February 11, 2022

Single Tenant Office 'Playing Ball' in St. Louis and Elsewhere

While this year’s baseball season appears to be in jeopardy due to stalled labor negotiations, transaction activity around the St. Louis Cardinals stadium—and apparently elsewhere—is playing ball.

Arch Street Capital Advisors and Orion Office REIT announced the formation and continuation of a programmatic venture focused on the acquisition of long-term leased, single-tenant office assets.

The partnership recently acquired 700 Market Street, a 127,468 square foot, state-of-the art office property located in the central business district of St. Louis near Busch Stadium.

The long-term leased, mission critical office property serves as the corporate headquarters for an investment grade-credit tenant. The property is located adjacent to the new $360 million Ballpark Village and four blocks from the landmark Gateway Arch, providing a live-work-play atmosphere for the tenant to enjoy.

Capital Betting on Long-Term Office Occupancy

Eli Randel, Chief Strategy Officer, CREXi, tells GlobeSt.com that the partnership’s increasing investment activity in single-tenant office space signals that investment capital is betting long-term on office occupancy and is confident in the credit of tenants and the CBDs in which they reside.

“As many companies call their employees back to the office, demand for office space has seen a recent uptick. While some companies have permanently made their workforces remote, most are adopting hybrid plans or reverting back to the office entirely,” he says.”

“In both instances, we’re seeing tenants expand to accommodate hybrid dynamics and to allow for flexible seating, less dense space, and de-centralized operations.”

Curtis Hodges, regional managing director, Northmarq, tells GlobeSt that investor demand for single-tenant net lease office assets has risen to a pre-COVID high and continues to be an attractive sector for investors.

“Last year, we saw annual investment volume for single-tenant office properties increase 47% year-to-year to reach $28.3 billion,” Hodges said.

Many Properties Having Little Trouble Receiving Multiple Offers

At Stan Johnson Company, all currently available and under contract single-tenant office listings with long-term leases have received multiple offers—both direct off-market or within the first few weeks of being brought to market—which has created a competitive bidding environment and driven market pricing for our clients.

“What we’re seeing illustrates what the overall market is seeing, and we expect the momentum for single-tenant office assets to carry well into 2022,” Hodges said. “In this next year, low cost of capital should continue to be available, cap rates should remain stable, and investor demand should continue to steadily rise as demonstrated by the recently announced Arch Street Capital and Orion partnership.

“However, we’ll continue to monitor the Federal Reserve for future interest rate hikes and policy changes to signal when cap rates might follow, as typically cap rate impacts are seen three to six months after interest rates change.”

Preston Young, National Head of Office Investor Services for Stream Realty Partners, tells GlobeSt, that “this isn’t surprising to see, and I suspect we will see more announcements like this in the months to come.

“At some point, the pricing dislocation between office and the heavily favored products such as multifamily and industrial gets so wide that many investors start to reexamine the risk-adjusted returns.

As we likely revert to more normalized social patterns in 2022, the ‘fear’ surrounding office should subside for many seeking more attractive yields. I anticipate 2022 being a solid year for office capital markets activity.”

Deal Comes from Orion’s Recent Spin-Off

Orion’s interest in the partnership was assumed from VEREIT, Inc., as part of Orion’s spin-off transaction following the Realty Income Corporation and VEREIT merger.

To date, the partnership has acquired six assets for approximately $227 million. The partnership is actively seeking new single-tenant office investment opportunities in the range of $10 million to $60 million.