism is the
principle of organization of a region around several political, social or financial centers.
It is well accepted by now that the degree of spatial interdependence among office
commercial firms, largely conditioned by contact costs, plays a pivotal role in shaping
intra-urban profiles of office commercial land values and employment densities e.g.,
Capozza 5 ; Clapp 10 ; and Ogawa and Fujita 30 ..1 Drawing from simple polycentric
models, such interdependence originates in information linkages between office
commercial firms at any site and their specialized service providers or clients housed in

large business centers. Invariably assumed to require fact-to-face contacts, these
linkages entail significant travel costs. In spatial equilibrium, travel cost savings
stemming from differential center access must give rise to negative commercial land
value and employment density. gradients. Most importantly, all else equal, exogenous
reductions in inter-firm contact costs must induce a lower degree of spatial
interdependence among firms, weaker center access advantages, and flatter
equilibrium land value and employment density. gradients. In light, then, of reduced
contact costs, increasingly dispersed patterns of office commercial activity must
eventually arise (Sivitanidou, 1997).
The St. Louis region has 2 downtowns, Downtown CBD and also Clayton, the
county seat. Clayton is newer in terms of the built environment and has been attracting
businesses away from the downtown area. Clayton has newer buildings, and higher-
grade office space and rents for a premium compared to downtown.

The CBD developed as the market square in ancient cities. On market days,
farmers, merchants and consumers would gather in the center of the city to exchange,
buy, and sell goods. This ancient market is the forerunner to the CBD. As cities grew
and developed, CBDs became fixed location where retail and commerce took place.
The CBD is typically at or near the oldest part of the city and is often near a major
transportation route that provided the site for the cities location, such as a river, railroad,
or highway. Over time, the CBD developed into a center of finance and control or
government as well as office space. In the early 1900s, European and American cities
had CBDs that featured primarily retail and commercial cores. In the mid-20th century,
the CBD expanded to include office space and commercial businesses while retail took
a back seat. By the beginning of the 21st century, the CBD had become a diverse

region of the metropolitan area and included residential, retail, commercial, universities,
entertainment, government, financial institutions, medical centers, and culture. The
experts of the city are often located at workplaces or institutions in the CBD – lawyers,
doctors, academics, government officials and bureaucrats, entertainers, directors and
financiers. In recent decades, the combination of gentrification (residential expansion)
and development of shopping malls as entertainment centers have given the CBD new
life. Housing, mega-malls, theaters, museums, and stadiums are common CBD
attractions. Pedestrian malls are also common today in CBDs in an effort to make the
CBD a 24 hour a day destination for not only those who work in the CBD but also to
bring in people to live and to play in the CBD. Without entertainment and cultural
opportunities, the CBD is often far more populated during the day than at night as
relatively few workers live in the CBD and most commute to their jobs in the CBD.
The CBD is home to the Peak Land Value Intersection in the city. The Peak Land
Value Intersection is the intersection with the most valuable real estate in the city. This
intersection is the core of the CBD and thus the core of the metropolitan area. You
would not typically find a vacant lot at the Peak Land Value Intersection but instead;
typically you would find one of the city's tallest and most valuable skyscrapers. The
CBD is often the center of a metropolitan area's transportation system. Public transit,
as well as highways converges on the CBD, making it a very accessible to those who
live throughout the metropolitan area. On the other hand, the convergence of road
networks in the CBD often creates overwhelming traffic jams as commuters from the
suburbs attempt to converge on the CBD in the morning and return home at the end of

the day.
It is well accepted by now that the prevalent pattern of the spatial organization of
commercial service activity within modern metropolises is polycentric. Such a pattern is
evidenced in the spatial concentration of service employment within not only ‘‘main’’
business centers, or traditional CBDs, but also large, non-CBD or ‘‘secondary’’ centers
(Stanback). The role that such main and secondary centers play within contemporary
residential land or property markets has been addressed by a series of both theoretical
and empirical papers suggesting that differential worker access to these centers must
give rise to distinct profiles of residential densities, land or property values (Gordon et
al., Heikkila et al., Helsley and Sullivan, McDonald and McMillen). Propositions or
conjectures on the role that main and secondary centers play within contemporary
commercial land or property markets are, however, based more on theoretical than
empirical work. In shedding light on this role, early location studies have invariably
emphasized the importance of forward clientele-related. and backward input-related.
linkages between firms providing or using such support services as advertising, ac-
counting, financial, business, and legal (Daniels, Goddard, Lichtenberg). Often realized
through face-to-face contacts, such linkages necessitate frequent travel by top-level
executives whose time carries significant opportunity costs. Although transportation and
telecommunication advances might have lessened the cost and frequency of these
contacts (Pascal), they are still necessary for the exchange of complex or elusive
information (Moss) and the ‘‘development and sustenance of trust among business
associates’’ (Black).

