CITY HIGHLIGHT, APRIL 2007

SUBURBAN ST. LOUIS CITY HIGHLIGHTS
Kimberly Travis, Christian Andrade, Ted Greenberg, Marc Cacciarelli and Thomas Homco

St. Louis Office Market

The Koman Group’s CityPlace Six, a 237,000-square-foot, Class A office building in Creve Coeur, Missouri, was completed in November 2006. Clayco served as design/build contractor for the $26 million development.

The St. Louis suburban office market experienced an increased demand for office space at the end of 2006, with more than 1.1 million square feet of office product absorbed. Recent growth in St. Louis’ service sector, including the financial services and professional services industries, contributed to this demand. Tenant demand for quality office space is expected to continue in the St. Louis region. With few large blocks of contiguous space available, continued growth in the St. Louis office market will escalate plans for build-to-suit and new construction development.

Vacancy rates fell in nearly all the St. Louis suburban office submarkets during 2006, ending with a direct vacancy rate of 10.6 percent, down from 14.3 percent in 2005 and the lowest rate recorded since 2000. As vacancy rates continue to decline, new small to medium-size speculative office development is expected to increase this year where conditions are favorable.

The direct average asking rental rate for Class A product fell slightly in the latter half of 2006, but continued to trend upward year-over-year, closing the year at $24.16 per square foot. The decrease of rental rates from the start to the end of 2006 was a product of increased leasing activity of Class A space. As higher-priced availabilities are removed from the market, the average price of available space is subsequently reduced. However, as demand increases, rates are expected to rise slightly.

The 58,000-square-foot Gundaker Commercial Center in Chesterfield, Missouri, was completed late in 2006.

Suburban office construction is up by 27.5 percent from a year ago. The bulk of this activity has come from CityPlace Six, a 237,000 square-foot, Class A office building located in Creve Coeur; St. John’s Mercy Hospital’s 110,000-square-foot build-to-suit project situated in Chesterfield; and the 58,000-square-foot Gundaker Commercial Center, a Class A office building also located in Chesterfield. These buildings are all positioned in the West County submarket. CityPlace Six, the most recent major office project delivered in the area, has only 57,000 square feet of contiguous space remaining for lease. The lack of large blocks of contiguous space is expected to influence developers to build new, speculative office projects with lower pre-leasing requirements.

The West County submarket has been the recipient of the most construction activity in recent years. Large blocks of office space are in short supply as a result of limited commercial development in previous years, due in large part to a slowed economy. As a result of recent progression in the St. Louis office market, landlords will be in a position to offer fewer, if any, concessions and increase asking rental rates. Consequently, Duke Realty Corporation, The Koman Group, Sachs Properties and Gundaker Commercial Group are among the first major developers in the region to take advantage of this opportune time in the market and announce new office projects. The West County submarket is expected to be a major supplier of new speculative and build-to-suit office projects in years to come.

— Kimberly Travis is senior research associate at Gateway Commercial in St. Louis, a member of the Cushman & Wakefield Alliance.

St. Louis Retail Market

Surveying the past year and looking to the future, retail leasing in the St. Louis metro area is expected to remain stable. Several new restaurant tenants, such as Chipotle, Moe’s Southwestern Grill, Salsarita’s and 54th Street Grill, have entered the marketplace. Moreover, banks continue to aggressively expand with National City and Fifth Third Bank leading the way in branch openings.

However, parts of the Manchester Road corridor in St. Louis County and the Highway K submarket in St. Charles County remain soft areas of the marketplace. The Highway K submarket suffers from overbuilding of speculative space; landlords have had to increase concessions and/or lower rental rates to fill up empty space. St. Charles County remains one of the fastest growing areas in Missouri, so it will only be a matter of time before the Highway K area firms up, assuming developers refrain from building new space in the submarket.

There continues to be a fair amount of development in the metro area; however, some of the focus of retail development has shifted from West St. Louis County and St. Charles County to St. Clair, Monroe and Madison counties in Illinois during the past year. In St. Clair, the city of Belleville is adding two new centers: The Desco Group’s 600,000-square-foot power center, Belleville Crossing, which is anchored by Target and The Home Depot, on Highway 15, and THF Realty’s Green Mount Commons, anchored by a Wal-Mart Supercenter and Lowe’s Home Improvement Warehouse, on Green Mount Road.

Koman Properties has recently completed a Wal-Mart Supercenter and Home Depot-anchored center just north of Belleville in Collinsville, Illinois, called Collinsville Crossing. Koman has even larger plans in the metro east area with its Troy Town Center in Troy, Illinois. Once all five phases are complete, the project will encompass more than 2 million square feet of mixed-use space. In Madison County, Capitol Realty has also completed the $58 million Edwardsville Crossing, which is anchored by a Dierbergs Supermarket, Borders, Best Buy, Office Depot and Petco. Also, expect to see at least one, possibly two, supermarket-anchored shopping centers come online in Waterloo, Illinois, in the next 1 to 2 years.

