CITY HIGHLIGHT, APRIL 2009

ST. LOUIS CITY HIGHLIGHTS
Jerome R. Crylen, Mark Palmer, Joshua Roedemeier and Steven Maulden

St. Louis Industrial Market

Like other sectors in the commercial real estate industry, the St. Louis industrial market will see a significant decrease in development of new product over the next 12 to 18 months, with the exception of a few select build-to-suit projects for users seeking to consolidate operations. With a mere 187,600 square feet of general industrial space under construction, and no new construction planned for the R&D/flex and warehouse/distribution sectors, brokers are looking to existing infill product to meet client requirements.  It is unlikely the Southwest Illinois market will see any new development until the levee re-certification matter initiated by FEMA in 2008 is resolved.  This could take up to 3 years, as the Illinois FEMA District is dictating this re-certification. To the contrary, Missouri development is likely to move forward because no such issues exists.

St. Louis is experiencing both the positive and negative impact of the economic troubles in recent developments in the metro area. Villa Lighting recently added 80,000 square feet of additional supply that is unlikely to be absorbed in the near future. The St. Louis market can boast of a few bright spots in this economic downturn, notably GreenStreet Properties’ Hall Street project, a fine example of an antiquated property  in Downtown St. Louis near Broadway that has been adapted for lighter industry, as well as offloading from the river.

While there will be a lapse in immediate development, the greater St. Louis area will still see site improvement move forward on land purchased in the preceding 24 months. Infrastructure and land development will continue in preparation for the economic upswing and sites will be cleared for vertical development in the future.

St. Louis has seen a slight decrease in vacancy rates since the end of 2008, declining to 10 basis points to 8.3 percent from 8.4 percent, which may be attributed to a continued decline in asking rents, currently at $4.24 per square foot. The highest vacancy rates are found in the area east of Interstate 170 to the St. Louis city limits (13.2 percent) and North County (13 percent), while the lowest vacancy rate is in Jefferson County, Missouri (1 percent).

Developers continue to push forward, slowly but surely, with existing projects. Activity from NorthPark Partners, Panattoni Development Company and Gundaker Commercial Group continues throughout the region. Look to Fenton and St. Peters, Missouri, as well as the area surrounding Lambert International Airport, to be the submarkets that sustain industrial development during the next several months.

— Jerome R. Crylen is a senior vice president with St. Louis-based Grubb & Ellis|Gundaker Commercial.

St. Louis Office Market

The economy, or general lack thereof, has done no favors to the commercial real estate market. The velocity of office property sales, which was at a record level in 2007, has slowed to a crawl. On the leasing side, the St. Louis market has managed to hold fairly steady despite the bad news, although vacancy rates, as a result of large and growing blocks of sublease space, are expected to rise over the course of this year and concessions are expected to increase.

At the end of 2008, the vacancy rate for the St. Louis metro area office market stood at 15 percent, up approximately half a percentage point from the third quarter, but essentially unchanged from fourth-quarter 2007.

Average lease rates for the metro St. Louis market, which showed a decline early in 2008, began to rise again late in the year, ending at $18.88 per square foot. Lease rates vary greatly by submarket, with the highest rates being found in the Mid-County submarket that includes Clayton, Missouri, a popular business destination that had a scant 7.1 percent vacancy rate for its Class A space at the end of 2008.

There has been precious little new development in the office market, and while developers have planned a variety of mixed-use projects that contain office components, most of those plans have been put on hold as a result of the lack of available financing and the poor performance of the overall economy.

Ballpark Village, which has been bubbling on St. Louis’ development pipeline for years, has made some progress towards fruition in the early stages of 2009.

In the Downtown submarket, for example, St. Louis has not had a new multi-tenant office building constructed since the late 1980s. That could change thanks to the plans for the long-gestating Ballpark Village, which is a mixed-use development planned at the site of the St. Louis Cardinals former baseball stadium. Ballpark Village, co-developed by The Cordish Companies and the St. Louis Cardinals, has gone through several development plans. Financing still is not fully in place, and while a bond referendum may help push things forward, it is unclear if construction will begin this year. When fully developed, Ballpark Village is proposed to add 750,000 square feet of office space to the Downtown submarket.

Several projects in Clayton are in various stages of development. Demolition work began in late 2008 for a new headquarters facility for Centene Corporation, which will be built at Hanley Road and Forsyth Boulevard. A similar project for Brown Shoe Company, however, has been delayed until economic conditions improve.

Development of Centene Corporation’s new headquarters facility at Hanley Road and Forsyth Boulevard in Clayton, Missouri, is moving forward following the demolition of existing buildings at the site.

In the coming months, expect lease renewals to be a critical component of office market activity. With a lack of new tenants coming into the market, it will be essential for owners to secure existing tenants so that they don’t lose their existing income stream or have to outlay additional costs to prepare vacant space for potential new tenants.

Tenants with significant size requirements may be willing to consider Downtown because of the lack of large blocks of space in the Clayton submarket. Should these types of tenants come along, it would certainly be a boost to Downtown, where the Class A vacancy rate is 21.5 percent.