Building on the above and similar arguments on the
importance of inter-firm linkages, the contemporary land
market theory has early on established that differential firm
access to business activity clusters must elicit significant
effects on commercial land markets. In the first formal
analysis of this issue, O’Hara suggests that spatial
differentials in the cost of business contacts within a square
CBD must give rise to equilibrium patterns of declining
densities, contact intensities, and business rents, all
radiating out of that CBD’s most accessible point. Ogawa
and Fujita, among others, reach similar conclusions by
placing O’Hara’s analysis in the broader geographic setting
of non-monocentric cities occupied by both households and
firms. Finally, using a partial equilibrium model, Clapp 6
explicitly demonstrates the role that executive trips made for
the purpose of face-to-face meetings play within a simple
metropolitan market structured around the CBD and a
suburban node. Assumed to partially. substitute for the CBD
in culminating face-to-face contacts, the suburban node
must, in equilibrium, exhibit the familiar declining rent
gradient, just as the CBD does (Sivitanidou, 1996).
Recently edge cities have begun to develop as suburban CBDs in major
metropolitan areas. In some instances, these edge cities have become a larger magnet

to the metropolitan area than the original CBD. This is important in St. Louis’s case
where the city represents only about 9% of the total Metropolitan Statistical Area (MSA)
population of 2.8 million. St. Louis is diverse in the makeup of the city/county in that it is
one of the most fragmented cities in America. It has currently 92 municipalities within
the county, 2nd only to Baltimore. Despite these theoretical advances, existing hedonic
studies of the office commercial sector still view the traditional CBD as the sole place
nurturing face-to-face contacts. As such, these studies only provide tests for the
existence of CBD commercial rent gradients, thereby ignoring the potential role that
large secondary centers may play within postindustrial commercial land markets
Brennan et al., Hough and Kratz, Sivitanidou. Clapp’s analysis, perhaps, presents the
only exception, as it attempts to validate the existence of linkage-induced land market
effects arising out of access to both the CBD and suburban ‘‘nodal’’ locations
(Sivitanidou, 1996).
2005 represents a time just before the economic downturn when economic
conditions were still exceeding expectations and growing tremendously. 2015 is the
most current complete year of analysis available and economic conditions have
rebounded from the recession of 2008. The factors to be compared for correlation with
the trend in Class A Office vacancy rates will be unemployment rates, available housing
stock, the number of businesses, population and income. The increase in residential
units in the CBD, civic center space leased, the number of rooms and occupancy rates
of hotels, the median income of the city compared to the county can also be compared
to better understand the local and regional context and importance of growth within the

city/downtown area and urban sprawl in St. Louis. Job to resident ratio is also important
to determine growth within the CDB and will compared from 2005 to 2015 as well as the
total number of businesses within the CBD, as reported by the Chamber of Commerce.
The number of businesses will also help explain the growth within the market of the
central business district and overall health of the economy within the scope of this
paper.
For the purposes of comparison, office space is grouped into three classes.
These classes represent a subjective quality rating of buildings; which indicates the
competitive ability of each building to attract similar types of tenants. A combination of
factors including rent, building finishes, system standards and efficiency, building
amenities, location/accessibility and market perception is used as relative measures.
The metropolitan base is for use within an office space market and the international
base is for use primarily by investors among many metropolitan markets. Building
amenities include services that are helpful to either office workers or office tenants and
whose presence is a convenience within a building or building complex. Examples
include food facilities, copying services, express mail collection, physical fitness centers
or childcare centers. As a rule, amenities are those services provided within a building.
The term also includes such issues as the quality of materials used, hardware and
finishes, architectural design and detailing and elevator system performance. Services
that are available readily to all buildings in a market, such as access to a subway
system or proximity to a park or shopping center are usually reflected in the quality of
the office market and therefore all buildings are affected. The class of a specific building