Back on the west side of the Mississippi River, Koman has been busy constructing Wildwood Town Center in Wildwood, Missouri. This project will feature 270,000 square feet of office, residential and retail space designed around the lifestyle/town center concept. A little closer to the St. Louis central business district, Sansone Group is planning to redevelop the University Club tower in Richmond Heights to include two hotels and 30,000 square feet of retail space. Coupled with Pace Properties’ 125,000-square-foot second phase development at The Boulevard, there will be 155,000 square feet of new retail space coming to Richmond Heights, Missouri, in the near future.

Overall, the retail market remains steady, with plenty of new and exciting developments across the metro area drawing new tenants into the marketplace. The dark horse for all real estate sectors in St. Louis is the effect of the forthcoming construction on Interstate 64. Office users have already indicated that they may be delaying or changing leasing plans because of the road work, so it will be interesting to see how consumers change their shopping habits to cope with the construction.

— Christian Andrade is a principal and founder of AH Realty Holdings, the brokerage arm of St. Louis-based Andrade Holdings.

St. Louis Multifamily Market

Multifamily occupancy rates in St. Louis County have traditionally been in the mid- to upper 90 percent range for most of the area. This changed during a period in 2000 and 2001, as interest rates began to plummet and home buying became more affordable. Apartment communities with higher rent profiles were most significantly affected, as the lower interest rates and the increased availability of money allowed tenants to purchase homes with little cash and payments comparable to leasing.

Beginning in the second half of 2005 and continuing through 2006, occupancy in the higher-end apartment complexes began to rise. The slow rise in interest rates has increased the cost of home ownership and demand for leasing has elevated as a cheaper alternative to ownership. At present, occupancy rates in the central corridor are in the mid-90 percent range, having risen approximately 2 percent in 2006 and continuing to increase. Many communities are still offering incentives to draw tenants; these incentives are lower compared to a year ago, but still evident as communities compete to attract tenants moving into the rental market. Bottom line income has suffered over the last few years as a result of occupancy problems, leasing concessions, and increased utility, insurance and real estate tax expense. Currently, rental rates in the West County submarket are in the $.80 to $1.00 per square foot per month range for older communities, with newer communities leasing in the $1.25 to $1.65 per square foot per month range. Overall, the county market has a 91 to 93 percent occupancy rate.

New multifamily construction is focused primarily on for-sale condominiums. Apartment complexes completed within the last few years are struggling, many with occupancy rates in the 50 to 70 percent range several years after completion. As a result of this slower than anticipated absorption — as well as the increase in construction costs — permits for new multifamily rental projects in St. Louis County have substantially decreased.

During the last few years, many developers have converted existing apartment communities to condominiums. This has been particularly successful in the Clayton submarket with smaller buildings. This market appears to be flooded with both conversions and new construction, causing conversion sales to slow, as new construction seems to be selling better. Select conversion developments in the Maplewood, Kirkwood and South County submarkets have also been flourishing, while some of the larger conversions have struggled. The smaller units appear to sell the slowest, while multi-bath and townhome units are the easiest to sell.

Led by the popularity of the downtown developments, several new projects are featuring loft-style units. In Creve Coeur, MLP Development has recently completed King’s Landing on Ballas just south of Olive. This property has several loft floorplans available. Conrad Development has successfully sold new construction loft condominiums, including the Hi-Pointe Lofts in Clayton and the Summit Lofts in Creve Coeur. The appeal of this style of unit continues to grow and can be very successful when placed in the right location.

All of the St. Louis County submarkets continue to be strong for multifamily rentals and sales. Major growth in housing continues to occur along all of the primary arteries leading south and west in the county. Southern Illinois is the latest high-growth area, perceived as being closer to central businesses than Jefferson and St. Charles counties, while also offering a small-town living environment. During the next few years, the Highway 40 construction will increase demand in central county areas, as commuters move to get closer to businesses and overcome difficult driving conditions.

— Ted Greenberg is vice president in the multifamily group in the St. Louis office of CB Richard Ellis.

St. Louis Industrial Market

The St. Louis industrial market continues to thrive in 2007. The market is tightening, primarily due to the declining vacancy rates in all categories (bulk distribution, office/warehouse and service center), the slight increases in rental rates and some aggressive development of spec space in the bulk distribution sector.

Absorption was strong in 2006, with a positive net absorption of 2.6 million square feet. This was a significant increase over the 1 million square feet absorbed in 2005. While the Metro East submarket in southwestern Illinois remains ahead in the race, on the Missouri side of the Mississippi River, most real estate professionals are optimistic that the 2007 absorption numbers will continue to improve, exceeding those from 2006.

