CITY HIGHLIGHT, APRIL 2008

ST. LOUIS CITY HIGHLIGHTS
James Sansone, Michael Donovan, Andrew Sheir, Jeffrey Algatt and Terry Stieve

St. Louis Retail Market

St. Louis is a very progressive city, both in the downtown and outlying areas of the city and county. There are both development and redevelopment opportunities in almost every market of the metropolitan area. While established neighborhoods in the city and near city areas are seeking redevelopments for run-down and blighted property to boost their economy, growing demographic trends in the surrounding counties are also providing new development opportunities.

Most recently, Sansone Group completed a $60 million, 400,000-square-foot mixed-use project in Jennings, Missouri, a suburb of North St. Louis County. The project involved the development of a nearly vacant and blighted center that had been an eyesore to the community for 2 decades. Sansone Group worked with the city, county and state to push this project forward with a strong dedication toward urban renewal. The development is anchored by Target and Schnucks Supermarket, and opened September 2007.

Currently, plans are underway for new $150 million project in Richmond Heights, Missouri, which is at the epicenter of the metropolitan area. This mixed-use redevelopment, University Village, will include a retail component, two hotels, upgrades to the existing Class A office building and the addition of two above-ground parking garages. The Lionstone Group, Sansone Group and EQUIS Hospitality Management have joined together for the development of the project, which broke ground in February.

There is development and redevelopment taking place in almost every submarket. Most redevelopment is occurring in older, more established communities, especially those with progressive-minded city governments. New development is taking place both in the Metro East submarket, including Belleville, Shiloh, Fairview Heights and Edwardsville, Illinois, and in the outlying counties on the Missouri side.

Outlying areas in St. Louis’ surrounding counties are showing a lot of development potential, as the population growth increases farther outside of the metro area. These once rural areas are becoming more attractive to homeowners, as the cost of living is cheaper. With the influx of new retail development and national tenants to these areas, travel is not a factor for shopping, dining and other amenities once limited only to more urban areas.

— James Sansone is a principal of Sansone Group, a full-service real estate firm based in St. Louis.

SIGNIFICANT DEVELOPMENT IN SUBURBAN AND DOWNTOWN ST. LOUIS

There is activity across all sectors occurring in every corner of the St. Louis market. Numerous shopping centers are underway in the suburban markets, while condo and mixed-use development is changing the face of the Washington Avenue corridor and other downtown neighborhoods.

TNC Investors is developing Town and Country Crossings, a 310,000-square-foot Target and Whole Foods Market-anchored shopping center in Town and Country, Missouri.

In Town and Country, Missouri, TCN Investors is developing the 310,000-square-foot Town and Country Crossings. The project is approximately 70 percent leased, and will be anchored by Target and Whole Foods Market. One half of the development’s 45 acres will be dedicated to green space. TR,i Architects designed the project, and Brinkmann Constructors is serving as general contractor.

The Metro East submarket in Illinois is awash with development activity. According to the Leadership Council Southwestern Illinois, there is a development pipeline of approximately $9 billion for projects in the Metro East. The industrial market is spurring the most development, including the $1 billion AirPark, which Martin Aviation Group is developing at Downtown St. Louis Airport in Cahokia, Illinois. Airpark will feature 3.5 million square feet of Class A office space, as well as retail space and corporate aviation hangars.

Work is underway in Dupo, Illinois, for Clayco’s $450 million first phase at Discovery Business Park. Located west of Interstate 255, the park could eventually represent an investment of more than $1 billion.

The Casino Queen, located in East St. Louis, is undergoing an expansion, with $92 million invested in a new gaming facility, and $58 million in additional investments planned. Belleville, Illinois, has a number of retail developments underway, as NAI Desco is working on Belleville Commons on Illinois Route 15. The 410,000-square-foot development’s first phase opened last October, and is anchored by The Home Depot and Target. Additional tenants include PetSmart, OfficeMax and Famous Footwear.

Bruce Development recently completed the Locust Street Lofts in St. Louis

Moving into the city, The Lionstone Group, Sansone Group and EQUIS Hospitality Management have partnered to develop the $150 million University Village in Richmond Heights, Missouri. The project will entail upgrading the existing 273,000-square-foot University Club Tower, and Lionstone and Sansone will develop retail space along Brentwood Boulevard, as well as add two parking garages to serve the development and two adjacent hotels. The hotels, a 158-room Homewood Suites by Hilton and a 243-room Westin Hotel, are being developed by EQUIS.