may be affected by proximity only to the degree that proximity distinguishes the building
(favorably or unfavorably) from other buildings in the market.
The purpose of the rating system is to encourage standardization of discussion
concerning office markets, including individual buildings and to encourage the reporting
of office market conditions that differentiate among the classes. Class A  is defined as
the most prestigious buildings competing for premier office users with rents above
average for the area. Buildings have high quality standard finishes, state of the art
systems, exceptional accessibility and a definite market presence.
CBD office tenants are changing. In Australia they are getting smaller, less  likely
to be in finance or government and currently taking advantage of market conditions. As
competition for the best people becomes a major issue, particularly in the competitive
technology sector, there is a greater focus on using real estate to attract and retain
startups. New Zealand is experiencing its own unique changes. Although finance and
insurance remains a stalwart of CBD occupiers, the number of architects and engineers
setting up business in the CBD has increased rapidly. Owners are responding to these
changes with the way that they lease space, develop and plan for the future of their
buildings.
Vacancy rates will be reviewed for the commercial real estate industry in the
central business district of St. Louis.

Many sources have expressed that the current rates
are cyclical and supply and demand will even itself out.
Several studies have examined the cyclic movements of the
office market and related the change in the supply of office
space to the absorption rates (Rosen, 1984; Wheaton, 1987;
Voith and Crone, 1988; King and McCue, 1987; Wheaton et
al., 1997; Hendershott et al., 1997, 2000). Offices house the
economic base in metropolitan service centers and are
owned by institutional investors. The large capital
requirements and long development periods make office
investment riskier than other types of real estate. Thus, there
is a need for improvements in market analysis methods and
techniques for office markets (Howarth and Malizia, 1998).
The accurate measurement of the supply and absorption
trends is itself crucial to understanding market behavour. In
this study, time-series data for the St. Louis office market
have been assembled.
The traditional model proposes that supply and
demand factors interact to determine simultaneously the
level of the vacancy rate. An extensive review of these
studies can be found in Hysom (1997). Due to development
uncertainty, expectations are extremely important in
determining the supply of office spaces (Sivitanidou).

A model of vacancy rate determination is estimated using over 30 years of data
for 20 U.S. office markets. The variances of individual city office vacancy rates are
decomposed into common, time-varying components and city-specific fixed effects.
City-specific persistence terms are also included to allow for lagged adjustment toward
equilibrium. Three striking results are obtained. First, we find that the level of equilibrium
is predominately determined by local rather than national factors. Second, we find that it
is the random shocks causing local deviations from equilibrium; which reflect the
integration across markets. Specifically, we find significant contemporaneous
correlations of shocks across cities. Finally, the results depict a dramatic level of
persistence in all markets. The model is then applied to determine whether the
experience of the 1980′s represented a structural break in the underlying office market
structure (Grenadier, 1995).
This paper will explore the many relationships that vacancy rates have in the
market and how they are viewed independently as a single indicator and also how they
are attributable to the overall health of the particular market. Additionally, this research
paper will explore the commercial real estate market vacancy trends, interference and
equilibrium in order to continue suitability for the future. This paper will be written using
themes that guide the subject from definition of vacancy rates and commercial real
estate to the application of and importance of those vacancy rates. Data from
interviews with leaders in the commercial real estate industry, academic papers, white
papers, market analysis reports and news articles will be gathered. Cassidy Turley and
CBRE provide research driven market analysis and white papers for each region, state
and city for use by industry professionals for the purpose of market outlook. Robert

Moore, Jr., owner of Cassidy Turley/Harry K. Moore Commercial Real Estate Services,
and other associates will be interviewed for in depth analysis of the local market for St.
Louis, MO. Many articles researched through the Saint Louis University libraries
website will also be used to support this paper. The information needed can be
obtained throughout the most current market analysis reports and should take between
2-4 months to complete this research once they are published.
This case study is important because it will reflect the current analysis on the city
of St. Louis; which is still recovering from the economic recession and has suffered the
fate like so many other “Rustbelt” cities. The post-industrial era has left many of these
cities striving to reinvent themselves and looking for new identities. This research will
specifically help St. Louis in taking a look at itself and if/how it has reformed and
rebounded since the recession for the redevelopment of its core downtown business
district. Commercial real estate is significantly more cost-competitive in the St. Louis
area when compared to the country as a whole. The average rate for Class A office
space in the St. Louis market was $21.76 per square foot, less than the U.S. market
average of $28.68 per CoStar. These rates are very competitive even when compared
with Midwestern markets like Chicago at $26.79 and Minneapolis at $24.98, or even
with Dallas at $25.01 and Atlanta at $23.69 (St. Louis Regional Chamber).
There are blocks and even entire streets — like

