CITY HIGHLIGHT, AUGUST 2010

ST. LOUIS CITY HIGHLIGHTS
Richard M. Randall, Lisa A. Prinster, J. Patrick Reilly

Retail Market

The St. Louis retail market can be compared to The Little Engine That Could. Retail activity in St. Louis continues to keep chugging slowly forward in the midst of the economic downturn. During the past 2 years, four new large retail developments have been constructed and opened, many area retailers are adding new stores, and a number of national retailers are looking at St. Louis for the first time.

While the St. Louis development horizon does not show an abundance of new activity in the works, many projects that were conceived prior to the economic downturn have been successfully constructed and opened. Four new developments totaling more than 1.7 million square feet of retail space have opened in St. Louis during the last 2 years. The Meadows at Lake Saint Louis, a lifestyle center developed by Davis Street Land Company and Bruce Johnston, is being constructed in phases and upon completion will offer approximately 500,000 square feet of leasable floor space. Von Maur Department Store will be opening its first St. Louis store to anchor The Meadows in September. During the second half of 2008, TNC Investors LLC completed and opened its 310,000-square-foot retail center, Town & Country Crossings, which is anchored by Target and Whole Foods. Pace Properties has completed construction of Manchester Highlands, its three-tiered 550,000-square-foot center including a 200,000-square-foot Wal-mart Supercenter and a 165,000-square-foot Costco Wholesale Club. Arnold Commons, a 350,000 square foot center, developed by THF Realty Inc., was completed in 2008 and is occupied by Dierberg’s Supermarket and Lowe’s Home Improvement Center.

The recent tenant expansions and the arrival of a number of new retailers to the St. Louis market have helped area landlords and developers to fill empty spaces. Retailers such as CVS/pharmacy, Dunkin’ Donuts, Microcenter, Nordstrom Rack, Rural King and Von Maur Department Store have all entered the St. Louis market during the last 2 years, while existing area retailers, including Ashley Furniture, AT&T, Best Buy, Dick’s Sporting Goods, Dress Barn, Golf Galaxy, JoAnn Fabrics, Mattress Firm, Petco, PetSmart, Shoe Carnival and Tile Shop, all continue to look to increase their presence.

— Richard M. Randall Jr. is senior vice president with St. Louis-based Pace Properties.

Office Market

Despite all of the banter of economic downturns and macroeconomic uncertainty, the St. Louis office market in the first half of 2010 continues to remain somewhat steady. Vacancy rates dropped slightly from this time last year across all classes of office buildings to 17.3 percent. The market has remained stable due to several larger office transactions in the last eighteen months.

The majority of the recent large transactions have occurred in single tenant new construction projects, leaving St. Louis in an unusually healthy position when compared to the national office market, which is oversupplied. However, the real story behind all of this is that despite the vacancy rate remaining relatively low, lease rates are still declining. The average asking rate dropped 22 percent during the past year to $18.98 proving that, although not a drastic change, landlords remain aggressive in pursuing tenants in the market.

Panera Bread Company also contributed to the steadfastness of the St. Louis office market, leasing 105,000 square feet at 3630 South Geyer Road, space formerly occupied by Anheuser-Busch. Panera leased the space directly from the landlord, Duke Realty Corporation, but 187,713 square feet of sublease space remains vacant.

The decisions by Thompson Coburn to remain in 240,000 square feet at US Bank Plaza in downtown St. Louis, and Lewis, Rice & Fingersh to relocate but remain downtown in 100,000 square feet at 600 North Washington relieves some of the uneasiness in the downtown market. Lewis, Rice & Fingersh’s new offices will span six floors and the law firm will become the anchor tenant for the 600 Washington Building. The building, owned by SCR Investments, will undergo extensive renovation along with the conversion of the St. Louis Centre shopping mall into a parking garage with street level retail and restaurant space

Centene Plaza, a 485,000-square-foot office and retail development in Clayton, is scheduled for completion in August. Centene Corporation will occupy 195,000 square feet of the project for their headquarters, and Armstrong Teasdale, the area’s third-largest law firm, has already taken occupancy of 130,000 square feet of the office space. With these and several other leases, the office building already boasts 95 percent occupancy before being officially delivered to the market.

Sales activity in the St. Louis office market is down by nearly 40 percent compared to mid-year 2009 statistics. The current activity appears to be driven by users as investor sales only account for 29 percent of total sales and the trend in the marketplace continues as wait and see.

All in all 2010 remains challenging, although statistically stable, with significant improvement not anticipated until early 2011.

— Lisa A. Prinster is director with St. Louis-based Gateway Commercial Cushman & Wakefield Alliance.

Industrial Market

The first half of 2010 in the St. Louis industrial market reflected the mixed bag of trends typical of many U.S. industrial markets recently. While a number of users stepped forth to take advantage of once-in-a-cycle leasing opportunities, sale activity remained historically low.

The resulting mid-year data paint a moderate picture of a market seeking a footing for recovery. Vacancy across all product types, bulk warehouse, office warehouse/manufacturing and flex, at mid-year 2010 stood at 8.8 percent, a half percentage point increase from the 8.3 percent rate at year-end 2009. Absorption, total occupied space compared to previous milestone dates, struggled toward positive territory, ending the second quarter at negative 55,000 square feet. This is a marked improvement, however, from the negative 475,000 square feet posted for the first quarter. Leasing activity increased by 25 percent compared to mid-year 2009, but 23 percent of 2010 activity resulted from Procter & Gamble taking 500,000 square feet in the Illinois submarket for a 1-year term.

The other major driver of the uptick in leasing activity is the historically low rental rates achievable by users willing to engage the marketplace and/or their current landlords. Properties that had commanded triple-net rates of $4.00 to $4.50 per square foot before the market downturn have accepted 5 year average lease rates in the low $2.00 per square foot range — or less — to fill vacancies. Active bulk warehouse users relocating in this aggressive climate have been, among others:

• Centric Group, leasing 588,000 square feet in three buildings in Earth City (St. Louis County) from Duke Realty.

• Worldwide Technology, taking 209,000 square feet in Gateway Commerce Center in Madison County, Illinois.

• Luxco, leasing 214,000 square feet from HSA in Park 370 (St. Louis County).

Many other users have pursued occupancy cost reductions through blend-and-extend negotiations with their current landlords, trading remaining near term lease obligations at higher rates for longer term commitments at lower ones. This practice, hardly unique to St. Louis, has boosted leasing activity but eroded asset value.

Contrary to the dynamics of the leasing market, St. Louis industrial sale activity sputtered to a point 50 percent below the market’s 5-year average. Owners of all product types have taken, often exhaustive, efforts to avoid having to sell assets in the current climate. Lenders reticent to push borrowers into foreclosure — the pretend-and-extend mentality so often quoted in the national media — have not yet forced the issue, in large part. Users and investors alike — either seeking distressed pricing, hoarding cash or both — remain passive observers, generating precious little traffic in the marketplace.

These sale and lease trends are essentially similar to many markets nationally. St. Louis’ fortunes for recovery in the industrial market depend upon several factors. Most significantly, the region as a whole must continue to focus on capitalizing on the quality workforce, central location and multi-modal transportation infrastructure that St. Louis enjoys, and on which healthy industrial markets are now built.

— J. Patrick Reilly, SIOR, is senior director and principal with St. Louis-based Gateway Commercial Cushman & Wakefield Alliance.

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