North County was the most active submarket in Missouri in 2006, with more than 375,000 square feet absorbed. On the Illinois side of the river, the numbers were exceptional, with 941,000 square feet absorbed last year. Real estate professionals have been amazed to see this area flourish, as the submarket housed virtually no bulk distribution space a decade ago.

Average rental rates have slightly increased in the past year, restricted by the additional spec space entering the marketplace. Across the board, rates are up approximately 5 to 10 percent, averaging $5.33 per square foot. There has not been a significant increase in rental rates in several years. Realistically, forthcoming rental rates will only increase slightly, if at all.

Vacancy rates continue to drop and, overall, the market can be characterized as healthy. The lowest vacancy is in the bulk distribution category, while service center/flex space is the weakest segment. The industrial vacancy rate is currently 7.4 percent, with the St. Charles County and South County submarkets posting the lowest rates, 5.1 and 6 percent, respectively. The highest vacancy rates can be found in North County and the Metro East submarkets, which measure 16.5 and 11.8 percent, respectively. The numbers are higher in these submarkets because each recently has added several large speculative facilities that are in the process of being absorbed.

Approximately 3.6 million square feet of industrial product is currently under construction. The North County and Metro East submarkets continue to serve as catalysts of development trends market-wide. Currently, there is a surge in the amount of construction of spec bulk distribution buildings in these areas. Due to the limitations on land availability in St. Louis and St. Charles counties, as well as the low taxes and good incentives across the river, most of the large distribution facilities are being built in Illinois. Some of the most active developers in the Metro East submarket include Trammell Crow, with two 500,000-square-foot buildings underway in the Gateway Commerce Center, and Panattoni, which is developing a 540,000-square-foot facility in Lakeview Commerce Center. North County’s major spec projects include Duke Realty Corporation’s 500,000-square-foot development in Hazelwood and Balke Brown’s 500,000-square-foot project in North St. Louis City, 120,000 square feet of which has been pre-leased.

In all, there is more than 2.5 million square feet of bulk distribution space in the St. Louis market that has yet to be occupied. The year ahead will be exciting and prosperous as all of this space is absorbed.

— Marc Cacciarelli is a first vice president, industrial specialist, in CB Richard Ellis’ St. Louis office.

The St. Louis Industrial Market Bulks Up

The St. Louis metro area continues to attract new bulk industrial developments. There are currently seven new speculative bulk projects with more than 200,000 square feet sitting vacant or under construction. With more than 4 million square feet of net absorption in 2006, developers are not afraid to come out of the ground with speculative products in hopes of attracting large regional distribution tenants.

Most of this absorption has occurred on the Illinois side of the Mississippi River, known as the Metro East submarket. The low ground cost, abundance of available land, superior infrastructure and numerous economic benefits make this area a strong player when competing for major distribution tenants. However, several infill sites both in St. Louis County and the city of St. Louis have been identified and construction has begun on state-of-the-art distribution facilities in these submarkets as well.

The closure of the Ford manufacturing facility in the north/central section of St. Louis County will offer a rare opportunity for a developer to acquire approximately 100 acres in close proximity to Lambert International Airport. This development could possibly include even more construction of bulk distribution warehouses in 2008.

There were many sighs of relief heard throughout St. Louis when Chrysler announced that it would not be shutting down its 2 million-square-foot manufacturing facility located in southwest St. Louis County. A Chrysler minivan will continue to be produced out of this facility, which ensures that many of the jobs and space occupied by Chrysler suppliers will be retained.

Another trend evident in the St. Louis real estate investment market is the influx of out-of-state private capital purchasing any and every available property that can be bought, which is driving down the supply and cap rates. Particularly prevalent is investment capital coming from California buyers. The low vacancies, steady growth, moderate market swings and solid investment returns (compared with other major markets) has out-of-state investment buyers acquiring almost any well-located property that is generating income. St. Louis has seen typical, institutional-grade industrial properties trade in the high-6/low-7 percent cap rate range, which is a good 200 basis points lower than what could have been achieved 24 months ago. Even with construction cost escalations and flat lease rates, sellers are still able to make significant profits because of the elevated cap rate disposition values.

Ultimately, the tenants are the benefactors coming out ahead in this game.

Over the next 24 months, we will see flat to slightly lower rental rates, due to the 4 million square feet of new construction deliveries being brought to the market all at relatively the same time. St. Louis will need to see a considerable amount of absorption of this new product before we see rising rental rates and decreasing tenant concessions.

— Based in the St. Louis office of Lee & Associates, Thomas Homco, principal, specializes in the St. Louis industrial market.


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