Washington Avenue — that are unchanged from the days of
the 1904 Louisiana Purchase Exposition. The district has
numerous landmarks, including Louis Sullivan’s 1892
Wainwright Building and Alfred Mullet’s 1884 Old Post Office
building.
Still, there has been a steady outflow of office tenants,
many of which moved to Clayton, a suburb six miles west of
downtown where office towers have sprouted over the last
decade.
Peter Krombach, a senior managing director of CB
Richard Ellis here, said it was a challenge to attract tenants
to the city’s many older properties. “There hasn’t been a new
office building built downtown in a long time, and when
tenants are looking for space they’re normally looking for
new space,” he said.
New construction remains a distant dream. “You can count
on one hand the sites for new office facilities downtown,”
said Richard Ward, a development consultant and urban
planner with Zimmer Real Estate Services here, but it turns
out that the older buildings with their high ceilings and heavy
construction function well as modern data centers.
The data-center business has a number of models.
Some companies own their own data centers, while others

use third-party providers to house and maintain their
operations. And to ensure redundancy, most companies
have more than one data center, with the additional centers
usually some distance from the primary center.
Over the last decade, many of these older buildings
— more than three million square feet — have been
converted to apartments or cultural uses. Indeed, for the first
time in a century, St. Louis has a substantial downtown
residential population — 12,500 according to the Partnership
for Downtown St. Louis, an advocacy group (Sharoff, 2011).
Many factors will be considered when looking at the correlation of vacancy rates
for prime downtown real estate office space to determine any trend. Future studies may
then explore the possibility of exploiting those positive correlating factors into future
growth of the CBD in St. Louis and other polycentric cities.

Correlating Factors
When looking at factors (possibly) related to the overall economic conditions of a
city it is important to also note the workforce environment. So, I wanted to and did look
at other factors that are telling of and help to define an economy; those other
ingredients that make up the outlook of an economy. I looked at housing,
unemployment, population, number of businesses, and income. This includes most
importantly the unemployment. At face value you can easily see in some instances it is
clear that there is a correlation between unemployment and office vacancy rates. On a
deeper level, these rates coincide with housing and transportation just as much as well.
Significance/Application
This research will help mitigate any concern that real estate, government,
business, investors and banking industry professionals may have on the current
commercial real estate market in St. Louis. This paper will also help to identify any
correlations that vacancy rates have with other economic factors and possibly across
other cities. This paper will help to explain the natural tendencies of the commercial
real estate market to return to equilibrium without interference. It is important to note for
this analysis that correlation does not imply causation. My study will focus on the
commercial real estate industry. CRE is divided into sub markets of Industrial, Retail
and office. We’ll be looking at the office market and specifically class a. For the
purposes comparison, office space is grouped into three classes.

These classes represent a subjective quality rating of buildings; which indicates
the competitive ability of each building to attract similar types of tenants. A combination
of factors including rent, building finishes, system standards and efficiency, building
amenities, location/accessibility and market perception is used as relative measures.
Amenities are those services provided within a building. Class A is defined as the most
prestigious buildings competing for premier office users with rents above average for
the area. Vacancy rates defined as the amount of unoccupied/available space divided
by the entre market space in a specific time.
Vacancy
Vacancy rates have been an important factor that explains supply and demand in
the commercial real estate market. The vacancy rate is a single number that can tell us
what the absorption rate is between the amounts of space built related to the amount of
space used, measured in square footage. In this research, the term commercial real
estate will be defined as Class A Office space. Commercial real estate is often used to
describe office, industrial, and retail property, which are often divided up into each of
their individual sector of the commercial market. Vacancy rate is also a term that will be
used frequently throughout this proposal. Vacancy rate is a term used to quantify the
space being used, as a percentage of the total, versus the space being unused. In
order to determine the vacancy rate, the amount of space utilized will be divided by the
amount of space available, usually measured in square feet, and then calculated as a