In the revitalized Washington Avenue area in downtown St. Louis, Paric Corp. recently completed renovations of the six-story, 97,325-square-foot Elias Haas Building. The property, which is located at the corner of 23rd and Locust streets, has been redeveloped into 96 loft apartments with 4,000 square feet of retail. The owner/developer is Bruce Development.

Also downtown, the city advancing is construction of the $16 million, eight-level Justice Center Garage on Tucker Boulevard and Clark Avenue. When complete next February, the 520-space structure will be utilized by area employees, and serve as a linchpin for sports parking and a boon to further development in and around Cupples Station. The garage will also feature 10,000 square feet of ground-floor retail.

St. Louis Office Market

The St. Louis office market is all good, if you are an owner of a quality office building in almost any major submarket.  In 2007, downtown St. Louis was the only submarket that experienced negative absorption, and that was only -85,000 square feet. Steady tenant demand and a limited amount of new deliveries over the past 5 years are the primary factors feeding the city’s strong office market.

The development community has taken note of this favorable market and has responded by breaking ground for a number of new office projects. There are currently eight significant office projects under construction totaling approximately 1 million square feet which will all be delivered this year.

A number of significant deals were executed in the suburban market in 2007. A summary of the major deals follows:

The above deals were a big part of a wave of activity that saw the St. Louis office market absorb close to 1 million square feet in 2007, which was well above historical absorption levels. In addition to the very healthy absorption activity, the overall occupancy rate for the Class A and B markets has increased to 90 percent. Below is the breakdown of the individual submarkets:

For the remainder of the year, pay special attention to tenant activity in the urban core. A number of large law firms are currently evaluating existing opportunities, as well as exploring new development alternatives downtown and in Clayton. There are no fewer than five major law firms actively in the market and seeking spaces from 80,000 to 250,000 square feet. When the music stops, not everyone will get the chair they prefer. Some will be forced to sign long-term leases at new construction rents. Rental rates in the low to mid-$30 per square foot range are necessary to justify new construction in the downtown and Clayton submarkets.  It will be interesting to see where the shifting tenants will end up when all is said and done.

— Michael Donovan is a principal with St. Louis-based Balke Brown & Associates.

Law Firms Have Downtown’s Attention

Downtown St. Louis is an exciting place these days. Landlords that once struggled to persuade tenants to remain downtown are not only retaining high quality tenants, but are now successfully attracting new users to the market. Centene Corporation’s plan to construct its new 750,000-square-foot corporate headquarters downtown within Ballpark Village is the largest office deal the area has seen in 50 years. Other local and national companies are looking at downtown St. Louis and like what they see — an area with an established and growing residential population, numerous new restaurants, world-class hotels, eclectic retail, and a young and talented work force. 

The hot topic this year is the leasing market and large law firms. There are several large law firms with leases expiring in 2010 that  are driving demand, and many questions about where these large law firms will land are still unanswered. At the top of the list are Thompson Coburn, which will need 230,000 square feet, followed by Armstrong Teasdale and its 150,000-square-foot requirement. The other firms seeking space are Polsinelli Shalton Flanigan Suelthaus at 90,000 square feet, and Stinson Morrison Hecker at 60,000 square feet. Husch Blackwell Sanders, the new firm resulting from the recent merger of Blackwell Sanders and Husch & Eppenberger, will soon begin evaluating its combined firm space requirement, which could easily exceed 200,000 square feet. All in all, these law firms require more than 700,000 square feet of office space. 

With limited new construction on the horizon and a downtown Class A market that is more than 90 percent leased, the first law firm move could be critical in establishing the path that the others will follow. For example, if either Thompson Coburn or Armstrong Teasdale moves out of its existing building into a new development, the other large law firms looking for space will have a rare opportunity to establish prominent positions in existing, high-quality buildings. There could be extensive movement among downtown law firms in the next few years, and it should be an interesting ride for landlords and tenants.

