According to a new report from Marcus & Millichap Real Estate Investment Services, the St. Louis office market is well into recovery mode, thanks to steady job growth and restrained new office construction.

“Investment activity continues throughout the market, and steady employment growth should drive demand for area office properties going forward,” says Jeffrey Algatt, regional manager of the St. Louis office of Marcus & Millichap.

Although the region’s manufacturing and information sectors are still a drag on new payrolls, employers are adding new hires in every other segment of the economy. The professional and business services and educational and health sectors continue to expand. These two industries have combined to add over one-third of all new jobs in the area, and expectations point to sustained growth through the end of the year. Employers in St. Louis have added 15,800 workers to the regional area over the past 12 months, an increase of 1.2%. Job growth was strongest in the first and second quarters, when more than 11,800 positions were created.

While employment grows, office development has moderated, with completions totaling 390,000 sq. ft. through the third quarter. The combination of healthy tenant demand and subdued office completions has dropped vacancies to their lowest levels in nearly seven years, at 14.9%, down 40 basis points from year-end 2006. As a result, owners are now pushing rents higher, a trend Marcus & Millichap expects to continue into 2008. Asking rents are projected to increase 0.6% to $19.64 per sq. ft. by yearend 2007, while effective rents will climb 0.5% to $16.26 per sq. ft.

Recent tightening in the capital markets, however, will lead to more conservative underwriting standards, generating some cooling in transaction velocity and forcing slight upward pressure on cap rates. For now, cap rates remain stable in the low-7% range, relatively unchanged over the past year. Meanwhile, transactions have increased 23%, with properties trading for a median price of $136 per sq. ft. year over year, a 16% gain from one year ago.

Algatt says investors will likely target properties near residential and business expansion west of the city, near Chesterfield. Buyers may want to consider medical office properties near Clarkson Road, where demand for space has enabled aggressive asking rent growth, which has in turn fostered price appreciation.

The largest development currently under construction is the 165,000 sq. ft. Solae Co. headquarters in the St. Louis City submarket. Scheduled for completion in spring 2008, the project will increase inventory in the area by 9.9%.