One significant submarket to monitor for activity in the near future is South County. Given the recent merger between InBev and Anheuser-Busch, there is now a large amount of office space, formerly occupied by Anheuser-Busch, that will be made available to the market for lease. The vacated space, coupled with existing large blocks of space at the Maritz campus in Fenton, Missouri, will certainly impact South County’s 11.3 percent vacancy rate, which includes only 4.2 percent vacancy in the Class A market.

— Mark Palmer is a senior vice president in the St. Louis office of CB Richard Ellis.

ST. LOUIS COUNTY EXPANDS FOREIGN TRADE ZONE

The St. Louis County Port Authority has received approval from the U.S. Department of Commerce Foreign Trade Zone Board to expand the foreign trade zone in St. Louis County to include new sites around and at Lambert-St. Louis International Airport. The expansion zone sites include NorthPark, a 550-acre business park located east of the airport; Hazelwood Commerce Center, an industrial park located on 170 acres directly northwest of the airport and interstates 70 and 170; Lindbergh Distribution Center, which is a 528,000-square-foot distribution facility located southwest of a former Ford plant in Hazelwood, Missouri; and a 755-acre airport-owned tract of land that is adjacent to Lambert.

“This could be a really big deal, if successful,” says Mike Jones, senior policy advisor for the St. Louis County Economic Council and chairman of the China Hub Commission. “It would transform St. Louis, but  also the whole Midwest. China is the third-largest economy in the world, and will be the biggest in the next 15 years. This is not just about imports from China, but about two-way trade. If we can pull this off, it could essentially do for 21st Century St Louis, what the East Bridge did for St. Louis in the 19th Century.”

The site expansion will provide St. Louis County and the sites involved with ability to increase investment and development, as well as spur additional employment opportunities. The expanded sites include designated areas with existing businesses, land that is under development, and vacant land that will be developed to attract new business to the community.

Foreign Trade Zones allow foreign products to be admitted without being subject to customs duties. Such sites are intended to increase U.S. participation in international trade and encourage growth and re-investment. The endeavor was promoted by the China Hub Commission, a group of area leaders that have been working with China for approximately a year to establish St. Louis as a commercial cargo hub for the country. The expansion offers St. Louis County a competitive advantage in developing future job growth through increased activity with China and other countries.

— Kevin Jeselnik

St. Louis Retail Market

While St. Louis has a diversified economy, it has not been immune from the forces reshaping the retail landscape. As the economy contracts and consumer confidence continues to dip, retailers are reeling from the impact. Circuit City was the latest fatality when its 567 stores went dark in early March, including seven sites in the St. Louis area. Colliers Turley Martin Tucker expects that 2009 will best be remembered as a year of significant closures and consolidations among retailers.

Despite the current uncertainty in the marketplace, there were several retail developments completed last year, all of which were primarily committed to well before the economy began taking its toll.

St. Louis ended 2008 with more than 1.5 million square feet of new retail space. The majority of these new developments are anchored by retailers selling necessity or discount items such as Costco, Wal-Mart, grocery stores and drug stores. Such a tenant base, combined with consumers now taking a more cost-conscious approach to spending, should allow these developments to do well despite the current economic turmoil.

Among these new developments is the new 260,000-square-foot Meadows at Lake Saint Louis in Lake St. Louis, Missouri. Billed as the first lifestyle center in St. Charles County, the first phase of the upscale center is approximately 75 percent occupied, with Bed, Bath & Beyond and Old Navy among its junior anchors. Eventually, the center, which is being developed by Davis Street Land Company, is expected to total close to 500,000 square feet and include Missouri’s first Von Maur department store.

Once underserved, the Lake Saint Louis suburb, which is situated near the outer limits of St. Charles County, now boasts a wealth of retail options. The Shoppes at Hawk Ridge is situated just across Interstate 40/64 from the Meadows, and is anchored by Wal-Mart Supercenter, Lowe’s Home Improvement Warehouse and Sports Authority. Developed by Retail Realty, the center will encompass 800,000 square feet of retail when complete, making it one of the largest developments in St. Charles County. These two developments are likely to alter shopping patterns in St. Charles County, especially the Highway K corridor, as well as draw consumers from West County.

Additionally, the West County submarket is home to two new retail developments that were added to the market in 2008. Anchored by Target and Whole Foods and developed by TNC Investors LLC, Town & Country Crossing opened with 310,000 square feet of retail space. Also, Pace Properties opened the first phase of Manchester Highlands, which features approximately 137,000 square feet of space. Anchors include Best Buy, Bed Bath & Beyond, PetsMart and Ulta. When it comes online later this year, the second phase of Manchester Highlands will include Wal-Mart Supercenter (203,710 square feet) and Costco (163,409 square feet).

In Jefferson County, Missouri, south of St. Louis, THF Realty has unveiled Arnold Commons, a 353,000-square-foot shopping center that is anchored by a 71,747-square-foot Dierbergs Market and a 138,684-square-foot Lowe’s.