percentage (multiplied by 100). Throughout this paper, the term commercial real estate
will be describing office space.
This research will reinforce the importance of maintaining equilibrium vacancy
rates in commercial real estate. When vacancy rates are too high then rents begin to
lower because of the excess supply. When there is an excess of supply, the market is
referred to as a renters’ market. It is referred to as a renters market because they are
the ones who are the price setters. Due to the excess of supply, renters are able to
shop around for lesser rents and lessees’ have to compete and reduce rent prices.
Commercial real estate properties are often times spec built, which is a term
applied to buildings that developers build before a tenant is secured. The speculative
built properties can artificially inflate vacancy rates in a time specific snapshot of the
market but the majority of spec built properties is built with either a tenant in mind or
with confidence that the market will consume the space in a timely manner.
Overbuilding will cause the vacancy to increase and putting the market back into a
renters’ market, which is not the intention of someone who owns commercial real estate
and seeking tenants.
Diana Mirel says, “Managers are being more creative with lease terms and space
(p. 41)” usage to adjust to the market. One thing that Raymond Y. C. Tse and
Dominique Fischer found is that, “Rates differ across cities (p. 37)” and therefore should
not be used when comparing two cities. Richard Voith and Theodore Crone explain,

“The level of excess supply in real estate markets is often described in terms of
deviations of the actual vacancy rate from the “natural” or “desired” vacancy rate. Such
deviations represent market disequilibria requiring price and quantity adjustments
(p.437)”. Wheaton and Torto (1988) examine and forecast the rental rates falling 40%
through 1996. Falling rental rates equate to high vacancy, which has been the case for
St. Louis in recent history.

Stability
Mark J. Eppli and James D. Shilling discuss the slow moving prices and rent in
their article. The vacancy rate is used to find equilibrium in the market at which the
market doesn’t allow renters to overcharge or a renter to price cut. During the recession
the market was a “renter’s market”, which allowed lessee’s to negotiate bargain lease
terms and cause renters to make concessions. Once the market reversed, it was time
for renters to recoup those concessions with renters. The time it takes for these
markets to catch up is called the “speed of adjustment (p. 1127)” and Eppli and Shilling
conclude that, “there is considerable lag between the supply response; and estimate
that the commercial real estate market can take up to two years to adjust to equilibrium
(p. 1143),” if left autonomous. Naturally, one would think that interfering in this would
create a quicker response to equilibrium but, John L. Kling and Thomas E. Mccue found
that “supply follows demand (p. 303)” when commercial real estate moves through its
cycle to return to equilibrium. Many sources have expressed that the current rates are
cyclical and supply and demand will even itself out. The low vacancy rate is beneficial
to the city as long as vacancy rates remain at equilibrium or lower.
As of fourth quarter 2015, the vacancy rate for St Louis Class A Office space in
the central business district was 13.3%. St Louis has an unemployment rate of 6.8%, for
the most recent Bureau of Labor Statistics (2nd quarter 2015) higher than the national
rate of 4.9%, which means St. Louis can still add businesses, space provided, with a
plentiful amount of labor force. “Job growth perpetuates housing, and the multifamily
market” according to Kristin Gunderson Hunt. Commercial industry jobs are considered

low wage jobs but they do provide jobs nonetheless, which support families, and
housing, and goods and services industry as well. These are all positive things that can
cause the city of St. Louis to cheer. All of the research reviewed has pointed to
preferring lower vacancy rates despite higher rents. The “do nothing” planning
approach seems to be favored and the literature suggests that the market will stabilize
itself. Further research should help to clarify some of the benefits and consequences of
low vacancy versus high vacancy rates in commercial real estate in the St. Louis CBD
(Central Business District) real estate market.
St. Louis has suffered from several economic downturns in the past, self-inflicted
and resulting from overall economic conditions. Those include the loss of multiple
automotive manufacturers, a sprawling suburban landscape and to an extent its
convoluted governments. The city of St. Louis has also suffered its share of general
bad luck suffered from developers such as the cities first TIF (tax increment financing)
district that bellied up when the developer pulled out.
Population
According to data from Downtown STL, Inc., the downtown core continues to
experience growth in residential population. Since 2005, there has been a 133%
increase in population in the Downtown and Downtown West neighborhoods. With
newly opened residential properties leasing up and other buildings being redeveloped,
residential population growth is anticipated to continue.