— Andrew Sheir is senior vice president in the St. Louis office of Jones Lang LaSalle.

St. Louis Multifamily Market

Apartment demand in St. Louis will continue to be strongest in the major white-collar job districts and adjacent submarkets this year, leading to pronounced vacancy and revenue improvements in these areas. As such, nearly all of the metro area’s apartment construction will occur within the few remaining sites located within the Golden Triangle, an area west of the St. Louis CBD that is bounded by Interstate 70, Highway 40 and the Missouri River. In Clayton, Missouri, for example, plans for 130 luxury rentals have been finalized, representing a dramatic shift away from the condo developments that dominated construction activity in recent years. The city’s slowing condo market and tighter lending standards are eliminating much of the demand aimed at for-sale units, which are quickly being removed from some mixed-use developments, such as the Bottle District project. On the supply side, few suburban projects can command rents high enough to justify development.

Investment activity in St. Louis will remain steady this year, as increased out-of-state buyer activity offsets some of the condo conversion transactions that have faded from the market. Out-of-state investors still holding exchange capital are turning to the metro area for above-average cap rates, which are currently in the low to mid-7 percent range for Class B plus product and above. In affluent submarkets, such as the Clayton/Mid-County area, the gap between rents and monthly mortgage payments is significant, and occupancy rates in some assets will improve with continued spillover demand from the downtown submarkets. Additional opportunities for revenue growth can be found in the Manchester submarket, where tight conditions will generate the metro’s largest decrease in concessions this year. Investors may want to pursue affordable properties in the South County submarket, near the planned River City Casino. The project, which should open in the spring of 2009, will create 7,000 traditionally lower-paying leisure and hospitality positions in the area, helping to further spur renter demand during the next few years.

After 18,000 positions were added in the St. Louis area last year, expect employment growth to slow this year to 9,500 jobs in 2008, an increase of 0.7 percent. Approximately 600 apartments will come online in St. Louis this year. In 2007, 550 units were added to stock. The vacancy rate is expected to improve 10 basis points to 6.8 percent in 2008, following a 110 basis point drop last year. Asking rents are forecast to rise 2.8 percent to $736 per month, while effective rents advance 3 percent to $697 per month.

After years of inexpensive capital flowing into the commercial real estate market, a drop off in demand for mortgage-backed securities has caused conduit lenders to scale back dramatically. The sub-prime residential collapse is largely to blame for the initial capital markets shock last summer, which caused a temporary shutdown of capital flows into commercial real estate. Residential sub-prime losses will climb further this year, resulting in overall volatility across credit markets. The commercial mortgage market has bounced back to some degree, but fears that lax underwriting standards have compromised the integrity of CMBS pools continue to swirl. Approximately half of the financing for major apartment transactions prior to the credit crisis was securitized.

Commercial delinquency rates are below 0.5 percent, and only a modest increase is anticipated in 2008. Apartment market fundamentals are also generally very healthy, and the more cautious lending environment makes an overbuilding situation unlikely during the foreseeable future. Nonetheless, lenders are closely scrutinizing deals, underwriting new loans based on actual NOIs, and requiring higher down payments and debt-service coverage. Interest-only loans for 2- to 3-year terms are making a comeback, and debt-service coverage ratios are up 10 basis points from 1 year ago to 1.2x. Rebuilding investors’ confidence in CMBS will take time, especially with the potential unwinding of structured investment vehicles looming. Fortunately, alternative lending sources are available and will continue to ramp up activity this year. Underwriting requirements may loosen modestly this year, returning to longer-term historical norms. The Fed continues to assert its intent to act as needed to prevent the broader economy from entering into recession. Assuming inflation remains under control, the Fed is likely to cut rates again this year.

Local investors with extended holding periods may want to target Class B and C assets in the Airport/Interstate 70 and East of Interstate 44 submarkets. Properties in these areas do not compete with the local housing market and area renters have few alternative housing options.

— Jeffrey Algatt is the regional manager of Marcus & Millichap Real Estate Investment Services’ St. Louis office.

St. Louis Industrial Market

In October 2007, Expansion Management magazine released its 2007 “Logistics Quotient” rankings, which identify the most logistics-friendly metro areas in the United States. St. Louis ranked second as the magazine evaluated industry climate, work force, infrastructure, highway access and other criteria in determining its rankings.