The newly added space, along with the market’s growing inventory of sublease space, is pushing retail vacancy rates up, according to CoStar. While the vacancy rate only rose slightly at the end of last year to 8.4 percent, which is up from 8.1 percent at the start of 2008, sublease space is steadily increasing. Sublease inventory totaled more than 415,000 square feet at year-end 2008, up more than 300 percent year-to-year.

The wealth of space available is putting pressure on rents. Quoted rents at the end of last year were $13.17 per square foot, down from $13.30 in the previous quarter, according to CoStar. Some of the area’s most challenged centers are reporting rental reductions of up to 30 percent. Slowing activity from Mom-and-Pop retailers, franchise operations and many smaller chains will continue to impact rental rates. Most affected are the Class B and C properties,  but the closures of once-stalwart junior anchors such as Linen-N-Things and Circuit City mean that some Class A space will find the going rough, as well.

Moving forward, developers are mindful of the troubles facing retailers and the glut of space coming onto the market. Speculative projects will be shelved for the foreseeable future, and the development pipeline will be minimal over the next several years, requiring significant pre-leasing commitments before work begins.

In particular, retail development will dramatically slow in former fast-growing residential areas such as St. Charles County and other outlying fringe suburbs. It will take some time to fill new space that has come online in these submarkets over the past several years.

With a vacancy rate of approximately 12.5 percent, St. Charles County has seen the sharpest increase within the St. Louis area. This is largely attributed to overdevelopment that has occurred during the past 5 years. With rising vacancy, this market has experienced substantial compression on rental rates. Investors, retailers and landlords alike are keeping a close eye on how this market continues to be affected by the depressed economy. Conversely, the South and West County submarkets have seen far more modest increases in their vacancy. This is largely attributable to these markets being more mature infill trade areas with less developable land still available.

While mixed-use development is again on the lips of developers and local governments as a way of spreading risk among multiple cyclical building types, the majority of the new developments are traditional community or power center developments anchored by a grocer or discount/warehouse retailer. An example of this mixed-use movement is unfolding in Chesterfield, Missouri, a West County suburb, where Sachs Properties has started developing a 98-acre site that will eventually include 1,000 residential units and 1.7 million square feet of restaurant, office and retail space.

This isn’t the first time that St. Louis and the global economy have been faced with tough times, nor will it be the last. Just as it has in the past, the market will inevitably correct itself. A return to the highs of 2007 may still be a few years away, but St. Louis and the areas’ developers will be poised once again for strong and substantial growth in the near future.

— Joshua Roedemeier is a retail broker in Colliers Turley Martin Tucker’s regional office in St. Louis. He specializes in retail sales and leasing, site selection and disposition.

St. Louis Multifamily Market

Apartment conditions in St. Louis will soften this year due to job losses and localized oversupply; however, some submarkets in the metro area will record a relatively strong performance. The local labor market is projected to be weighed down by the manufacturing sector and the trade, transportation and utilities segment, resulting in approximately 12,000 job cuts in 2009, which will ease apartment demand.

Vacancy is projected to climb 100 basis points this year to 8.6 percent, the highest rate since early 2006. As a result, owners will reduce rents in an effort to maintain occupancy levels. The average asking rent is forecast to end the year at $722 per month, a contraction of 1 percent, following a 1.7 percent advance in 2008.

In the near term, fundamentals will firm in the Airport/Interstate 70 and Clayton/Mid-County submarkets, as their proximity to arterial routes will continue to generate healthy tenant demand. As such, vacancy is forecast to retreat approximately 60 basis points to 9.5 percent this year in the Airport/I-70 submarket, while vacancy in the Clayton/Mid-County area is expected to fall roughly 30 basis points to 7 percent. Class A properties near interstates 270 and 170 are projected to outperform as a result of limited stock additions and heightened leasing interest.

Elsewhere, ongoing redevelopment and gentrification efforts have been slow to take shape downtown. However, apartment developers remain fairly active in the area, as approximately 80 percent of the 510 units slated to come online throughout metro St. Louis are scheduled to come online in the North City submarket. The redevelopment of the Union Pacific building was originally planned to include 98 condos and 57 apartments, but has been revamped in light of the slumping housing market to feature 193 apartments, which represents an emerging trend that will likely continue throughout the year. The Union Pacific endeavor, which will be the largest project to come online in the St. Louis metro area this year, is on pace for completion in the fourth quarter. Despite the housing downturn, condominium construction is proceeding at a brisk pace in the submarket. Approximately 350 for-sale units are slated for completion in the submarket this year, which represents 55 percent of the metro area’s total projected for-sale deliveries.

Looking ahead, anticipated employment growth along the Interstate 55 corridor has developers targeting the South City submarket with nearly 550 apartment units in the planning pipeline. The area is relatively underserved, with just 6 percent of the metro area stock, and has a median household income level that is 11 percent below the metro average, which will bolster apartment demand.

— Stephen Maulden is the regional manager of the St. Louis office of Marcus & Millichap Real Estate Investment Services.

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