Housing
Residential occupancy has remained strong in the downtown core. There was
nearly 5% growth in the number of residential units over last year. Additionally, overall
occupancy increased from 92% to 93%. With the continued growth in rental inventory,
higher vacancy rates in large, older properties, a large number of new loft units
designated as affordable (income restricted) and still moderate mortgage rates,
downtown rental rates per square foot have remained relatively low while growing at a
much slower pace than sale prices. In 2000, the average rent was $0.83 per foot. In
2005, the average rental rate remained at approximately $1 per square foot. From 2000
through 2005, Downtown St. Louis has enjoyed considerable success with establishing

new residential development as a principal component of downtown revitalization.
During that time, over $800 million was invested in residential development with 1,700
new units opened and over 90% of those units occupied. Properties such as the Plaza
Square and Jefferson Arms continue to provide a substantial inventory of centrally
located, moderately priced units. Meanwhile, several of the large, newly renovated, loft
properties provide a considerable number of affordable /workforce units. For example,
40% of the units at Merchandise Mart (213 units), Paul Brown (222 units), and Majestic
Stove (120 units), and virtually 100% of the Cupples Apartments (131 units) are set
aside as affordable housing. The whole Neighborhood Gardens will house 144
affordable units. The Arcade Building is anticipated to open in fall 2015, bringing nearly
300 additional residential units to the downtown core. With the continued strengthening
of the downtown residential market since the recession, many apartments are now
being converted into condominiums. Residential occupancy has remained strong in the
downtown core. Additionally, overall occupancy increased from 92% to 93%. The
Arcade Building is anticipated to open in fall 2015, bringing nearly 300 additional
residential units to the downtown core. With the continued strengthening of the
downtown residential market since the recession, many apartments are now being
converted into condominiums. Over 300 apartment units have been added in the
Downtown neighborhood the last 3 years. This past year the Tower at OPOP opened,
adding 128 new residential units. Several properties such as the Arcade building,
Alverne and 720 Olive are being redeveloped. Most recently announced was the
redevelopment of Crowne Plaza into 300 residential units and a boutique hotel
(DowntownSTL, 2015). Another trend, according to Sherman Associates, occurring

downtown is the increasing geographic diversity of residential development. As a result,
new neighborhoods arc being created (Cupples Station, Ballpark District), emerging
neighborhoods arc becoming more established (Downtown West) and established
neighborhoods arc achieving greater density (Washington Ave.). Based on projects that
are Under Construction, In Development or Planned, the Post Office District,
Washington Ave. East, the Washington Ave. Loft District, Downtown West, the Cupples
Station, BaIIpark District and Gateway Village/Bottle District will each have over 1,000
new residents by 2010.
Source: DowntownSTL

Source: Sherman-Associates
Source: DowntownSTL

Source: DowntownSTL
Business
Several recent transactions are raising the possibility that this city’s downtown, a
depressed office market with an overall vacancy rate of over 22 percent, may become a
regional hub for computer software and data-center companies (Sharoff, 2011).
Downtown St. Louis used to be home to 7 of the top 10 law firms in the area, 4 of the
top ten public companies in the area, 5 of the top ten architectural firms, and 4 of the 8
largest accounting firms (2005). Downtown events and attractions generate over 25
million visits each year. Downtown is home to America's Center, the Edward Jones
Dome, Busch Stadium and the ScottTrade Center. These multipurpose facilities host
hundreds of events annually including: professional baseball, football, hockey, soccer,
arena football; major amateur sporting events including Final Four basketball (men's
and women's) and national championships for hockey, figure skating, and wrestling;
plus national concerts, family events and trade shows. ScottTrade Center is recognized
as one of the top concert venues in the US. Downtown is home to the new Kiel Center
for the Arts (in development), the restored Roberis' Orpheum Theater, the Art Loft

Theater, and a growing number of art galleries. The City Museum has been recognized
as one of the "World's Ten Best Public Places" and attracts over 600,000 visitors per
year. This research does not consider the price per square foot or amount of square
feet in the central business district. This research also does not take into account the
newly constructed Thomas F. Eagleton civic courthouse building. The new Thomas F.
Eagleton courthouse building is not considered since it is a government facility, even
though a large portion of it is being unused at this time. The cost of doing business is
significantly lower in the St. Louis region compared to similarly sized regions.
Accounting firm KPMG has listed the St. Louis area as the 9th most cost-competitive
large metropolitan area to conduct business in, based on a variety of factors (St. Louis
Regional Chamber).
Methods
Measurement of the data was collected over 3-4 time periods. This was to
ensure collection and accuracy of trends. The time frame the data was collected was
from 2000-2015so it would include the pre-recession boom, recession, recovery and
post recession times of our economy.
Data was collected from U.S. census, Costar, St. Louis Regional Chamber,
Colliers International, Cushman and Wakefield (DTZ and CassidyTurley), CBRE and
interviews with brokers.