Developers wouldn’t argue with the magazine’s conclusion. Much of the 2007 industrial construction in St. Louis was built speculatively to supply the needs of the growing local logistics industry. More than 3 million square feet of new industrial construction was completed in the St. Louis metro area in 2007, of which 2.5 million square feet was modern bulk space. More than half of the new construction was speculative, as developers are betting on growth in warehousing in general, and logistics specifically.

A tenant needing 200,000 square feet of space today would have 14 choices. St. Louis has not had this many options in my 20-year brokerage career. More options mean more choices for tenants, and downward pressure on rents.

Institutional investors have completed several major projects during the last 3 years. Multi-Employer Property Trust completed three buildings totaling more than 1.5 million square feet, all in the Edwardsville, Illinois, area in the Metro East submarket. Duke Realty Corporation completed three buildings totaling 920,000 square feet in 2006 and 2007, all in the northwest portion of St. Louis County. JB Management completed two buildings totaling 650,000 square feet, one each in Edwardsville and northwest St. Louis County.

This year, local developers will bring to market bulk buildings of 500,000 square feet in Metro East (Balke Brown Associates), and 400,000 square feet in North County (McEagle Properties).

St. Louis has been a beneficiary of the growth in international trade. Exports by Missouri companies increased by more than 5 percent in 2007. Leading export industries were transportation equipment at $4.7 billion and chemicals at $2.2 billion. With the U.S. dollar exchange rate falling, exports nationally are expected to increase.

Construction of manufacturing buildings continued a comeback in 2007, with the completion of four new facilities totaling 550,000 square feet. Three of the four manufacturers are in transportation industries; the fourth manufacturer serves the commercial construction industry. Initiating new facilities in biotechnology industries in 2007 and 2008 are Pfizer, Monsanto, Sigma Aldrich, Solae, Steris and Covidien.

Absorption in 2007 was unevenly distributed across the metro area. Metro East had by far the greatest increase in occupancy in 2007, with 1.27 million square feet absorbed; approximately 900,000 square feet of this total occurred in the Edwardsville and Granite City, Illinois, submarkets. Net additions to the Metro East inventory totaled 1.35 million square feet, and vacancy fell to 13.9 percent from 14.4 percent. South St. Louis County absorbed 587,000 square feet in 2007, but added only 185,000 square feet to the inventory, the result of which pushed the vacancy rate down to 2.7 percent from 4.3 percent.

Lease rates for bulk space vary from $3 per square foot — including taxes, insurance, and CAM — in Metro East, to $4.50 per square foot in the city of St. Louis and St. Charles County, to $5.25 to $5.75 per square foot in St. Louis County.

— Terry Stieve, principal and senior vice president, provides industrial leasing and investment services in Colliers Turley Martin Tucker’s regional office in St. Louis.

ST. LOUIS REAL ESTATE ICON PASSES AWAY Theodore R.P. Martin Theodore R.P. Martin, a leader in the St. Louis commercial real estate market, has passed away at the age of 83. As one of the founding partners of Colliers Turley Martin Tucker, Martin helped build what has become the largest commercial real estate firm in the St. Louis area, and one of the largest firms in the nation. He began his career in 1950 with Stifel Realty Company, forming Martin & Associates in 1957, a firm that specialized in the industrial market. Throughout his career, Martin was responsible for developing hundreds of thousands of square feet throughout St. Louis, including a joint venture in developing Laclede Airport Park with Laclede Gas Company. He also assembled sites downtown for Equitable, Southwestern Bell and the former First National Bank. In 1972, Martin merged his company with Turley Corporation and with Westgate Management, which brought property management expertise to the firm. This company eventually became Colliers Turley Martin Tucker. The firm broadened its reach, expanding into Kansas City, Nashville, Indianapolis, Cincinnati, Dayton, Ohio, and Minneapolis/St. Paul. Martin served as president from 1972 until 1993, when he became chairman. He assumed the role of chairman emeritus in 2002, remaining active in new business development and as an advisor. Martin is survived by his wife, Frances; his daughter, Frances Martin Weaver; and his sons, Thomas and Theodore Rombauer.

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