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ST. LOUIS COUNTY — Four years since the pandemic upended the ӣ����Ƶ office market, new data suggest the region has bottomed out, and may be prepped for a revival.

More office space was leased than vacated in the previous three months — marking the first time in a year, according to new research from commercial real estate firm CBRE. Although the industry isn’t expecting blockbuster figures for the rest of the year, experts say the market has likely seen the worst.

“We’re not back to pre-pandemic activity by any means, but it was really anemic six months ago,” said David Kelpe, senior vice president of CBRE. “There’s more tenants in the market today than we’ve had in the last year for sure.”

But businesses aren’t selecting just any office anywhere. New research from real estate firm JLL found that an overwhelming majority of leasing, nearly 81%, was in Class A buildings — those with the highest quality offices. It underscores the pressure facing landlords to provide luxury office space, or have the means to pay for such renovations.

That’s led to an uneven recovery.

Class A office space in Clayton, the region’s premier office market, was almost 83% filled in the second quarter this year. Class A space in Downtown ӣ����Ƶ, meanwhile, was less than 70% occupied. The third-largest office market in the region, the Highway 40 corridor in west ӣ����Ƶ County, was 73% occupied, CBRE data shows.

“I’m not sure there’s a place for the building owner who wants to be the low-cost provider and not invest in the property,” said Chris Fox, president and CEO of Gershman Commercial Real Estate. “That could be a race to the bottom that you don’t want to win.”

‘Big boost’

The office market stats at the beginning of the pandemic were stark as employees transitioned to work from home. Each quarter in 2020 saw more and more office space emptied: 157,000 square feet in the second quarter, 249,000 in the third, and more than 500,000 square feet in the last quarter, according to CBRE.

The average vacancy rate ticked up, too, from 11% at the end of 2019 to 16% by the end of 2023.

A “doom loop” theory emerged that cautioned that empty office buildings could have a trickle effect for the economy. Banks could be forced to take over vacant buildings. Municipalities could lose revenue from the lack of foot traffic.

The ӣ����Ƶ region showed some warning signs.

Sublease space, for instance — when downsizing companies sought to have other firms take over their space — hit levels not reached in a decade.

And some notable companies, such as managed health care provider Centene Corp., put whole office buildings on the market. Centene alone dumped nearly 1 million square feet of space.

Over the past four quarters, however, the gush of office space on the market turned into a trickle, said Joshua Allen, CBRE’s Midwest research manager.

The second quarter this year, for the first time in a year, saw more office space occupied than vacated. In total, a little more than 169,000 square feet of office space was leased that quarter, roughly half of that attributed to First Bank moving into its new headquarters in Creve Coeur, CBRE found.

“That was a really big boost,” Allen said.

The average rental rate for office space also grew — a little — for the first time in a year, by 28 cents to $22.60 a square foot.

And the amount of sublease space on the market continued to shrink by more than 500,000 square feet over the beginning of the year.

Paul Larson, CEO of ӣ����Ƶ-based Larson Financial Holdings, which owns some office buildings and advises clients on their holdings, said his firm has signed more leases in the first quarter of 2024 than it has in the past two years combined.

“There’s a lot of movement in the right direction,” Larson said.

Pressure’s on

In the last months of 2019, BurkHill Real Estate acquired 18 properties, mostly office buildings, in Chesterfield. The local firm immediately began renovating the properties and upgrading the amenities, aiming to lure tenants with higher quality spaces.

That trend, called “flight to quality,” is now ubiquitous in commercial real estate as tenants seek ultra-modern in order to entice workers back to the office.

“We got ahead of it. We decided that that was (going to be) a differentiator,” said Paul Hilton, BurkHill’s managing principal. “It’s worked out very well for us.”

The company is in a good place financially, he said. It doesn’t have to offer the concessions that some landlords are doling out to attract and retain tenants. BurkHill also doesn’t have to battle with higher interest rates and conservative lenders that some other landlords are now dealing with, he added.

But it’s a rough environment for office owners in need of funding, experts said. Banks often are asking for more equity with office deals, but that dilutes investors’ return and many investors are finding higher returns in other ventures. That, in turn, impacts the metrics banks use to assess a borrower’s ability to repay the loan.

Hoffmann Commercial Real Estate — an affiliate of the Hoffman Family of Cos. that tried to create a Napa Valley-like appeal in Missouri’s wine country — defaulted on its 16-story office building in Clayton. The company told its lender that it had no confidence it would be able to secure financing to pay off its $28 million loan before it comes due in November, according to a report from .

Larson said building appraisals are coming in low as well, which creates gaps between how much financing the owner needs versus what the bank will lend. And in some cases that could force sales of buildings well below market value.

“The domino effect can be dangerous,” he said.

His company is opting for one-year extensions with banks as it waits for interest rates to fall.

Some owners have opted to sell, like Virginia-based real estate investment firm Lingerfelt, which put its dual-property Pierre Laclede Center in Clayton on the market. The Forsyth Boulevard buildings are 62% occupied, . The company bought the complex in 2019 for $95 million.

Fox, the Gershman leader, said some tenants are asking for more details on a landlord’s financial status to better determine whether the owner has the funds to make the improvements it said it would. Tenants, he said, are often not willing to pay higher rent without upgrades.

“It’s not getting any less expensive to operate office properties. Taxes have gone up, utilities have gone up, property casualty insurance has gone up,” said Fox. “The only way you can raise your rent is by investing in the property.”