Findings
Number of Firms and Vacancy Rates
Vacancy Number of Businesses
2005 12.2 % 10,189
2010 8.5 % 9,235
2015 13.3 % 10,876

We can see here that the trends of vacancy rates and the # of businesses have a
positive correlation. This trend seems to go against common knowledge that if
businesses moved into an area, you would assume that vacancy would decline. This
data suggests otherwise though so I was able to look at class b and c as well as retail
and industrial vacancy rates to see where these new businesses were moving. I also
looked at the possibility of firms locating in class b or c space. Cushman and Wakefield
account that 83% of all office occupancy growth has been in class A. Industrial vacancy
rates in the CBD of St. Louis have also grown from 2005 to 2015. In 2005, the
Industrial vacancy rate was 9.73%, 12.42% in 2010 and 19.78% in 2015. This proves
that new business moving into the CBD are not using Industrial space, but the opposite,
not only are they not using Industrial property, they aren’t using Class A either. Class B
vacancy rates went from 26.25% in 2005, to 24.43% in 2010 and 41.23% in 2015.
Class C office space vacancy went from 28.41% in 2005 to 18.43% in 2010 and 23.76%
in 2015. Retail vacancy was only recorded in 2010 and 2015 where it fell from 8% to
8.6%. We don’t have enough data here to explain this but we just know that this
phenomenon occurred.

Median Income and Vacancy Rates
Vacancy Median Income
2015 13.3% $ 36,965
2010 8.5 % $ 40,863
2005 12.2 % $ 36,282
2000 10.5 % $ 28,091

We can identify here the negative correlation between vacancy rates and income
from 2005-2015. With the information given we can see that as incomes decrease,
vacancy rates decrease. This may be contributable to class a space is usually for more
prestigious users and since incomes are falling, more users will occupy lower class of
office space or other uses.

Unemployment and Vacancy Rates
Vacancy MSA Unemployment
2015 13.3 % 5.8 %
2010 8.5 % 10.4 %
2005 12.2 % 6.3 %
2000 10.5 % 3.5 %

We can see here graphically the negative correlation between vacancy and
unemployment. As Unemployment declines, vacancy increases. This is also contrary
to conventional wisdom when you would think that vacancy would decrease when
unemployment decreased because more people are being employed and more user
space is being used. Keep in mind this unemployment is for the MSA, block level for
downtown would not have been an accurate measure to explain the overall environment
because unemployment is a home based factor and more people are working in
downtown than just live in downtown.
Population and Vacancy Rates
Vacancy Population (St Louis
City)
2000 10.5 % 346,904
2005 12.2 % 352,572
2010 8.5 % 319,257
2015 13.3 % 318,416

We can see here a positive correlation between vacancy and population from
2000-2010. Its plausible that this can also be evidenced in that downtown does not
have a strong class a need, but also that other areas (suburbs) are “stealing” those

higher wage earning jobs that typically reside in class a space and city residents are
working in class a space in the suburbs.
Residential Units and Vacancy Rates
Vacancy Residential Units
2015 13.3 % 175,656
2010 8.5 % 176,319
2005 12.2 % 176,267
2000 10.5 % 176,354

Conversion space from office to residential played a factor in this correlation. In
2015 there was a hotel conversion and a residential conversion. U.S. Census shows
only an increase of 36 units within the specified census tract from 2010-2014 so it was
more relevant to use the figure for city wide residential units.

Correlations
(Summary of Findings)
Positive Negative
Population Unemployment
Number of Firms Income
Empirical correlations included both positive and negative correlations and some
were stronger than others. We should note here that correlation does not imply
causation. Here we have looked at several factors that more firms moved in, creating a
higher class a vacancy. We don’t have enough data here to explain this but we just
know that this phenomenon occurred. Downtown does carry the highest class a
vacancy of the region and so there is the potential to increase capacity without building
in the suburbs. As the population rose and declined from 2000-2015, the class a
vacancy rates followed.
Our negative correlations conclude that as unemployment and income
(independently) increased or decreased, the opposite happened with regard to class a
vacancy. From this, we can conclude that some common knowledge trends don’t apply

to the class a market in downtown St. Louis. Downtown St. Louis is not a market for
class a space even though more people are moving to and living in downtown.
It has been concluded here that vacancy rates cannot be a single indicator of
economic conditions seeing that it has such a fluctuating correlation with other
economic indicators and going back to it’s a lagging indicator of the market and cyclical
in nature. Implying previous research by Geltner (1996) regarding a high hurdle rate for
low rent buildings would be applicable to high vacancy buildings as well, it would appear
that the property value of the CBD in St. Louis carries a low value overall.
Future study
This correlation study can further be explored by using its analysis to compare
submarkets within a city, cities to other cities and also metropolitan statistical areas to
each other. Further research should also include whether or not this research would be
applicable for large cities versus small cities. Tying into the literature review findings
that cyclical nature will continue to be a natural occurrence with all of these factors. The
original goal of this research was to identify a single figure or statistic that would identify
the economic conditions of a market; which we have found thus far not to be achieved
through Class A office vacancy rates.
The relevance of urban planning and municipal investments in office markets’
strategies and policies is increasingly justified by widespread globalization, the

structural organization of firms, the progress of information technologies and
accessibility networks; restrictions to the assumptions of neoclassic services location
theory; the different variables that currently explain location/relocation decisions and
offices’ rents; the emerging importance of local agents and markets; and the current
concerns of western economies with the land social function. These planning
interventions may consist, namely, of regulation of property markets, reinforcement of
rent indirect controls, and a stronger tight approach to local economies. Thus, traditional
location and relocation paradigms, and the strategic role of planning must be
reassessed. This requires resort to strong permanently updated management
information systems, and to flexible (non-deterministic) decision-support devices, able
to express any moment physical, economic and functional market characteristics
(Rebelo, 2011).
A deeper look with regression analysis can also help to find more relationships.
In statistical modeling, regression analysis is a statistical process for estimating the
relationships among variables. It includes many techniques for modeling and analyzing
several variables, when the focus is on the relationship between a dependent variable
and one or more independent variables (predictors). More specifically, regression
analysis helps one understand how the typical value of the dependent variable (or
'criterion variable') changes when any one of the independent variables is varied, while
the other independent variables are held fixed. In regression analysis, it is also of
interest to characterize the variation of the dependent variable around the regression
function; which can be described by a probability distribution. Regression analysis is

widely used for prediction and forecasting, where its use has substantial overlap with
the field of machine learning. Regression analysis is also used to understand which
among the independent variables are related to the dependent variable, and to explore
the forms of these relationships. Furthermore, this study did not analyze block level or
building level data, only sub-market data. More detailed record of block level or building
level data may show some differences within the sub-market that may be relevant to the
office market.
I would also be interested in the number of hotel rooms and their occupancy
rates over the same time period. Cities are often classified as having a thriving
economy by the number of tourists the city brings in. The number of hotel rooms and
hotel room vacancy rates can calculate another method of this. Cities must have a
certain number of hotel rooms to attract larger conventions so a cities vitality should be
able to be measured y these factors. Key performance indicators for St. Louis City and
County including hotel occupancy, rate and RevPAR account for new highs of 66.4%,
$107.19 and $71.17 respectively according to Smith Travel Research. Our Sales team
continues to set the bar for success by exceeding their FY 2015 goal securing 449
convention/meetings and 563 group tours committing to 576,542 room nights for groups
arriving between 2015 and 2021. Renewed or extended bookings include the
InterVarsity Christian Fellowship (2018, 2021), Church of God in Christ (through 2019),
Capitol Sports (through 2021), TransWorld Tradeshows (2017, 2018, 2019), Stifel
(2016, 2017) and the National Information Solutions Cooperative (through 2020). New
groups that selected us include the National Bar Association (2016), the American

Federation of Labor and Congress of Industrial Organizations (2017), and United
Rentals (2017, 2018) (www.explorestlouis.com). (2016)
Government buildings and space leased or owned would also help to create a
more complete picture of the local economy. Government can play a role in the vitality
of the local office market by them leasing space. Firms see government moving in and
see that as a sign of boosting the economy and then they decide to follow, further giving
the local market a boost.
Further empirical research, however, is needed to not only ascertain the
continuation of observed trends but also to more conclusively link them. Urban spatial
models may need to be revised to more accurately reflect dispersed patterns of office
commercial activity within post-industrial markets.
Lastly, it would also be imperative to look at the Urban Carrying Capacity of the
CBD in St. Louis. This means looking at what the capacity is for not only the built
environment but the population as well. Attributes that make up the Urban Carrying
Capacity include: Societies Supporting Capacity, Infrastructure and Urban Services,
Environmental Impacts and Natural Resources, Public Perception, and Institutional
Setting (Wei and Xie, 2016). By determining the Urban Carrying Capacity of the city,

we can determine an achievable goal and benchmark to measure our current status and
future successes.

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